Life Sciences M&A Mid-Year Outlook

Like the broader M&A market, the Life Sciences sector cooled in the first half of 2022, following a banger 2021. However, activity remained strong and well above the historical average.

  •   Deal value was down 35%, and volume down 21%, compared to the first half of 2021. 
  •   Weighing on deals is a general sense of regulatory, economic, and geopolitical uncertainty in the near term.
  •   There are strong fundamentals that will drive Life Sciences M&A, making it one of the likely top performing sectors over the next three years.
  •   Look out for major companies pursuing inorganic growth, digital transformation, and IP acquisition amid expiring patents and a changing healthcare landscape.

Life Sciences M&A is still going strong, but looks weaker after such an outstanding run in 2021. Value and volume were both down for the space year-over-year, even outpacing the drops in the broader M&A market. This slowdown masks a powerful first half of the year, which is on track to beat out every year except 2021.

The sector did exceptionally well last year in a wave of reorganization, driven by the COVID-19 pandemic. Digital transformation was and still is the order of the day, both for healthcare and the broader market. For pharmaceutical companies, adding new, freshly patented IP to an aging roster will also drive acquisitions over the next few years.

As the pandemic recedes from the forefront, powerful M&A drivers remain for the space. Many companies amassed huge war chests over the past few years, having cashed in on high valuations, cheap debt, and record profits during 2020 and 2021. We expect Life Sciences to outperform the broader M&A market in the near term, as the sector will face unique pressures to consolidate, transform digitally, and gobble up patent-protected IP.

Some of the biggest deals in the first half of 2021 include:

  •   Pfizer’s $12 billion acquisition of Biohaven, along with its suite of novel migraine treatments.
  •   Bristol-Myers’ acquisition of Turning Point Therapeutics. The $4 billion acquisition includes a novel lung cancer treatment expected to launch in 2023.
  •   Healthcare Trust of America’s $11.2 billion merger with Healthcare Realty Trust, achieving massive growth and eliminating a key competitor.
  •   UnitedHealth Group’s $6 billion acquisition of LHC Group, marking a major stake in the home medical care space. 

Post-COVID Pivots

COVID Vaccines have been a windfall for the companies fortunate enough to quickly bring one to market, generating hundreds of billions in revenue since they began to launch in late 2020. That cash flow won’t last forever; demand has already slumped this year. Companies like Moderna and Pfizer are eying acquisitions to keep their growth going. 

As Moderna CEO Stephane Bancel said in the Q1 earnings call, “In terms of M&A, I can tell you, our teams have never been as busy. They are looking at a lot of opportunities literally across the world, across therapeutic areas, but also technologies.”

Bancel’s comments mirror the mindset of many biotech companies, seeking inorganic growth and greater digital innovation to stay competitive in a changing space. 

Caution: (Patent) Cliffs Ahead

Pharmaceutical companies will face a number of patent cliffs in the next few years on some of the world’s top-selling drugs. These include:

  •   Humira’s (Abbvie): $20B in sales at risk after 2023
  •   Keytruda (Merck): $15B in sales, at risk after 2028
  •   Revlimid (Bristol): $12 B in sales, at risk after 2025
  •   Eliquis (Pfizer): $9B in sales, patents phase out after 2027

The top 15 drugs facing a cliff this decade totaled over $100 billion in sales last year, representing a major topline threat for some of the biggest pharma companies. Experts say all that patent pressure, coupled with record cash reserves, will boost deals in the coming years.

Pharma companies will see growing pressure from shareholders to staunch lost revenue with new intellectual property. The quickest, safest way to do that is to indirectly acquire new drugs by buying out their owners. The pharmaceutical space is consistently a hotbed of M&A activity for this reason.

Maria Whitman, head of Biotech at consulting firm ZS Associates, confirmed both the size of potential losses and the likelihood of greater M&A to get ahead of them. As she said in a recent conversation with BioSpace:

“Depending on the company, the losses [from expiring patents] represent from 14% to 79% of their revenues… With about $180 billion in ‘dry powder’ sitting with the top 12 companies alone, we can anticipate more mergers and acquisitions activity.”

Fundamental Factors

While we expect unique tailwinds to drive greater M&A activity in Life Sciences than the broader economy, the sector is still subject to many of the same macroeconomic factors. In the first half of 2022, those factors were defined by uncertainty. Along with geopolitical tensions, rising inflation and interest rates weighed on investor sentiment. Few asset classes were shielded from a tough correction since the beginning of the year.

As of this article’s writing, cause for economic optimism appears to be growing. Inflation is front and center in the minds of consumers and business leaders alike, particularly its impact on interest rates and real GDP. That threat is a little less imposing now than it was a few months ago, as July’s inflation data saw virtually no change in the CPI month-over-month, thanks mainly to cheaper fuel costs. If inflation stays tame, the Fed will have some room to ease up on rate hikes, which all capital markets should welcome.

Life Science M&A: Plenty of Gas in the Tank

Deal-making in the Life Sciences space was bound to cool off after a remarkable year in 2021. Activity remains strong though, and there are powerful fundamental factors to drive M&A for years to come.

The sector enjoys massive cash reserves thanks to the cheap credit and high revenues of the past few years. It also needs to both digitally transform and acquire new IP as this decade’s patent cliff approaches. We expect M&A in the Life Sciences space, particularly pharmaceuticals, to see stronger growth than the broader market in terms of value and volume in the next three years.

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