Biopharma companies looking to maximize the visibility of their M&A activity often reveal deals during the J.P. Morgan Healthcare Conference. But leading into this year’s event, many couldn’t wait.
At the end of 2023 there was a flurry of acquisitions. Of the 10 largest biopharma deals of the year, six came in the fourth quarter and four were signed in the last five weeks of 2023.
In a four-day holiday spree in late December, Bristol Myers Squibb inked two deals—buying out psychiatric disease specialist Karuna Therapeutics for $14 billion and radiopharmaceutical innovator RayzeBio for $4.1 billion. AbbVie also had a late-year splurge, snapping up ImmunoGen and its ovarian cancer therapy Elahere for $10.1 billion, and then a week later, buying neuroscience specialist Cerevel Therapeutics for $8.7 billion.
Will the M&A momentum will continue this year?
“Our cautious optimism for 2024 is strengthened by the mad dash we saw in late December deal activity,” Arda Ural, EY Americas industry markets leader, health sciences and wellness, said in an interview last week.
Ural is one of the authors of EY’s annual Firepower report, which assesses (PDF) the capacity of pharma companies to execute M&A deals based on the strength of their balance sheets. Entering 2024, the top 25 companies identified by EY have $1.37 trillion on hand to make deals.
In the 10 years that EY has performed the analysis, it is the second-most-dry powder available at the start of a year. It's one of the reasons the analysts expect M&A activity to continue to accelerate in 2024.
Another component EY points to favoring an uptick in deals are the revenue challenges faced by the industry over the next five years. These include the oncoming losses of exclusivity of several blockbuster drugs, the price reduction effects of the Inflation Reduction Act and an uptick in late-stage trial failures.
These elements are coalescing to drive more of the sort of deals seen late in 2023, with the largest drugmakers paying big sums and acquiring more late-stage and approved assets. In 2023, with roughly the same number of transactions as in 2022, the total value of the deals ballooned from $142 billion to $213 billion. Additionally in 2023, of the assets that were acquired, 60% were marketed or in stage 3 development, compared to 52% in 2022.
“You’re seeing pharma’s focus shifting toward late-stage assets because of the sense of urgency to address the growth gap,” Ural said.
Another aspect to consider is that economic conditions in 2024 are likely to be more conducive to dealmaking, Ural added. He points to a December meeting of the Federal Reserve, which brought positive news on interest rates. It also could help explain the late surge of activity last month.
“That could have had some impact psychologically that, OK, now the risk around the deal is gone, so I will feel more comfortable to close it,” Ural said. “We’ve seen big macro uncertainty on interest rates disappear.”
With increased competition for the assets and with valuations down for a variety of reasons, deal premiums spiked to 77% on average in 2023, compared to 54% in 2022 and 50% in 2021. This makes dealmaking more challenging, according to Nauman Shah, Johnson & Johnson’s global head of innovative medicine business development.
“Companies with in-market portfolios and those without may have different vantage points on risks in valuing opportunities, and such alignment on value assumptions becomes critical to dealmaking,” Shah told EY in a guest perspective Q&A section in the Firepower report. “Consider, particularly, the impact on pricing resulting from the regulations various governments have imposed or are considering. It is imperative that the entire pharmaceutical innovation ecosystem understand these regulations and their impact on the value of innovation.”
KPMG on innovation M&A
Meanwhile, a recent survey of biopharma industry executives conducted (PDF) by KPMG shows shifting attitudes toward M&A as companies strategize in response to challenging macroeconomic conditions, global instability and government policy stances that have caused an “unprecedented” level of disruption to business operations, analysts wrote.
The survey is part of KPMG’s annual Healthcare and Life Sciences Investment Outlook, which examines the dealmaking market in eight subsectors, including the biopharma industry.
When asked what type of targets their companies would look to acquire in 2024, late-stage assets ranked first at 70%, followed by early-stage, innovative assets (55%), commercial-stage assets (45%), technology or digital-type assets (40%), full company acquisitions to diversity (35%) and full company acquisitions of pre-revenue biotechs with innovative platforms (30%).
“Further clarity and consensus about the impact of the IRA in 2024 could help shape pharma companies’ approaches to developing their pipelines,” the KPMG analysts wrote. “Additionally, if anti-competition policies continue to have success, the industry may have to rethink the current innovation model where large companies fund smaller companies to develop early-stage assets.”