It is worth noting that the biopharmaceutical sector has gone on to experience a revival when it comes to mergers and acquisitions in the second half of 2023. One can see three major reasons resulting in this uptick in deal-making intensity: pharmaceutical companies looking for pipeline diversity as a result of the Inflation Reduction Act- IRA, the cash availability on Big Pharma’s balance sheets, and patent expiration, among other aspects. Let us have a look at how each one of them is spurring M&A and what this can go on to mean for the sector going forward.
The fact is that an ongoing, humongous patent cliff is anticipated through 2030, which will go on to comprise more than $200 billion in revenue. Corresponding to this trend happens to be the impending loss of exclusivity for major pharmaceutical products like AbbVie’s Humira in 2024 and Keytruda from Merck, which is slated for 2028.
It is well to be noted that some companies go on to face a horizon of four to seven years before the expiration of patents, and there is a proactive shift toward taking over late-stage biotech assets, as they happen to have the potential so as to become approvable drugs in the impending time frame.
The Impact of the IRA
The IRA has gone on to become a prominent factor in the recent rise of M&A activity within the pharma sector. Apparently, with Medicare now able to go ahead with price negotiation for 10 bestselling drugs, such as notable names like Eliquis from Bristol Myers Squibb’s and Novartis’ Entresto, the spectrum is indeed evolving. The influence of IRA will be better pronounced on small-molecule drugs since the legislation may apply to them post seven years, vis-à-vis the 11-year period when it comes to large-molecule drugs.
This variance within the applied time restrictions could seep into a strategic shift in pipelines when it comes to biologics, leading to an amplified focus on cell therapies as well as treatments for rare diseases, thereby reflecting the extended timeline in terms of strategic considerations. The IRA is going ahead and prompting industry leaders to diversify their existing portfolios, which can be achieved by way of strategic M&A deals.
Diversity in the pipeline
Big Pharma companies go on to face an internal research and development dearth with limited capacity in terms of replenishment, which could as well offset the loss in terms of revenue from the patent cliff. Companies happen to be interested in the best possible science and at the same time remain on the hunt for the best-in-portfolio deals, all across, both late as well as early-stage assets. Rare diseases go on to remain an appealing case, thereby attracting high premiums, whereas oncology and immunology also happen to be the top-tier areas.
Funding when it comes to drugs nearing regulatory approval circumvents a long as well as uncertain process involving drug development, which can move over a decade and is indeed fraught in terms of potential failures. As per McKinsey, the revenue percentage from externally sourced pharma innovation, especially preclinical, has gone on to increase recently, and this trend is all set to continue.
It is worth noting that there are certain biopharmaceutical names that happen to be returning to a focused scenario since only a few big Pharma companies can go on to afford to maintain a varied therapeutic area. Because of this, one can see a divestment-to-investment sort of approach in which companies sell non-core assets in order to accumulate interest as well as funds in one major area for longer-term focus. This approach is supported by certain large spinoffs, like the Sanofi and Novartis manoeuvres, that go on to create new potential targets in terms of acquisitions.
The financial position concerning numerous big Pharma firms happens to be at unmatched levels. Companies like Eli Lilly as well as Novo Nordisk are going through significant cash inflows because of the high demand when it comes to their obesity treatments.
Goldman Sachs Research reports that, in a more broad context, the international pharmaceutical industry happens to be commanding almost $700 billion when it comes to M&A and R&D initiatives.
Valuation of Biotech
Comparatively depressed valuations when it comes to biotech firms make them attractive acquirers’ targets who had gone on to previously been deterred due to inflated valuations. The broad financing spectrum in the sector has gone on to witness a downturn in 2022, thereby shifting the sentiment to a buyer market.
Notably, venture capital investments, initial public offerings, debt financing, as well as follow-on offerings have gone on to witness some relatively higher reductions. As per EY, right from October 2021 to January 2023, the total valuations of biotech companies dipped by 30%—69% fall for preclinical stage firms and 45% when it came to Phase I.
IPO Market that’s Weak
As of November 2023, there are 20 biotech IPOs, marking another year that’s pretty challenging for the sector. This dearth of IPOs has gone on to have prominent implications: Late-stage biotechnology firms are more likely to get acquired by other larger pharma companies, majorly because of the lack of viable IPO choices. This situation is indeed a stark contrast to the yesteryears of readily available investments, posing challenges for the sector’s progress sans an increasing number of deals in the M&A gamut.
The Present Environment
As of December 6, last year, the number of M&A deals, which account for those above $50 million so far this year, went on to stand at 34 as compared to 43 in 2022 and 35 in 2021. The past years’ overall dollar figures happen to be lower than the record-setting 2019. The average premium when it comes to the deals in 2023 stands at almost 75%, within which many overtook a 100% level. For instance, Sanofi went on to pay just about three times the actual value for Provention Bio in March 2023, whereas Bellus Health went on to propose a 103% premium for the acquisition in April 2023.
Going Forward: How This Shapes Up
The number of deals that involve small as well as medium-sized companies with a market capitalization falling in the range of $2 billion to $5 billion will speed up over the upcoming quarters. In the macroeconomic environment of the present, in which the cost of capital is pretty high and the IPO number is diminishing, Big Pharma happens to be ready to thrust a premium on the acquisition of companies that happen to have promising pipelines, or, for that matter, separate molecules.
There happens to be a potential regulatory risk when it comes to larger acquisitions, but as seen in the investigation that has just taken place by the Federal Trade Commission in the case of Amgen’s deal and the intensifying scrutiny when it comes to the biopharmaceutical deal.
Big Pharma’s balance sheets happen to be strong, and they are also well-positioned for an M&A activity to take place. Johnson & Johnson, for example, may go ahead with deals thanks to the most recently undergone spinoff of its consumer health unit called Kenvue, which has gone on to add $13.2 billion for the potential acquisition funding.
Despite increased regulatory scrutiny, one can still see room when it comes to potentially larger deals. Companies with a market capitalization of almost $50 billion may go on to become possible targets.
With the ongoing loss in terms of exclusivity in the sector and also the upcoming execution of the IRA, big pharma companies should go on to continue to go ahead with M&A in order to diversify their revenue streams, make sure to fill the gaps from patent cliffs, and at the same time also intensify their pipelines in terms of promising areas so as to bloat shareholder value.