M&A activity in the healthcare sector has experienced a slowdown in the first half of 2023, with the number of deals reaching its lowest point in three years. However, experts predict that the biopharma sector will witness a significant uptick in mergers and acquisitions in the coming months. In this article, we will explore the market circumstances that are expected to contribute to a surge in biopharma M&A deals.
One prominent M&A lawyer, Matt Gardella from Mintz, believes that three key factors will drive the influx of biopharma M&A deals: a looming patent cliff, reduced valuations, and a weak IPO market. According to Gardella, the biopharma sector is projected to accumulate approximately $180 billion worth of M&A deals by the end of the year, surpassing last year’s total of $127 billion and 2021’s total of $108 billion.
A primary reason for the anticipated increase in M&A activity is the concern among large pharmaceutical companies about an imminent patent cliff. Many of the industry’s blockbuster drugs will face patent expirations between now and 2030, impacting their market exclusivity. For instance, AbbVie’s Humira lost its exclusivity this year, and Merck’s Keytruda is scheduled to go off patent in 2028. As a result, pharmaceutical companies are actively seeking late-stage assets held by biotech firms that could potentially offset declining revenue.
Recent instances of large pharmaceutical firms acquiring biotech companies with promising late-stage assets further demonstrate this trend. For instance, Biogen’s acquisition of Reata Pharmaceuticals for $7.3 billion, Sanofi’s purchase of Provention for $2.9 billion, and AstraZeneca’s completion of the $1.3 billion acquisition of CinCor in February exemplify this strategic approach.
Another driver behind the potential surge in biopharma M&A deals is the relatively low valuations of publicly traded biotech companies. Buyers, who retreated from overpriced valuations in recent years, now find these companies attractive in terms of valuation. Biotech companies’ valuations have witnessed a notable decrease, with an overall decline of 30% from October 2021 to January 2023. Valuations for companies in the preclinical and Phase I stages dropped by 69% and 45%, respectively.
Additionally, the biotech sector’s IPO market is experiencing a sluggish period. As of the end of July, there have only been nine biotech IPOs, the slowest pace in six years. This makes M&A an attractive alternative for many late-stage biotech companies wishing to secure their future. When IPOs are unfavorable, acquisition by a larger drugmaker becomes a viable option to sustain operations.
Despite the positive outlook for M&A in the biopharma sector, Gardella cautions that antitrust scrutiny from federal regulators could present a potential obstacle. For example, the Federal Trade Commission (FTC) is currently working to block Amgen’s acquisition of Horizon Therapeutics for $28 billion. The agency argues that the deal would strengthen the monopoly positions of two drugs held by Horizon.
The biopharma sector is poised for an upswing in M&A activity due to a combination of factors. The looming patent cliff, reduced valuations of biotech companies, and a stagnant IPO market are creating fertile ground for mergers and acquisitions. However, regulatory scrutiny remains a potential challenge. As market conditions evolve, it will be crucial for industry stakeholders to closely monitor these developments, which will undoubtedly shape the future of the biopharma industry.
Market Capital Research 