Since the pandemic began, biopharma M&A has settled into a languor amid the uncertain and volatile capital markets. Each year, analysts have said dealmaking should pick up again, but the beacons have remained unlit. Now, in 2023, there might finally be a reason to believe those estimations will come true.
Potential buyers on the Big Pharma side have amassed rich coffers of cash during the pandemic and are looking for ways to deploy that ammunition for a secure future. But in 2022, the corporate giants largely signaled they weren't ready to step into the deep end quite yet, said analyst Glenn Hunzinger, U.S. pharma and life science leader at PwC.
"Coming into last year, we did think it was going to be an active year, and what we saw was a lot of companies trying to stay disciplined and poised and deploying capital in the best and most effective manner," Hunzinger said. "The available cash at Big Pharma and the desire and burning need around growth (gave way to an attitude of) 'let's wait and see how it plays out.'"
The consensus is that Big Pharma will have to pull the trigger on dealmaking soon, though, to make up for massive future losses due to patent expirations of some of the biggest blockbusters the industry has ever seen. AbbVie's Humira, for example, will see direct biosimilar competition in the U.S. for the first time this year.
Overall industry sales could dwindle to the tune of about $175 billion over the next five years as these patent burnouts pick up, Hunzinger said, and filling those gaps will require more than just in-house development.
What's more, biotech companies were funded well in recent years. Hunzinger said that in 2021, capital raise for these smaller outfits was eight times higher than normal, giving them some runway to conduct their affairs solo for a while — this also gave pharma companies time to keep an eye on scientific progress at those biotechs before opening the purse strings.
"Looking at the landscape, we say OK, why is it this year and not last year? Because now, there's further data and more of a burning platform," Hunzinger said. "One year further toward filling in those pipeline gaps, and there could be a time where some broader dominoes fall toward industry consolidation."
Deal announcements at the end of 2022 and during the J.P. Morgan Healthcare conference (JPM) this week show companies’ willingness to step onto the field, and if these are a sign of things to come for the industry, then 2023 could indeed be the year all of that potential energy springs to life.
"I do think we'll continue to see infrastructure deals — it's a fabric of the industry and it's worked well — but combining the older, more traditional structure of deals with a new wave of thinking will be super critical."
Pharmaceutical and life science leader, PwC
The changing face of dealmaking
Amgen capped off a slow M&A run in 2022 with the December announcement that it would purchase Horizon Therapeutics for almost $28 billion, which was the largest deal of the year followed by Pfizer's $11.6 billion Biohaven acquisition announced in May. Pfizer, flush with cash from COVID-19 vaccine sales, also bought Global Blood Therapeutics in the only other deal to break the $5 billion mark in 2022.
Cut to 2023, and JPM saw a flurry of smaller deals that could set the tone for the new year. Companies like AstraZeneca, Ipsen and Chiesi contributed to a total of about $4 billion in biopharma deal announcements in the first few days of January.
The industry is approaching M&A with more flexibility than it used to, though, Hunzinger said. Partnerships, joint ventures, alliances and co-promotion have become a less risky way to incorporate new ideas into the pharmaceutical landscape.
"The deal and transaction ecosystem is much broader, and people are thinking about it more holistically," Hunzinger said. "I do think we'll continue to see infrastructure deals — it's a fabric of the industry and it's worked well — but combining the older, more traditional structure of deals with a new wave of thinking will be super critical this year."
Just look at the partnering bread and butter at CytomX, an antibody-focused cancer biotech that offers its technology platform to develop and improve oncology treatments along with pharma giants like AbbVie, Bristol Myers Squibb and Amgen. Recently, the company has embarked on fellowships with Regeneron and Moderna, and CEO Sean McCarthy said such alliances are a core part of the company's strategy.
"As we've seen over the last couple of years, the equity capital markets come and go for emerging biotech, and we realized that we had an opportunity with the platform to leverage partnering as a way to help finance the company in addition to all the other strategic benefits that partnerships bring," McCarthy said.
There will always be room for diverse ways of thinking on both sides of the table, though, and striking a clean balance to avoid risk will be important for big pharmas to consider, Hunzinger said.
"We expect to see a lot of discussions as far as the natural ways companies are going to both double down on where they are and also diversify."
Pharmaceutical and life science leader, PwC
"It comes down to a broader deployment of capital and making sure you're doing it in the most effective, risk-averse way," Hunzinger said. "Pharma needs to have a balanced view of the internal R&D, external M&A and licensing and other deals to have as many shots on goal as possible — looking at some of the early-stage things as licensing until you can see some progress and momentum, and then risking a little bit more as the probability of success grows."
Furthermore, Hunzinger said this is the year that companies will need to embrace digital solutions to bring about better returns on investments. Bringing these technologies into the fold will require outside investment either through infrastructure or partnering deals.
"The industry needs to go through a digital transformation," Hunzinger said. "It's here to stay, and it has to be a fabric of those companies that are going to operate more efficiently and have better returns."
The haves and have nots
The biopharma industry has lagged behind the overall markets, according to a PwC report, and Hunzinger said this revelation was curious to analysts who saw the simultaneous breakthroughs in science that should have spurred investment.
"With that kind of science, we thought, how could it be underperforming the overall market? When we dug deeper, we saw that some companies were underperforming, but others were overperforming," Hunzinger said. "The capital allocation toward building internal capabilities is allowing companies to differentiate themselves — it's going to be super important to not just develop a drug and sell it, but to really run the business as effectively as possible, and that's where we're going to see companies that are able to outperform their peers."
Oncology remains one of the areas of deepest returns, benefiting from breakthrough science and industry growth, Hunzinger said. As pharma companies look for the best outcomes for patients and for reimbursement, the best returns often lie in the cancer field, and that's where the M&A focus is likely to continue, he added.
But economic headwinds like the pricing statutes within the Inflation Reduction Act and rising interest rates, as well as geopolitical concerns, will continue to play a part in slowing pharma's roll for dealmaking. However, a declining SPAC and IPO market, as well as falling valuations, have created a "buyer's market" for the companies that have the capital to invest, according to an EY M&A report.
"Though M&A financing is more complex against a background of ascending interest rates and inflation and despite the impact of legislation in the U.S., in a longer perspective 2022 may come to be recognized as the calm before the storm," EY analysts said. "The dealmaking dip has the potential to (turn) into a dealmaking deluge in 2023, as companies seek innovation not just in their portfolios but across their entire operating models."
But it's been a tightening of the belt for pharmas in the last few years as they focus on costs and returns on investment.
"They're really taking a step back and saying, am I getting the returns I should be getting by making these necessary investments? Making sure that each investment decision really has a capital markets lens applied to it?" Hunzinger said.
Applying that lens, 2023 could see some of the mid to mega-level deals return to the game.
"We expect to see a lot of discussions as far as the natural ways companies are going to both double down on where they are and also diversify," Hunzinger said. "That's why we expect to see not only the $5 billion to $15 billion biotech type deals, but also a couple of the $20 billion to $40 billion type deals that start to happen as companies look to place bigger bets to fill that pipeline."