All of the stars are aligned for there to be a flurry of deals activity across all areas of the sector despite the slow start to the year so far. Many large pharma players are flush with cash (particularly those that have COVID-19 treatments in their arsenal), biotech valuations have been normalizing after years of a boom market and the 2025 patent cliff is rapidly approaching, all making for a strong deal environment.
Given the broader labor changes, supply shortages and constantly changing supply chain strategies and operations, the focus on quality can be challenging to sustain. Yet the downside can have massive impacts on businesses, including the potential inability to manufacture products.
The long litany of macroeconomic and regulatory headwinds has CEOs looking for transactions that are easily integrated and will get cash off their balance sheet as inflationary pressures mount.
Increased scrutiny from the US Federal Trade Commission (FTC) around larger deals could mean that 2022 will be a year of bolt-on transactions in the $5 to $15 billion range as pharma companies take multiple shots on goal in order to make up for revenues lost to generic competition in the remainder of the decade. However, don’t rule out the potential for larger deals — consolidation is good for the health ecosystem and drives broader efficiency.
Expect to see big pharma picking up earlier stage companies to try and fill the pipeline gaps that are likely to start in 2024. While market conditions suggest bargain prices for biotech are possible, recent transactions indicate that pharma companies are still paying significantly above current trading prices (ranging from approximately 50 to 100% of current trading), but below the peak valuations of recent memory.
In the first few months of the year, semi-annualized deal value was down 58% from the same period last year, with companies investing just $61.7 billion so far. Only 137 deals were announced during that time, compared to 204 in the year-prior period.
Talk of drug pricing regulations continues in Washington as Congress bats around a pared down version of the Build Back Better plan. Expect some of that tension to ease in the fall if a new Congress takes on a different agenda.
Other areas of the sector like medical devices face similar headwinds from regulators, and continue to deal with a greater impact from semiconductor shortages. Even though semi-annualized deal value in the medical device space is down 85% from the same period the prior year, expect these companies to remain focused on M&A as the subsector searches for alternative forms of revenue — particularly from new consumer-centric technologies.
Macroeconomic headwinds and geopolitical tensions have created volatility in spending at CDMOs and CROs, limiting their willingness to deploy capital as the uncertainty persists.
“Pharmaceutical and life sciences companies continue to actively search for new capabilities and inorganic growth, which we believe will lead to a rebound in deal activity in the second half of the year.”
Partner, Pharmaceutical and Life Sciences Consulting Solutions Leader, PwC US
Roel Van Den Akker
Partner, PwC US