The life sciences industry is no stranger to mergers and acquisitions (M&As), helping to expand product portfolios, access new markets and pursue new innovations, amongst a myriad of other reasons. In this article, we will look at the current state of M&A activity based on data from the Biotechgate database, with insights on where the industry may be heading.
M&A trends are intrinsically linked to the market environment, surging in bullish markets while times of economic downturn lead to a decreasing number of transactions taking place. This relationship between both the economic conditions at the time and regulatory changes significantly influences M&A decisions. Recent market conditions have led to a reduction in both the number and value of M&A deals since 2021.
Current Market Environment
The above chart offers a two-decade overview of the biotech market environment, using the Nasdaq Biotech Index (NBI) as a benchmark. From it, we can gauge that market downturns lasted one to three years, with the most significant correction stemming from the COVID bubble. Market recoveries, meanwhile, appear to showcase themselves faster and faster.
The recent downturn can be attributed to various industry factors. Investors have retreated due to uncertain economic conditions, leading to reduced funding sources for many companies. Legislative changes in the US affecting pricing and patents have played a role, as well as a record number of small and medium-sized enterprises trading at negative enterprise values. Moreover, the Food and Drug Administration (FDA) approved fewer drugs last year than usual, intensifying uncertainty.
Total Value & Number of M&A Deals
Over the past decade, 2015 witnessed the highest total value of completed M&A transactions, reaching approximately USD 420 billion. In contrast, 2021 had the most individual deals, totaling 235. However, this was followed by a sharp decline in 2022, affecting both the number and cumulative value of deals. For 2022, the top three acquisitions accounted for 50% of the total deal value, highlighting the lack of significant deals taking place.
Deals by Development Stage
The above graph highlights the percentage of deals according to their development stage. It reveals that more transactions are concluded with companies possessing later-stage assets. This trend is particularly pronounced during periods of economic uncertainty when acquiring organizations adopt a more risk-averse approach. This is particularly evident in both 2013 and 2022.
Who’s Doing the Deals?
Unsurprisingly, the cash-rich pharma companies dominate the buying side of the M&A environment, predominantly purchasing smaller biotechs involved in therapeutics and diagnostics.
What Does the Future Hold?
All in all, the future isn’t entirely doom and gloom for M&As in the life sciences industry, many of the big pharmas have a significant amount of deployable cash on hand, ready to use once the market conditions appear right. Additionally, the looming patent cliff, historically prompting significant business combinations, such as Pfizer’s acquisition of Wyeth and Merck’s merger with Schering-Plough in 2009, remains an influential factor shaping the industry’s future landscape. These elements can help set the stage for a resurgence in M&A activity for the life sciences industry.