Big pharma’s bet on biotech — key drivers and top focus areas for M&A

Acuity Knowledge Partners
4 min readAug 10, 2023

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In the biopharma sector, mergers and acquisitions (M&A) are as critical as a scientific breakthrough and have been a core pillar of leading companies’ growth strategies. For example, blockbuster oncology drugs such as Keytruda and anti-inflammatory drugs such as Embrel are the result of high-value acquisitions.

The number of high-profile acquisitions in the biopharma sector has spiked in recent years. As innovation is typically slow in biopharma, big pharma frequently turns to young biotech companies to boost product pipelines, making such acquisitions an existential necessity for pharma companies.

2023 likely to see a rebound in M&A activity

Deal making had a turbulent year in 2022, with fewer and smaller deals. M&A volume declined around 22% across the sector while deal valuations plunged 45% in 2022 vs 2021. That said, 2022 saw a number of new and exciting innovations come to market; these would be attractive candidates for acquisition by big pharma. With more attractive valuations for small biotech firms, we expect increased M&A activity in the sector in the coming months.

The second half of 2023 looks set to be an active period for M&A. Deal announcements YTD in 2023 include multiple transactions of more than USD1bn each, suggesting strong appetite for acquisition. For example, in 1Q23, Pfizer announced the acquisition of Seagen, an antibody-drug conjugate (ADC) leader, for USD43bn. This deal alone accounted for a quarter of total M&A spending in the sector for full year 2022.

Top focus areas in 2023

Typically, these M&A deals focus on strengthening core assets and expanding capabilities of the acquirer in specialised areas such as immunology, oncology and gene therapy. As long as fundamentals for M&A remain intact, a pharma company’s favoured targets are likely to be smaller companies with innovative drugs in targeted therapeutic areas.

As the chart below shows, the focus of big pharma M&A is now shifting to therapeutic areas such as immunology, neurology and others versus cancer and rare diseases previously (36% in YTD 2023 vs 42% in 2022 vs 67% in 2018). We expect the trend to continue and believe there will be more deals in diversified therapeutic areas in 2H23 and into 2024.

Biopharma sector to see an acceleration in M&A activity in 2H23 and 2024

While macroeconomic conditions may remain challenging for the rest of 2023, pharma companies are expected to deploy their accumulated cash to address gaps in their innovative pipelines. Big pharma will also likely consider high-value acquisitions to reallocate resources to compensate for patent losses, stay ahead of the competition and reach growth targets.

We believe there will also be plenty of willing sellers given that a large number of innovative biotech companies were founded and funded in recent years. In addition, 2022 proved difficult for the slew of biotechs that raced to Wall Street (>100 in 2021), as they saw large declines in their share prices after listing (an average 75% decline to date for the top seven IPOs since listing in 2021). Such companies would find it difficult to raise additional equity at their previous valuation benchmarks. M&A would be an attractive alternative for realising their long-term potential and would provide an exit to early investors.

From a regulatory point of view, we believe the potential increase in scrutiny by the Federal Trade Commission (FTC) of certain M&A transactions would make megadeals more complicated or delay deal timelines; however, this would not have a significant impact on the value or volume of the deals.

All these factors should help drive a strong M&A wave in 2H23 and into 2024.

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Originally published at https://www.acuitykp.com

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Acuity Knowledge Partners

We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://bit.ly/3NaJ4Et