Last year closed with a flurry of big-money biopharma deals. Of the industry’s top 10 acquisitions, six came in the fourth quarter. Bristol Myers Squibb pulled off three of these buyouts in the final three months of 2023, spending a combined $23 billion, while AbbVie inked a pair of deals totaling $19 billion.
With drugmakers navigating patent cliffs and the looming effects of the Inflation Reduction Act, they are scrambling for new potential blockbusters to replace those that are nearing sales declines.
Despite this recent splurge, going the high-priced-acquisition route is not the best way for companies to optimize their portfolios, according to a McKinsey report: "Top M&A Trends in 2024: Blueprint for success in the next wave of deals."
In researching M&A activity over the last two decades across all industries, McKinsey found companies that make a stream of relatively small, strategic transactions enjoy a higher total shareholder return than those that make large, selective deals.
In biopharma M&A, the difference in total shareholder return is even more pronounced, favoring smaller, programmatic buyouts over multibillion-dollar acquisitions, McKinsey analysts discovered.
Jake Henry, an analyst who co-authored the McKinsey report, said in an interview that drugmakers—instead of simply trying to land assets that will provide immediate revenue recognition—should be doing some “soul-searching.”
“This means asking: What assets will build my pipeline and make me a leader in fast-growing segments like cell and gene therapy and biologics,” Henry and co-author Mieke Van Oostende wrote in the report. “And can my capabilities make the deal economics work?”
Going small is a strategy that Anshul Mangal, president of the consulting firm Project Farma, also often advises.
“It de-risks your investments because now you have more at-bats than you would if you’re doing larger acquisitions,” Mangal said in an interview. “And those smaller acquisitions may have potential to drive innovation that can help expand your market reach into new modalities and put you on the leading edge of science in front of your competition.”
In M&A, there is much to consider with talent retention and cultural integration, both analysts stressed. Mangal said an acquiring company should ask questions such as: Does the biotech’s C-suite have experience with successful acquisitions? Is there a transition plan in place to retain management in key leadership positions? Who must be retained to ensure that in-house knowledge is not lost?
“There are several acquisitions that we can point to that show, this company was acquired then three months later, everyone’s got the big payday and everyone’s left. That’s not what a strong acquisition should look like,” Mangal explained. “You’ve acquired that company, not just only for its pipeline and its assets, but also for the fact that it can be innovative.”
In Pfizer’s recent $43 billion deal to pick up Seagen, the parent company restructured its organization to keep much of the leadership of the antibody drug-conjugate pioneer intact. Mangal further pointed to Gilead Sciences' $11.9 billion buyout of cell therapy specialist Kite Pharma in 2017 as an example of a successful integration.
Mangal’s mantra when advising companies on M&A is that “it’s all about the clinical data.” While that may border on obviousness, it’s something Mangal can’t stress enough.
“If you don’t have great clinical programs (when acquiring) a small to midsized biotech, then you’re going in and fixing clinical programs instead of focusing what you’re really, really good at, which is getting assets across the finish line and to the commercial stage,” Mangal said. “Positive clinical data also may give a strong indication on the market demand for a biotech company’s products.”
Both Mangal and Henry believe M&A activity will be brisk this year. Biotech valuations have declined since their peak but have been rebounding in recent months, providing some impetus for dealmakers to strike.
Another critical factor is the $200 billion revenue hit the industry will take by way of patent losses over the next decade.