Let's make a deal: Conditions are right for biopharma M&A to break out, analysts say

Pfizer’s proposed $43 billion acquisition of Seagen two months ago was the largest deal in biopharma since 2019. Is it a signal that companies are ready to wheel and deal again? Or is it a false alarm in an M&A market that has been suppressed for the last few years?

The first quarter of 2023 gave mixed signals on the M&A landscape. Aside from Pfizer’s deal, other transactions in the industry added up to a mere $8.8 billion, and deal volume was down 9% from the previous quarter.

The lack of activity was even more apparent globally across all sectors as deals were down 55% from the fourth quarter of last year, according to a report from Ernst & Young.

In biopharma however, there are many reasons to believe that M&A is ready to surge. EY global deals leader Subin Baral said in an interview with Fierce Pharma that drugmakers are set to “pull the trigger.”

Meanwhile, West Monroe analyst Jennifer O’Brien says there are a confluence of factors at play in the industry that will convince companies to dive into the market. 

“It’s an interesting time, right on this perfect storm for biotechs and where big pharmas are in terms of building out their core specialty areas and having capital to deploy,” O’Brien said. “I think it’s a great space.”

The incentive to seek out deals is high for big drugmakers because of looming patent cliffs and the need to secure replacement products. Another factor favoring M&A is the industry trend of companies selling off business units to focus on their more profitable pharma offerings.

“Divest to invest,” said Baral. “We’re seeing companies getting rid of their non-core assets to raise funds and then are able to redirect the funds into the core.”

On the biotech and medtech side, lower levels of available capital are giving firms an incentive to seek M&A exits, Baral said.

Similarly, the lower valuations of those companies have brought their prices down, making them more attractive targets.

Also at play is an “innovation renaissance,” Baral wrote, with artificial intelligence, machine learning and other technologies being sought by large drugmakers.

Perhaps the biggest reason to expect more deals is the firepower on hand for many big pharma companies—$1.5 trillion, Baral says.

The desire of multiple firms to make high-money deals has been apparent in the industry’s most recent transactions. Before Seagen sold off to Pfizer, three other companies were involved in talks with the biotech, according to SEC filings. And before Amgen closed last year’s biggest biopharma acquisition, paying $28 billion for Horizon, Johnson & Johnson and Sanofi were in the hunt.

The firepower for Pfizer comes in part thanks to $57 billion in sales last year of its COVID products—the Comirnaty vaccine and the Paxlovid oral antiviral. In addition to the Seagen buy, the company had two of the top three deals in the industry last year, paying $11.6 billion for Biohaven and $5.4 billion for Global Blood Therapeutics.

If a splurge of deals is imminent, Pfizer was just ahead of the trend, shaking off the unfavorable microeconomic conditions—inflation, high interest rates, overall economic uncertainty—to make deals influenced by compelling industry factors.

Baral believes other companies are set to follow Pfizer’s lead.

“The climate is right for everything outside of the macroeconomic conditions,” Baral said. “Companies will work around the macro factor because the underlying business requires you to do these deals. Obviously, different companies have different thresholds of appetite, and some companies have a lot more firepower. But in general, we feel this is just a matter of time.”