M&A landscape is tilting away from late-stage buys and toward a platform strategy: analysts

The times are changing in the biopharma industry—and it’s happening fast. From 2019 to 2021, for example, total investment in biotechs nearly doubled, which helps explain why the average premium for purchasing biotech assets increased from 51% in 2018 to 71% last year.

Something else to consider: Over the last five years, biotechs accounted for 55% of the drugs on the market as opposed to just 30% from 2012 to 2016. Backed by investment power—biotechs have shown more willingness to bring their own assets to the market.

What does this all mean for the large cap biopharma sector?

It’s time for companies to reconsider their approach to M&A as the traditional methods of fostering growth are no longer sustainable, says to a report from Accenture Life Sciences.

“We do really think we’re in an industry transformation stage that’s here to last,” Petra Jantzer, Accenture’s Senior Managing Director, Global Life Sciences Lead, said in an interview.

While the shifting landscape of the biotech industry has sparked the transformation, the pandemic has accelerated its pace, placing a premium on innovation. The most obvious example is mRNA technology. But many other innovations are changing the industry quickly, such as machine learning and artificial intelligence.

“Leading companies are really beginning to translate these complex biological problems into computational problems,” Jantzer said. “They’re shifting the traditional probabilistic approach to innovation into more of deterministic approach using technology and data to support the entire pipeline and that really requires a whole set of new capabilities.”

Accenture’s conclusions are based on analysis of approximately 300 M&A deals executed by the top 30 biopharma companies from 2010 to 2021. Analysts classified M&A activity into four pathways.

The Builder pathway is a late-stage buy to acquire a potentially lucrative asset or assets. An example would be Bristol Myers Squibb’s $13.1 billion purchase of MyoKardia in 2020.

The Architect pathway is an earlier-stage acquisition, which involves not only assets, but more importantly, a technology platform. An example here would be Sanofi’s pickup last year of Translate Bio and its mRNA technology for $3.2 billion.

The Builder and Architect pathways make up about 70% of M&A deals. But while activity in the Architect pathway grew by 30% in the last five years, deals in the Builder pathway have stabilized.

“We really expect the Architect pathway will be used a lot more often,” Jantzer said. “We think the traditional Builder pathway, just buying these extremely expensive late-stage assets, we expect to see a sharp decline here.”

The remaining 30% of M&A deals can be classified into the Ecosystem and Controller pathways. The Ecosystem pathway—which Accenture says is growing rapidly—is  about acquiring capabilities to increase innovation, often around AI or data analytics. An example would be Roche’s $1.9 billion buy of Flatiron Health and its cancer analytics capabilities in 2018.

The Controller pathway has more to do with a geographic expansion or a vertical integration which results in more control over the supply chain. Falling into this category would be Pfizer’s 2015 buy of Hospira for $17 billion to take advantage of the latter’s global injectable drug reach.

The mindset for companies going forward should be to use M&A to acquire new platforms that can give them a technological advantage, instead of the traditional method of poaching biotech for promising assets, Accenture says.

To best pull off this platform-focused strategy, companies should be willing to restructure—moving away from a traditional organization built around therapeutic areas—Accenture advises. Creating a science and technology incubator that reports directly to the C-suite is one way to establish the initiative, the analysts suggest.

“Companies really need to get on a journey and our recommendation would be actually—start embracing this platform concept and learn as you go,” Jantzer said.