2022 forecast: Biopharma M&A lags in 2021. Will drugmakers still look for bolt-on deals or large transactions?

In contrast to the bustling dealmaking by medtech and life sciences service businesses, merger and acquisition activity by drugmakers went largely quiet in 2021. But after all the slim-downs, biopharma M&A might finally see a rebound.

2022 could be a “pretty buoyant year” for biopharma M&A, and not just because large companies have accumulated plenty of cash. The need remains clear for pharmas to scale up and diversify in different therapeutic areas, said Glenn Hunzinger, U.S. pharmaceutical and life sciences consulting solutions leader at PwC, in an interview.

The entire life sciences sector could pull off $350 billion to $400 billion worth of M&A deals in 2022, PwC projects. Besides a flurry of $5 billion to $15 billion biotech takeovers, the accounting firm also sees opportunities for large buyouts of around $50 billion or even a “transact-to-transform” megadeal at $100 billion or more.

In a report in December, RBC Capital Markets analysts also projected that “a rebound in M&A is imminent,” given that large companies now have stronger balance sheets while still have looming patent cliffs to fight. Valuations of small- and mid-cap biotechs have been under pressure recently, making them more affordable and attractive buyout targets, the team said.

As for the size of potential deals, the RBC analysts said they expect single-asset companies in mid- to late-stage clinical development valued at around $1 billion to $5 billion will be the “sweet spot” for most M&A in 2022, but added that “we may be due for a larger blockbuster deal.”

Mizuho analyst Salim Syed also thinks companies could be buyers, especially when they’re under growth pressure. But he argued that without a clear shift in overall dealmaking sentiment, 2022 is going to be more or less the same as 2021 for biopharma M&A.

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For his part, Hunzinger has identified a pattern to support his bullish predication.

“If you just look at the evolution of the larger pharma companies, they’ve always gone from being this conglomerate multinational to being a focused biopharma—every five years, the trends seem to go back and forth,” Hunzinger explained.

Big Pharma companies have indeed been busy selling off noncore assets in the past few years in consumer health, animal health, generics or smaller brands. For this year alone, Merck spun out its women’s health portfolio, along with biosimilars and established medicines, into Organon. GlaxoSmithKline is in the middle of demerging its consumer health joint venture with Pfizer into a separate publicly listed company, and Johnson & Johnson is doing the same with its large over-the-counter franchise. Novartis just kicked off a review of its generics unit Sandoz, which has reportedly attracted buyout inquiries. Through the spinoffs, the companies have become more focused in just a few areas of interest.

“The market at times doesn’t love that level of concentration, so the next natural progression of the life cycle is to diversify in adjacencies and in different therapeutic areas to continue that growth story,” Hunzinger said.

The divestments also freed up a lot of cash for the companies to do more deals. Given $500 billion in projected cash and the ability to leverage additional financing, 18 large-cap U.S. and European biopharmas will theoretically have about $1.72 trillion in M&A firepower by the end of 2022, SVB Leerink analyst Geoffrey Porges wrote in a recent note.

Among the 18 companies, Johnson & Johnson has the biggest M&A capacity of over $200 billion. Pfizer and Novartis followed with $175 billion and $154 billion, respectively. AbbVie, GSK, Bristol Myers Squibb and Merck all have more than $100 billion in potential M&A war-chest capacity, according to Porges.

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At the end of 2020, PwC had estimated that the life sciences industry would have $1.47 trillion in firepower this year. But some of the largest deals announced this year were still not up to last year’s level, which was itself a low.

AstraZeneca’s $39 billion purchase of Alexion, the largest biopharma takeover in 2020, was roughly worth the top five M&A deals of this year combined. CSL’s proposed $11.7 billion deal for Vifor Pharma, Merck’s $11.5 billion acquisition of Acceleron Pharma and Jazz Pharma’s $7.2 billion buy of GW Pharma are the top three transactions in 2021 among drugmakers.

A potentially more vigilant U.S. antitrust watchdog was viewed as a roadblock for large pharma transactions, Hunzinger acknowledged. The U.S. Federal Trade Commission kicked off a revamp of its anticompetition review process, threatening tighter regulatory scrutiny down the road around pharma deals.

Still, pharma companies know it’s important to have scale, Hunzinger argued, and that they “have the conviction to move forward” with acquisitions. Mizuho’s Syed also noted that anticompetition evaluation has always been a concern that companies have learned to live with.

Another reason Big Pharma didn’t move more actively in M&A in 2021 is related to a high valuation of biotechs, Torreya analysts wrote in a September report after talking to “a number of friends in large pharma companies.” The Nasdaq Biotech Index and the SPDR S&P Biotech ETF were ticking upward and reached all-time highs in early 2021.

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Biotech valuations seem to have trended southward lately, which could give buyers a way in. But Syed noted that the dealmaking mantra doesn’t really change at large-cap biopharmas.

“It’s not like you hear these guys saying, ‘Oh, everything’s cheap, let’s go buy three SMID-cap biotech companies,’” Syed said. “It’s always like, ‘We’ll remain disciplined and we’re going to look for something that strategically and financially makes sense.’”

In addition, uncertainties with potential changes to U.S. drug pricing policy and relatively good internal pipeline development were factors Torreya cited that have lessened companies’ motivation for M&A.

Syed also pointed to the emerging omicron variant to illustrate the uncertainties around biopharma M&A next year. The new coronavirus variant has quashed on-site attendance at the dealmaking event of the year, the annual J.P. Morgan healthcare conference in January. Although companies have figured out how to do business in the new norm, disruptions to the business development meetings might slow things down, he said.

The RBC team also noted that the pandemic-related market volatility may also deter M&A movements. On the flip side, though, all the lessons that companies learned from “pandemic-proof” due diligence efforts in 2021 may come to fruition in 2022, the team said.

Despite all the twists and turns, large biopharmas still need deals to drive shareholder returns, Hunzinger said in a report. “The ever-changing regulatory landscape, the potential for U.S. and global tax reform, and the continued focus on the affordability of drugs will remain issues that the sector will need to consider when executing deals in 2022 and beyond.”