Dealmaking in the life sciences sector comes with characteristics not typically seen in more traditional mergers and acquisitions (M&A). Deals often involve negotiating around complexities associated with both the unique nature of assets of life sciences companies and the unique industry ecosystem that brings these assets to life. Innovations—be they to drugs or medical equipment—can take years to develop and are not always guaranteed to succeed in the various clinical trial stages. These innovations can also involve multiple stakeholders from academic institutions, hospitals, startups, and established companies, creating a complex web of ownership issues, competing interests, and priorities.
Buyers also come with different views, perhaps wanting to license a product, do a collaboration, or undertake an M&A. Given these traits, life sciences deals can be more creatively structured, sometimes featuring a combination of an M&A transaction, coupled with a partnership or co-commercialization agreement, spin offs, or options to buy.
When the stars align, buyers are willing to put up significant funds. In 2023, life sciences M&A spending rose to $191 billion, up 34% from 2022. What does 2024 have in store for M&A deals in the life sciences sector? In this Insight, we examine the year so far and provide predictions for 2024 as well as emerging trends potential buyers and targets should keep in mind.
2024 SO FAR
The first quarter of 2024 showed positive signs of robust biopharma deal activity.
The market for private investments in public equities was up, with 48 privately negotiated fundraisings of publicly traded companies totaling $4.4 billion. Follow-on offerings were also up, with 48 deals accounting for $10 billion, marking the most seen in a quarter since 2021.
Initial public offerings (IPO) were mostly positive, with $3.9 billion in IPO money raised. As is typical, M&A activity slowed in the first quarter of 2024 following a busy close to 2023. The first quarter of the year saw 26 deals total $19.4 billion, compared to $60 billion in the fourth quarter of 2023.
Finally, venture capital invested $12.4 billion into the sector through 306 deals, matching 2019.
PREDICTIONS FOR THE YEAR AHEAD
Biopharma dealmaking could accelerate in 2024 and onwards because the industry is now reaching the much-anticipated “patent cliff” where several pharma companies have major blockbusters that are going to go off patent protection relatively quickly.
The sector retains more than $1.37 trillion in available capital for M&A, leaving a lot of “dry powder” on the sidelines for M&A activity. It is important to note that M&A in pharma tends to be driven more by strategic priority than depressed value for a particular company. So even if a price for a company is low, an acquisition will likely depend on whether that company fits into the strategic goals of the buyer.
In 2024, we expect M&A will more closely resemble prior years with a total deal value in the $225 billion to $275 billion range across all subsectors of the life sciences industry. We continue to expect that deals in the $5 billion to $15 billion range will be the market sweet spot but see the potential for one or more deals in the $20 billion to $40 billion range before year-end.
EMERGING TRENDS
- Bankruptcy/Solvency Concerns: Deal partners are increasingly wanting to know more about the financial health of their counterparties.
- Antitrust and Anticorruption: The US Federal Trade Commission and other anticompetition agencies are putting more focus on pharma mergers.
- Heightened Geopolitical Risk: There is some belief that CFIUS filings can have a chilling effect on US-China deals and stakeholders are now tracking the potential impacts the BIOSECURE Act would have on manufacturing and supply if enacted.
- Inflation Reduction Act: To respond to any impact of the IRA on pharmaceutical pricing, some licensing and collaboration agreements have added provisions to decrease royalties by a particular percentage if a drug becomes subject to the IRA.
- Partners Enforcing Diligence/Commercially Reasonable Efforts Obligations: To ensure a project comes to fruition, partners are using strategies such as time-based diligence obligations, or renewing focus on remedies such as special enforcement provisions and arbitration.
KEY TAKEAWAYS
It is important to keep in mind that life sciences dealmaking is different. Along with having to navigate the unique and complex relationships that form to create innovations, the nature of the life sciences business requires specialized diligence around things like intellectual property, regulation, licensing, collaborations, manufacturing, solvency, and pricing.
Other considerations include the following:
- Agreements can be bespoke and creative. They need to properly reflect economic terms and the other nuances of these transactions through specialized representations and warranties, covenants, conditions to closing, and termination provisions.
- Due diligence is key. Since most of a company’s value is in the form of intangible assets, such as patents or unique knowledge, due diligence by industry experts is critical to understand what exactly comes with a transaction and whether such intangible assets have been properly protected and enforced.
- Beware of the poison pill. Buyers should be wary of acquiring a company that can poison its platform or create significant obligations that are not worth the trouble. For instance, a requirement to give away all data or share other confidential information to get a deal done is likely not going to be worth it in the end.
- There will be risk. Trusted corporate counsel can add value as a strategic thought partner to solve for unique risks in the space. A deal may not achieve zero risk, but there are many creative mechanics that can used to mitigate risk as much as possible.
- Plan for uncertainty. Given the constant innovation and steady flow of M&A and partnership deals in the life sciences industry, keep in mind that a current partner may go bankrupt or be acquired, so it is important to plan accordingly. Protective measures include requiring a partner to provide notice of an acquisition or require approval in some cases.
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