Subin Baral, a partner at Ernst & Young LLP and EY Global Life Sciences Deals Leader

Pfizer’s planned $5.4 billion acquisition of Global Blood Therapeutics (GBT), announced on Monday, appears to signal a new wave of merger-and-acquisition (M&A) deals within biopharma. Not all of them are based on Pfizer’s desire to spend the billions of dollars it has generated from the COVID-19 vaccine it co-developed with BioNTech.

True, Pfizer has been more than busy using M&A to fill perceived gaps in its pipeline, snapping up oncology drug developer Trillium Therapeutics last year for $2.26 billion (oncology), then shelling out up to $525 million in April for ReViral, a developer of antiviral therapeutics targeting respiratory syncytial virus (RSV). A month later, Pfizer bought Biohaven Pharmaceuticals for $11.6 billion cash, adding a portfolio and pipeline focused on migraine drugs.

Pfizer is not the only pharma giant busy with M&A in recent months. Last month, AstraZeneca agreed to buy TeneoTwo for $1.27 billion, while GlaxoSmithKline (GSK) also boosted its oncology pipeline by acquiring Sierra Oncology for $1.9 billion. Merck & Co. is reportedly in talks to acquire Seagen for as much as $40 billion. Just last week, Amgen said it was acquiring ChemoCentryx for $3.7 billion to boost its autoimmune portfolio, while Gilead Sciences announced buying University of Oxford spinout MiroBio for $405 million.

All those deals aside, M&A activity slowed down in the first half of 2022, EY (Ernst & Young Global Ltd.) recently shared with GEN Edge. According to M&A data compiled by Capital IQ, there were 37 biopharma deals in the first half of this year totaling $36.1 billion, compared with 41 deals valued at $40.6 billion in the first six months of 2021 (down 10% and 11% year-over-year).

As for initial public offerings (IPOs), combined data from Capital IQ, EY, and VentureSource showed a virtual collapse in activity during January-June 2022, with a mere 10 offerings totaling $680 million—compared with 97 offerings totaling $13.16 billion in 1H 2021 (down 90% and 95%, respectively).

The declines were more pronounced for private financings, according to combined data from Capital IQ, EY, and VentureSource. American and European biotech startups raised a combined $11.24 billion in 422 financing deals in the first half of 2022, compared with a combined approximately $14.503 billion in 480 deals a year earlier (down 22% and 12%, respectively).

Subin Baral, a partner at Ernst & Young LLP and EY Global Life Sciences Deals Leader, discussed current and projected short-term trends for biopharma M&A with GEN Edge. (This interview, conducted just before the Pfizer-GBT deal, has been lightly edited for length and clarity).

GEN Edge: Earlier this year, you predicted that the decline in evaluations due to the bear market would compel smaller biotechs to pursue M&A with pharmas. How much had that begun to occur in the first half of this year?

Subin Baral: We’ve seen some of the recent deals that Pfizer’s done, most recently its deal with Biohaven, and the deal GSK did to acquire Sierra Oncology. You are seeing a lot of deals coming back, with the biotechs having the opportunity to partner with the big biopharma companies, or be acquired by them.

The reason why we feel that we haven’t yet seen a flurry [of deals] is this is still the rebound period for a lot of biotech companies. All of a sudden, after a massive boom, they are looking at a very normalized level of valuation. I think there is a little bit of a psyche that needs to kind of level-set a little bit. We do feel that because of the valuation downturn, there will be increased activity in the deal market, albeit the quality of assets is the number one priority for the pharma companies.

GEN Edge: Pfizer-Biohaven was an $11.6 billion deal, and GSK-Sierra, $1.9 billion. What values can we expect to see for future M&A deals?

Baral: You never say never to megadeals, such as the $20-30-plus billion deals. But a lot of these bolt-ons, in the single- to double-digit billions, are in play in our view, if you look at macroeconomic trends and the headwinds with geopolitical issues. I know there’s a lot of noise around that. But the industry fundamentals are very strong.

GEN Edge: What are those fundamentals?

Baral: When we say the fundamentals are strong, if you look at the business drivers for the biopharma companies, there are four things. 1) the available firepower. 2) the revenue gap. 3) the R&D pipeline. And 4), the patent cliff that companies are facing. If you look at these elements, we feel pretty confident that dealmaking is the way to bridge those gaps.

If you think about it, the big pharma companies are increasingly getting faced with LoE [loss of exclusivity] pressures that are looming between 2024 and 2026. We all know that the industry is going to grow but that there is not enough in their pipeline to be able to bridge the growth gap due to the revenue loss from the patent cliff.

Then, add to the fact that there is now a much more normalized level of valuation. Then also add that these large pharmaceutical companies are sitting on a record firepower, so they have cash to do deals. These are fundamentals that we think are going to be very important, and indicative that this M&A market is going to be bullish in the second half of the year.

Obviously, the focus is on the quality of assets. And frankly, if you look at what the stock market downturn did for biotech, it really cut out a lot of the companies that were in the fringes. They probably shouldn’t have been out there to start with. So you’re now in a group with a lot of quality assets. We also feel that it would be much more competitive for a lot of the quality biotech companies.

GEN Edge: How much firepower do biotech and pharmas have for M&A deals now?

Baral: $1.2 trillion is the firepower available for the biopharmas to do deals.

GEN Edge: How much have evaluations been declining this year?

Baral: The market hasn’t really been very helpful for biotech companies. Two routes to accessing capital—the SPAC and the IPO paths—have both clearly closed for the largest biotech companies. They have a massive nosedive in valuation from the overall sector perspective.

GEN Edge: Speaking of SPACs, they appear to face two challenges: The kinds of companies drawn to that vehicle, and regulatory challenges. With the SPAC market pretty much dried up, how has that affected the regulatory issues?

Baral: In our view, the SPAC market is, I won’t say done, but it’s almost dried up for the sector. I think that they created an alternative path for a lot of the early-stage companies to get access to capital and go public. That was also impacting the valuations. The more options you have, the more competitive it gets.

With that now gone, obviously it’s back to the quality of the asset. As unfortunate as what has happened in the biotech sector is, perhaps it was coming.

GEN Edge: However, several electronic transfer funds (ETFs) have shown increases over the past two months after falling for most of this year. Is it too soon to say they’ve bottomed out and that they’re heading back up?

Baral: Yes, it’s too soon to say it’s bottomed out. It had taken a massive dive, as we all know. If it’s not bottomed out, it’s probably close to being bottomed out. The bigger issue still remains: the quality of the data and the content of the trials that tends to be the driver. Quality companies with good clinical data and good management are seen favorably by a lot of the large biopharma companies. Companies with quality data are getting funding.

GEN Edge: You say they’re getting funded. But the numbers and values of the deals are now smaller than last year.

Baral: That is absolutely a fair point, yes.

GEN Edge: What types of drug development or technologies are most likely to stoke M&A activity in the second half?

Baral: Those areas haven’t changed. I know we’ve talked a lot around antibody therapies, cell and gene therapy. Oncology has continued to be a big area, and you’ve seen that by the number of deals that that took place in the second quarter. Obviously for Pfizer, CNS drug development is coming back for them. Other companies are looking at that focus area.

One thing that this Biohaven deal seems to suggest is that companies are looking at some of their focus TA [therapeutic areas], and how do we look at growing some of these focus TAs? CNS is one area that had been on the back burner for many companies, so I think it’s good to see that it is up there now.

GEN Edge: What impact will the projected growth of M&A have on collaborations going forward? Can collaborations be expected to slow down?

Baral: I don’t want to make a one-quarter data trend, but at least the Q2 data seems to suggest that the collaborations are down. If you look at one of these recent acquisitions, you see that Pfizer had a collaboration and a minority stake in Biohaven for a long time, so that has not completely gone away.

GEN Edge: What if any narrowing is there in the types of collaboration that are more likely to go forward and maybe less likely?

Baral: I think in general that collaboration is here to stay. But how do you turn these collaborations into meaningful M&A opportunities? That is where the big questions are. And the collaborations that we’ve seen be successful are the ones where the larger companies have gone in and have good relationships, with an inside track to the quality of the data and the quality of management that are in place.

So, general structures [of collaborations] are not necessarily changing from what we see. But I think a lot of focus on the types of the data and the management that they’re dealing with is what is being seen as critical success factors.

GEN Edge: Meaning more collaborations that potentially could lead to an M&A?

Baral: Exactly.

GEN Edge: What impact will the projected growth of M&A have on financings for private companies? We’ve already seen declines in both the value and number of such financings in the first half of 2022. Does that continue into the second half?

Baral: We would see some cautious investment. So, I think that probably, if not declining, it probably would be at a steady state into the second half, because people are still reorienting themselves with the market correction. Whether it’s going to come back up or not, there’s a lot of sentiment associated with this.

From what we see, it will probably stay at the Q2 level which actually is a declined state from what we had seen before, at least for the next quarter. Then depending on how this next quarter turns out, there may be some correction in the third and the fourth quarter.

GEN Edge: For public companies, you foresee less public activity of companies rushing to IPOs as we’d seen in the last couple of years. Does that market stay slower until things bottom out?

Baral: If you look at the companies rushing out to go public, in many cases, they were very early in their journey. Perhaps in hindsight, they probably shouldn’t have been public in the first place.

We expect that the companies who are going to go public, if this market rebounds, will be companies that are properly ready to go there. But given the market as is, it would be very difficult to see anyone rushing to go public at this stage. They’ll probably look for an alternative, whether getting acquired by larger companies, provided they have all the right attributes.

GEN Edge: Will M&A activity be driven by the largest pharmas or will we see more activity from mid-sized and smaller biopharmas?

Baral: We’ll see middle market activity as well, but largely it would be the larger pharmas.

GEN Edge: What effect will increasing M&A have on job trends and layoffs? If companies are getting bought, doesn’t that mean more layoffs or more cutbacks in operations?

Baral: There will be some redirection of resources that we expect to see. It’s not always to say that it’s truly a cutback. But there are areas that these companies probably would look at, some uncharted territories, and you’d expect a lot of these big pharmas to explore those opportunities.

So whether that will turn out as a straight cut on jobs or that will be repurposing of some of these resources—upskilling, perhaps—is what we should expect. We’re seeing this across sectors; it’s not just a biotech or life sciences issue. I think given all the technology advancement, people are forced to upskill themselves to continue to be value-add in the new areas that they’re venturing into.

GEN Edge: How will increasing M&A affect premiums for future deals? How might those change with more companies getting bought?

Baral: If you look at the types of assets that are getting the high premiums, they are the quality assets. So, I think the focus is now on the quality of these assets that are being acquired.

The seller will have to be much more ready with the value story, with the management profile, the strategic alignment that they could share with the buyer. There’s a lot more onus on the seller to showcase that they’re ready for the next step in the journey. So that will drive the premiums, and the good quality assets will command the premiums that that they deserve.

GEN Edge: Does that necessarily mean that later-stage candidates will need to be in the clinic longer?

Baral: If you look at a lot of the larger pharma companies, their policy had been that they look at Phase II and beyond for assets, generally. Now the challenge is becoming for them, how do I get into these assets earlier and earlier, because of the quality of these assets, and tap into them as early as I can?

This is where collaborations and partnerships really come into play. So, you see why companies are focused on collaborations. Some of these minority stakes and so forth are not just going away, because the need to access this innovation early in the process is even more acute. So, assets do not necessarily have to stay in the labs longer, but perhaps they stay in the labs longer to generate quality data, in collaboration with the larger players.

GEN Edge: How much does this push companies to narrower pipelines, maybe focusing on one or two areas rather than more?

Baral: That is probably more important now. I think you probably want to focus on your key areas and be really good at those two one or two, whatever those are, than having much broader trials or fields that that may or may not be explored.

At the end of the day, buyers are only interested in the areas that are much more mature, much more robust from a data perspective, management perspective and so forth. While other areas might still have a value in the very long term, being focused on key areas is where the opportunities are for the companies.