Subin Baral, EY Global Life Sciences Deals Leader

It’s too early to call it a boom, but the cycle of biopharma mergers and acquisitions (M&A) has returned to one of “conscious coupling” as large pharmas desperate to replenish pipelines find the promising drug candidates they’re looking for from smaller biotechs.

Acquisitions of biopharma companies totaling tens of billions of dollars have slowly but surely resurfaced since the end of 2022, when Amgen agreed to acquire Horizon Therapeutics for $27.8 billion—a deal the U.S. Federal Trade Commission (FTC) initially sought to torpedo as being anticompetitive and thus hurtful to consumers, before settling differences with Amgen earlier this month.

This year, the M&A merger-go-round was stoked by Merck’s $10.8 billion purchase of Prometheus Biosciences, completed in June, and especially Pfizer’s planned $43-billion buyout of Seagen, the antibody-drug conjugate developer once known as Seattle Genetics, which investors rightly speculated would run afoul of regulators based on antitrust concerns. Unlike with Amgen-Horizon, the FTC signaled it may block the Pfizer-Seagen merger in July, when it issued a second request for data about the deal.

Following close behind were five M&A deals in the single billions of dollars by biopharma giants:

  • Biogen’s planned $7.3 billion acquisition of Reata Pharmaceuticals, a deal intended to bolster the buyer’s neurological drug portfolio. Last week, Reata shareholders approved the deal, which is expected to close on September 26.
  • Astellas Pharma’s $5.9 billion purchase of Iveric Bio, completed in July. The transaction expanded Astellas’ pipeline of treatments for eye disorders.
  • Novartis’ up to $3.5 billion buyout of Chinook Therapeutics, completed in August. Novartis paid $3.2 billion upfront for Chinook, gaining access to its two Phase II candidates for Immunoglobulin A Nephropathy (IgAN).
  • Sanofi’s $2.9 billion acquisition of Provention Bio, completed in April. The deal added to Sanofi’s portfolio Tzield (teplizumab-mzwv), which won FDA approval last year as the first and only therapy to delay the onset of Stage III type 1 diabetes (T1D) in adults and children aged eight plus years with Stage II T1D.
  • Eli Lilly’s recent expansion of its immunology portfolio by acquiring Dice Therapeutics for $2.4 billion, a deal completed in August.

According to EY, the professional services firm originally known as Ernst & Young, biopharma M&A deals during the first six months of 2023 more than doubled in value year-over-year, to $97.296 billion from $36.12 billion in the first six months of 2022—though nearly half of the H1 2023 total reflects the single Pfizer-Seagen deal. However, the number of deals dipped during the period, from 37 to 32.

The uptick in M&A may help explain a fall-off in the number and value of collaboration deals year-over-year. The first half of 2023 saw a total of 105 collaborations launched worth $63.8 billion. The value of the alliances fell nearly 17% from $76.5 billion in January–June 2022, while the number of alliances dipped 10% from 117.

Subin Baral, EY Global Life Sciences Deals Leader, recently discussed factors that help explain the budding comeback of biopharma M&A, and what the next few months may hold, with GEN Edge. (This interview has been lightly edited for length and clarity.)

GEN Edge: Back in January, we chatted about what 2023 would be like for M&A. How much has this unfolded according to your expectation? And how much is it maybe even exceeded those expectations?

Subin Baral: We have always said an M&A comeback was a matter of when and not if. The industry fundamentals have been pretty strong, and we have been a big advocate when the market was down from a macroeconomic perspective.

If you drill down, particularly in the biopharma space where we’re looking at record firepower, we’re looking at the patent cliff that is looming—the majority of the branded drugs coming off patent between now and 2030—and we’re also looking at the R&D deficit within the big biopharma companies. There is not enough in the pipeline to be able to replenish, or substitute for their revenue potentially lost through the patent cliff.

If you just focus on those three factors alone, there are enough drivers to continue the deal making when you think about it. We’re bullish. Obviously, the macroeconomic environment was a little bit more uncertain, and the deal market doesn’t like a lot of uncertainty and volatility, right? Coupled with the fact that the valuations of the big biotech companies have actually stabilized, we are not really surprised by this comeback. We were just waiting for things to happen, and we even asked in our prior publication, how long can biopharma companies really wait on the sidelines, because the patent cliff is looming? We’re not overly surprised that the market has rebounded in in the way it has.

The right deals are getting done, and the right assets are getting the valuation that that they deserve. Now it’s a buyers’ market. But if you have the right seller with the right data and science behind it, those deals are getting the valuations that are high and attractive. So, while these are very exciting times, we expected this to happen. Perhaps this is signaling that the companies are not sitting on the sideline any longer for the right deals.

GEN Edge: Some recent M&A deals have generated huge numbers: Pfizer-Seagen ($43 billion), Merck-Prometheus ($10.8 billion), Biogen-Reata ($7.3 billion). Is this the low end of where we’ll see these numbers?

Baral: The average deal size has increased by over 60% year-over-year. The average deal size is about $1.5 billion. So, asset valuations continue to go up. Again, I keep coming back to the quality of assets, and there are not many out there. The ones that are really good quality, backed by the right science and so forth, they’re attracting the valuation. Obviously, the rare disease area is attracting a lot of premium deals, but it we’re seeing this across the board.

GEN Edge: Has there been any change in what constitutes the right assets now, compared to even a few months ago?

Baral: It’s almost becoming a portfolio play in the unmet need area. Oncology and immunology continue to be big areas. Rare disease has always been an area that has always attracted high premiums. I think the question companies are looking at with M&A is: Does this make a strategic fit with our strategic vision? And how do you create value and meet the unmet need?

A lot of the immunology and oncology deals that are happening, they’re all attracting those high valuations. That’s because the priority focus is the area. I hate to say it, but I don’t think anything has changed drastically in terms of what makes it an attractive asset.

GEN Edge: To what degree are the top M&A deals this year more like the smaller bolt-on deals, where buyers are snapping up a smaller company in order to fill a specific niche, as opposed to expanding into four or five new specialties or therapeutic areas?

Baral: Focus is back. Certain companies, like larger biopharmas, can afford to have a little bit more of a diverse therapeutic area focus. But generally speaking, companies ask, what are our key focus areas? What we’ll see even more of in the back half of this year is this whole notion of divest to invest. Companies are divesting their non-core assets to really focus on their cores. And that could mean getting out of the segments that probably are not their longer-term perspective, and where they can create value for those segments as either a standalone company or finding a buyer that could create value for them.

This whole notion that we have been talking about for a long time is, how do you look at portfolio? How do you prioritize portfolio? How do you use the investment as a fundraising mechanism to invest in the priority areas? That will continue. And we’re already seeing this in the numbers. A lot of larger spinoffs have happened. A lot of companies in the services phase, whether it’s a CRO [contract research organization] or CDMO [contract development and manufacturing organization], are attracting investments from private equity buyers. We expect that trend to continue in the back half of 2023.

GEN Edge: You mentioned macroeconomic trends earlier. So far this year we’ve seen central banks in the U.S. and Europe raise interest rates several times. There’s still inflation, even if it’s not as high as it was a year ago. What effect have those conditions had on M&A dealmaking? And what effect will that have on M&A the rest of this year?

Baral: I would be lying if I say they wouldn’t have any impact. They will have impact. The cost of capital continues to go up. So, the business case of justifying some of these investments continues to be a higher threshold to fly. I come back to the fundamentals: What choice do you really have, because your pipeline is not there. Your LoE’s [losses of exclusivity] are impending. And can you afford to sit on the sidelines for too long? And how long is that?

The question that’s even more important on the buyer side is, how do you capture synergy out of these acquisitions? Because you are paying a high multiple on a lot of these deals. The cost of capital continues to be high. Are you integrating these businesses well enough? Are you providing the level of support well enough for the business that you bought, whether it has commercial assets or R&D assets? Are you maximizing value creation or value capture? Execution risk in planning is much more rigorous and higher, so there is increased focus on companies making sure that they execute to their plan, that they are able to capture the value that is contemplated in their deal models.

GEN Edge: Have there been areas where this year missed expectations in any way, in terms of the types of deals that are still not happening to a great extent?

Baral: I don’t think so. I think we’re seeing what we expected to see. We said divest-to-invest will continue to be a theme. We said in our prior report that it [an M&A comeback] was a matter of time, because the industry fundamentals continue to be strong. We said the therapeutic areas where the larger unmet need will continue to be in areas such as oncology, such as immunology; that has continued to happen. And we said the good companies with what I’ll call quality assets will continue to attract higher valuations, so that hasn’t really changed from our perspective. So we’re glad that what we have narrated as a forward looking comment continues to unfold as we look at the last two quarters in 2023, and we expect the same for the back half.

GEN Edge:
Despite several recent IPO filings, far fewer biopharma companies are going public now compared with two years ago. Is the IPO market poised for the sort of comeback we’ve seen with M&A?

Baral: It’s hard to tell. There is a natural level of attrition that happened with public biopharmas, because we all know that there are certain companies that probably went public when they were not ready to go public. In the down market, it’s inevitable that they will dissipate because of lack of funding, and there is limited access to capital, so to speak, available for them.

I think the interesting part here is that a lot of the early-stage companies are in the predicament that venture capitalists are looking toward a good data set at certain points to de-risk risk some of their downside—while larger companies are also saying, show me a certain data set to limit my downside. [Startups] are in this predicament of, who’s going to fund me when I have no data set yet to prove any of the science? Very, very early-stage funding is a tough piece.

Big biopharma is looking at companies that are Phase II and beyond. That creates a natural challenge for them with respect to the IPO market. I don’t see [companies going public] coming at the same pace that we had seen in the in the few years back, but we see odd ones here and there getting listed. Quality companies will very likely be snapped up by larger biotech companies before anything else happens.

GEN Edge: Speaking of larger companies, big pharmas have been buying a lot of smaller biotechs this year. Novartis has bought two companies, so too Eli Lilly. Gilead, Astellas, GSK, Merck, Pfizer, Sanofi, AstraZeneca, BioNTech and Moderna have each bought one biotech. Why have so many of the bigger companies been such active buyers?

Baral: I don’t think this is any different than what we have seen in the past, where biotech companies have continued to feed into the big biopharma companies. It’s even more so now because of the two factors that that I talked about before, the LoE pressures, and the lack of R&D pipeline within these biopharma companies. Those two factors are always an attractive measure as to why biotech companies have continuously been a good mechanism for the big biopharma companies to fill their pipelines.

Alex Philippidis is Senior Business Editor of GEN.

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