M&A deals in life sciences sector to rebound in 2023, says EY

2022 was a slow year for dealmaking in the global life sciences industry. But as companies face a rapidly changing market, and conditions for deals improve, 2023 is set to become a more active year for life sciences deals, according to a new report by EY.

With ‘only’ $105 billion in life sciences M&A deals completed in 2022, last year was the industry’s lowest dealmaking year by value since 2017. Compared to 2021, deal volume was down 27%, while deal value slumped by 53%.

The development aligned with broader global dealmaking trends for all industries – due to disruptive uncertainties, ongoing geopolitical conflicts and macroeconomic volatility, overall M&A investment worldwide saw a similarly considerable drop.

In the biopharma segment, M&A investment fell 42%, with much investment focus going towards alliances rather than acquisitions. The medtech segment saw an even larger drop. Despite the massive $16.6 billion acquisition of Abiomed by Johnson & Johnson in the United States, merger & acquisition value plunged by 62%.

2023 set for a rebound?

For this year EY’s experts expect that dealmaking activity will pick up. Early signs already unfolded late 2022, when Amgen announced it will pay a massive $28.5 billion to acquire Horizon Therapeutics, which markets the thyroid ocular disease blockbuster Tepezza (teprotumumab-trbw)*.

“And there are strong reasons to suspect Amgen will not be the only big player making a return to the big dealmaking table in 2023”, said Subin Baral, global deals leader for the life sciences industry at EY.

Meanwhile, a smaller but sizeable deal closed last week: AstraZeneca expanded its cardiovascular capacities with the $1.8 billion acquisition of CinCor.

For one, the life sciences industry has deep reserves of deployable capital – funding that can readily be put to use (comparable to ‘dry powder’ in private equity). According to EY’s calculations, the biopharma industry alone holds over $1.4 trillion in deployable capital: an 11% increase on 2021, and the highest level recorded since EY started tracking the metric in 2014.

Second, the M&A drop in 2022 has dragged valuations down, meaning that companies are now incentivised to acquire ‘cheap’ targets. They will however face stiff competition in this space – EY suggests that private equity funds are increasingly turning to life sciences in their hunt for attractive deals, and buy-and-build platforms.

Third, there is an ongoing innovation renaissance in the life sciences sector, including advances in cell and gene therapies, mRNA, digital technologies and data analytics. “Turning to deals – or partnerships and alliances with innovative players – can be an effective way to accelerate ambitions,” said Baral.

A more long-term driver, revenue erosion is another factor that will come to play in 2023. As leading products lose patent protection and face competition from lower-priced generic and biosimilar challengers, the biopharma industry is set to experience significant revenue erosion over the next decade.

“Companies therefore need strong pipelines and a deep therapeutic focus to realise value, which will give them further incentive to seek high-value acquisitions,” Baral stated.

Making dealmaking work

While the life sciences industry “has got the resources, the incentives and the opportunities to lean into making major M&A moves again in 2023,” said Baral, the sector will have to adapt its M&A processes to the changed environment. In addition, the EY leader advises companies to “take a more strategic and end-to-end perspective” as to how deals can deliver value to core strategies.

* The Amgen - Horizon Therapeutics deal is likely be finalised in the first half of 2023 and is not included in EY’s deal data for 2022.