Life Sciences M&A: Market Slowdown Masking Strong First Half of the Year

Life Sciences M&A has been going strong, but has shown signs of weakness after an outstanding run in 2021. Despite the slowdown, the first half of the year is on track to beat out every year except 2021. The sector did exceptionally well last year in a wave of reorganization, driven by the COVID-19 pandemic. Digital transformation was and still is the order of the day, both for healthcare and the broader market. For pharmaceutical companies, adding new, freshly patented IP to an aging roster will also drive acquisitions over the next few years.

As the pandemic recedes from the forefront, powerful M&A drivers remain for the space. Many companies amassed huge war chests over the past few years, having cashed in on high valuations, cheap debt, and record profits during 2020 and 2021. We expect Life Sciences to outperform the broader M&A market in the near term, as the sector will face unique pressures to consolidate, transform digitally, and gobble up patent-protected IP.

Some of the biggest deals in the first half of 2021 include Pfizer’s $12 billion acquisition of Biohaven, Bristol-Myers’ acquisition of Turning Point Therapeutics, Healthcare Trust of America’s $11.2 billion merger with Healthcare Realty Trust, and UnitedHealth Group’s $6 billion acquisition of LHC Group.

COVID Vaccines have been a windfall for the companies fortunate enough to quickly bring one to market, generating hundreds of billions in revenue since they began to launch in late 2020. That cash flow won’t last forever; demand has already slumped this year. Companies like Moderna and Pfizer are eying acquisitions to keep their growth going.

Pharmaceutical companies will face a number of patent cliffs in the next few years on some of the world’s top-selling drugs. These include Humira’s (Abbvie): $20B in sales at risk after 2023, Keytruda (Merck): $15B in sales, at risk after 2028, Revlimid (Bristol): $12 B in sales, at risk after 2025, Eliquis (Pfizer): $9B in sales, patents phase out after 2027. The top 15 drugs facing a cliff this decade totaled over $100 billion in sales last year, representing a major topline threat for some of the biggest pharma companies. Experts say all that patent pressure, coupled with record cash reserves, will boost deals in the coming years.

While we expect unique tailwinds to drive greater M&A activity in Life Sciences than the broader economy, the sector is still subject to many of the same macroeconomic factors. In the first half of 2022, those factors were defined by uncertainty. Along with geopolitical tensions, rising inflation and interest rates weighed on investor sentiment. Few asset classes were shielded from a tough correction since the beginning of the year.

Deal-making in the Life Sciences space was bound to cool off after a remarkable year in 2021. Activity remains strong though, and there are powerful fundamental factors to drive M&A for years to come. The sector enjoys massive cash reserves thanks to the cheap credit and high revenues of the past few years. It is also facing patent cliffs and the need to digitally transform. The Life Sciences M&A market is expected to continue to be active in the near term and will likely outperform the broader M&A market.