In 2023, the life sciences sector, particularly Big Pharma, has witnessed a significant return to large-scale deal making.

This resurgence is primarily driven by the looming patent cliff, with numerous key products facing the loss of patent protection within the next five years.

The EY (Ernst & Young) M&A Firepower Report sheds light on these evolving dynamics, emphasizing the urgent need for strategic dealmaking to secure future value.

According to the report, the global life sciences industry finds itself in a pivotal transformation, fueled by an unprecedented surge in mergers and acquisitions (M&A) this year.

With $215 billion in M&A investment last year, the sector eclipsed its previous year's spending by a staggering 51 percent. This resurgence, primarily driven by Big Pharma's strategic maneuvers, marks a significant shift in the industry dynamics.

The report stressed that the necessity for immediate and impactful deals has never been more pronounced, especially as companies strive to foster new revenue streams and long-term value.

Behind this upswing in deal activity are the life sciences behemoths, the pharma multinationals, who have rediscovered their appetite for big-ticket acquisitions. This shift in strategy is exemplified by landmark deals like Merck's acquisition of Prometheus and Pfizer's massive $43 billion takeover of Seagen.

The report stressed this intensified activity has not only raised the average deal size but also set the stage for an equally dynamic 2024.

Yet, the path ahead is not without challenges. The industry must navigate a complex landscape shaped by economic conditions, regulatory changes like the U.S. Inflation Reduction Act, and the overarching imperative to deliver enhanced patient outcomes.

Korea Biomedical Review recently conducted an online interview with Subin Baral, EY Global Deals Leader for Life Sciences, to delve deeper into these trends.

Baral pointed out the notable surge in biopharma acquisition sizes in 2023, attributing this to the scarcity of high-quality assets.

"There are not many quality assets out there, and those that are available are commanding high valuations due to their robust data and science," he said. "These assets often include combinations of marketed products and assets matured in clinical trials to phase two and beyond."

A key driver of deal sizes, according to Baral, has been the oncology sector, and he predicts this trend will continue into 2024.

"Everyone acknowledges that oncology has been a dominant force in recent deal-making, driven by advances in ADC (antibody-drug conjugates) platforms," he said. "Oncology, unfortunately, is an area where the patient population is growing faster than the cures we have in the market."

This trend highlights the unmet needs in patient care and the immense potential for growth and innovation in this therapeutic area, he added.

Baral also brought attention to the CNS space, which has historically seen less focus in recent years, in part due to challenges in proving efficacy and bringing new innovations to the market.

"However, there has been a noticeable increase in successful trials and studies in this area," he said. "This shift indicates a growing interest in CNS-related deals, reflecting the sector's response to the significant unmet patient needs in this field."

On the challenge of navigating the patent cliff, Baral emphasized the importance of effective management strategies for pharma companies.

"The EY M&A Firepower Report highlights the industry's strong fundamentals despite challenges like the $300 billion revenue at risk due to the patent cliff for the top 25 biopharma companies through 2028," he said. "It all depends on the company's ability to negotiate cliff and secure future growth."

To address this issue, there is a need for external innovation through partnerships, collaborations, or direct M&A, he added.

Baral further mentioned that the top 25 big biopharma companies have [JE1] $1.4 trillion of firepower for deal-making, a positive sign for the industry.

Adding to this factor is the financial state of smaller biotech companies.

"Nearly 50 percent of them are running at cash flows of less than two years, compelling them to engage in deal-making to sustain clinical trials and operations," he said.

Despite some macroeconomic headwinds, such as rising interest rates and regulatory uncertainties like the Inflation Reduction Act, Baral remains optimistic.

"Given the fundamentals continue to be very strong, and companies are forced to make deals to access new innovation due to impending patent expiries and competitive landscape, we expect 2024 to be a strong year of dealmaking," he said.

However, Baral points out that the real challenge lies in securing value from the deal.

Baral emphasized the critical aspect of managing post-M&A activities in early-stage deals, which is how new innovations, whether developed internally or acquired externally, are quickly moved through R&D channels and commercialized.

"The product lifecycle management continues to be a very important part," Baral said. "This process is vital in ensuring robust integration strategies to secure value contemplated in the deal model."

Baral also predicted a rebound in M&A activities in the medical device sector, previously affected by operational challenges. "Despite these challenges, I expect a comeback in medtech deal-making," he said. "However, I don't expect large mega deals but rather early-stage acquisitions.”

During the interview, Baral also commented on the strategy between forming alliances or pursuing acquisitions. Baral pointed out that collaborations and alliances have always been a critical part of the life sciences industry. These partnerships serve multiple purposes, including as a de-risking strategy and a precursor to full acquisitions. "Many of those companies typically see alliances turn into M&A," Baral said. "This approach allows companies to build a collaborative vision and understand the potential of a partnership before committing to a full acquisition."

Once an acquisition is made, the acquired business will be on the company's balance sheet, assuming business combination, which means it is important to understand the maturity of assets, especially from a clinical trial perspective, he added.

Baral stressed that the decision to pursue collaborations, minority stakes, or alliances also depends on a company's core competencies and its operational or R&D readiness.

"Companies should evaluate where they play effectively, not just to de-risk but also to fast-track operational and R&D integration," he said.

In his closing remarks, Baral stressed the importance of execution in securing long-term sustainable growth from M&A activities.

Baral highlighted that the current high valuations in the life sciences sector are increasingly posing a challenging business case for M&A.

"The higher valuation continues to be a challenge from a business case perspective," he said. "As a result, companies are forced to critically challenge assumptions about revenue, synergies, costs, and the pathway to market, especially when acquiring early-stage companies."

The central challenge, according to Baral, lies in execution, which is the ability to deliver on the expectations set during the deal-making process.

"The bigger question is on the execution. Can you execute well to deliver the expected values?" he questioned. "This emphasis on execution involves not just meeting financial targets but also managing the integration strategy, aligning stakeholders, and implementing effective change management processes."