In a lackluster year for global mergers and acquisitions, a busy fourth quarter brought a flurry of deals in the life sciences sector, leading to cautious optimism about 2024. Generally characterized by a decline in merger and acquisition activity (down 17% compared to 2022) . In 2023 , the total value of pharmaceutical and life science products increased by 50% compared to 2022 .
Why is life sciences outperforming the market? The last quarter of the year ended with high commercial activity. In the biopharmaceutical sector, for example, AbbVie, Bristol-Myers Squibb, AstraZeneca and Roche each announced several significant acquisitions in the fourth quarter, including AbbVie's acquisition of ImmunoGen for $10.1 billion and Cerevel Therapeutics for $8.7 billion. Dollar; Bristol-Myer Squibb's purchase of RayzeBio for $4.1 billion, Mirati for $5.8 billion and Karina for $14 billion ; AstraZeneca buys Grecell Biotechnology for $1.2 billion and Ecosavax for $1.1 billion ; Roche bought Carmot Therapeutics for $3.1 billion and Telavant for $7.1 billion . Big Pharma dominated life sciences M&A, accounting for more than two-thirds (69%) of M&A investments in 2022, up from 38% overall.
Why did you get up? First of all, the antitrust environment dominates the market, but Amgen's acquisition of Horizon Therapeutics and Pfizer's Cejan was successfully completed in October and December despite scrutiny from the Federal Trade Commission. Commission (FTC). Pharma buyers enjoyed increased confidence in the second half of 2023 and we expect this to continue in 2024.
Of course, while blockbuster acquisitions continue to grab headlines, smaller deals are dominating the market , increasing their level by 160% by 2022. In 2023, more than half of M&A activity in the life sciences sector involved private and small biopharmaceutical players . The market and regulatory environment has contributed significantly to the industry's complex and innovative transaction structures with the introduction of reverse mergers, permanent and stock-for-stock transactions, and sponsor-led private transactions.
What were the key favorable and unfavorable factors that drove strong deal activity in 2023 and will continue to impact the early life sciences M&A environment in 2024? This is for the message. Let's dig.
Tailwind
What else can we thank for the relative stability of M&A in the life sciences sector as we approach 2024? It turns out there are many reasons for this.
New patents
In 2030 , more than 190 drugs, including 69 popular drugs, will lose patent protection , putting $236 billion in sales at risk. This is expected to have a significant impact on large pharmaceutical companies such as Bristol-Myers Squibb, AbbVie and Novartis as existing products are supplemented with internal research and development activities and new products or development assets are acquired.
"dry powder"
Big pharmaceutical companies with lots of money in their pockets had a lot of “dry powder” and didn’t hesitate to get it out. Other major acquisitions for 2023 include Pfizer's acquisition of Siegan for $43 billion and Merck's acquisition of Prometheus for $10.8 billion.
Public markets and the money supply problem
The IPO market remained relatively quiet through 2023, prompting many life sciences companies to turn to other exit strategies to raise funds. In particular, the difficulty of raising capital for small and medium-sized life sciences companies that lack commercial revenue and require liquidity to develop pipelines has forced companies to explore strategic options.
Strategic innovation
Strategic buyers are feeling greater pressure to make targeted acquisitions to complement their portfolio, enter new markets and close innovation gaps. Others have made less traditional acquisitions and instead opted to build alliances and partnerships.
differences
Large life sciences companies are focusing more on their core businesses, which has led to splitting and spinning off their businesses to provide more liquidity for acquisition targets.
Headwind
The antitrust investigation has not yet been completed.
Perhaps the biggest obstacle is the investigation by antitrust authorities inside and outside the United States. However, this increased control does not always mean success for the antitrust authorities. As noted above, the success of the Amgen/Horizon and Pfizer/Segene deals in withstanding regulatory scrutiny bodes well for large pharmaceutical companies looking to continue their expansion through mergers and acquisitions. Of course, conducting this review is not without time, commitment, or expense - and that does not mean that it covers significant product overlaps or product candidates that do not comply with the FTC/DOJ merger's revised product guidelines. The FTC filed a lawsuit in May to block Amgen/Horizon's marketing and only reached an agreement shortly before the trial in September. Pfizer, which was the subject of a second FTC investigation in July, announced in December that it would refer regulators' concerns to Merck KGaA, which earns royalties from sales of cancer drugs. A few months after the sale of the pharmaceutical business to a German company.
Let's not overstate the problem: regulators have won significant victories in 2023. Illumina battled U.S. and European antitrust regulators for years to track down Grayle, and shortly after an appeals court sent the case back to the FTC, Illumina decided in December to pursue the case and sell Grayle. In addition, after the FTC sued Maz to block an agreement to grant an exclusive license to Maz's drug candidate to treat Pompe disease, Sanofi decided not to contest the lawsuit and dropped the case, arguing that it would result in a emerging competitor would be eliminated. Agreement. The FTC said the deal "not only deprived Sanofi of significant market share, but also threatened to displace Sanofi treatments as the standard treatment for Pompe disease."
The FTC may continue to apply new antitrust theories unless the parties believe that the benefits of challenging the transaction outweigh the costs. Furthermore, the impact of an aggressive FTC is felt not only on deals that are prevented from closing, but also on deals that might otherwise close but never materialize. Many buyers want to avoid the time and expense of a protracted legal battle—and sellers want to avoid a deal that may never happen—so they avoid deals with real antitrust risk or charge high termination fees to mitigate the risk.
The price cuts continue.
In the post-Covid era, the polarization of the life sciences market between successful and distressed companies has deepened, with buyers focusing on distressed assets and stark differences in liquidity and willingness to invest. Many buyers adjusted their market expectations accordingly as acceptance of the “new normal” slowly began to keep up with sales. Valuation relationships between sellers and buyers continue to represent a major obstacle to agreement on transaction terms, even when strategic and financial interests and capital exist and the parties are willing to do so. This is especially true for companies that focus on developing prime-time assets. Life sciences companies use tools such as contingent milestone payments – often called earnouts in private deals and contingent value rights (CVRs) in public deals – to account for significant changes in drug prices. This helps provide a level of control and closes the valuation gap. However, as we discussed in a previous blog post , these tools are not universally applicable and cannot always be relied upon to bridge the gap.
Results
Put it all together and what do we get? In addition to the large pharma acquisitions discussed above, we have seen very strong activity in the deal market.
Buyers continue to focus on risk-free assets even later.
With this in mind, one of the key trends in 2023 was that buyers preferred to focus on relatively risky product candidates with a stronger data set to better assess the true value of the company at a later date. In an already risky environment, buyers have been reluctant to take risks on platform and discovery companies.
In 2023, 74% of transactions will involve companies with lead assets that are at least in the third phase of development or have already received market approval , a significant increase compared to the average share of 58% between 2019 and 2022 (which is 16%) . This shift has had a negative impact on early-stage companies, particularly Phase 1 and pre-clinical stage companies, as they still struggle to raise funds in a weak public market or, when possible, borrow at high interest rates. We could see this shift in 2024 as buyers focus on companies that promise late-stage clinical data.
Participate or buy? The question fundamentally remains
Life sciences acquirers still face the decision of whether to acquire a company or enter into a joint venture agreement that includes the potential benefits of joint ventures, partial control risks, potential valuation and prevaluation adjustments, and antitrust risks. Overall, the number of R&D partnerships and licensing agreements has declined - volumes are expected to decline by 15.4% between 2022 and 2023 - as buyers are more selective about the types of assets in which to invest and prefer to acquire companies. And get full control. Most licensing deals in the biopharmaceutical industry in 2023 occurred in the high-risk platform and discovery phases. While buyers in a competitive market tend to take risks by purchasing unproven properties, the current climate has shown that buyers are unwilling to take the same risks and prefer joint arrangements until the property is secure. On the other hand, licensing agreements are not immune to fraud affecting procurement activities: the FTC's success in forcing Sanofi to waive its licensing agreement with Maz could further undermine licensing activities. In an environment where licensing agreements also raise antitrust concerns, large pharmaceutical companies may opt for mergers and acquisitions to gain full control of their assets and bring valuable and valuable lawsuits against antitrust regulators.
The complex marketing structure is coming to the fore again
While cash-to-cash and CVR transactions have traditionally been the focus of life sciences companies, the past year has continued to see consolidation in other non-industry transaction types. In this section, we discuss the most common, or at least most discussed, alternative trading structures that life sciences traders are considering this year.
Reverse combos remain buffered
In 2023, the door was opened for small and medium-sized public life sciences companies that were trading below their IPO price and often below the value of available cash to cancel merger deals. As we enter the second quarter of 2023 , 29% of publicly traded U.S. biotech companies are trading below their financial value . Faced with limited options, listed companies have sought reverse merger deals to capture value for their listings and put their excess capital into developing new assets. Private life sciences companies that have no realistic prospect of going public via a traditional IPO have also identified reverse merger deals as an attractive alternative to DSP deals, which carry their own risks, particularly unknown payout rates ( up to 95% on average) . in 2023 ) and independent private investments in public equity financing (PIPE). However, shareholders of listed companies or other parties, including high-profile activist investors, are more likely to oppose reverse merger deals than make a risky long-term bet if they see liquidity being returned to shareholders of listed companies. . New properties. Accordingly, reverse merger applicants have adopted a signal and block structure that requires approval from shareholders of public companies as a condition of completion. For any undervalued reverse merger candidate, the onus is on the company (including PIPE investors) to convince them that the long-term thesis (for the deal or independent pursuit) is worth the risk.
The stock-for-stock deals continue.
While cash has traditionally been the name of the game in M&A transactions in the life sciences sector, stock deals have become more common in 2010. In 2023, the combination of capital markets and life sciences companies remains an attractive option for buyers looking for legitimate value. However, those who make these deals often encounter twists and turns along the way. For example, in 2023, Amedys' board decided that acquiring shares in the combined company would not be in the best interest of shareholders (from the perspective of consolidating the combined company) and instead paid Alternative $106 million as a termination fee of 3.6% billion US dollars. Healthcare. Try an all-cash offer. While the market responded well to a number of market valuations, including a 20% increase in Revolution Medicines' share price following the EQRx acquisition announcement, the market did not respond well to several other developments. In a stock-for-stock deal, it is important that both parties effectively market the strategic benefits and long-term potential of the deal and actively anticipate shareholder objections - a competing cash offer or a liquidation option.
Sponsor-driven private businesses and hate attacks are entering the life sciences
Private equity-backed private equity deals have become a hot topic in the healthcare industry. Notably, in 2023, private equity firms Elliott Investment Management, Patient Square Capital and Veritas Capital purchased biopharmaceutical solutions company Syneos Health for $7.1 billion through an all-cash purchase of Dechra Pharma, EQT's entire veterinary products business. - Receive $6.1 billion in cash.
Some financial players also want to use the net cash discount targeted for 2023 to buy distressed biotech companies in order to distribute the remaining cash immediately and buy it as dividends. Most recently, in December 2023, Tang Capital Partners (Tang Capital is a major shareholder through Concentra Biosciences) made an unsolicited offer to acquire 100% of Lianbayon's shares with the intent to sell for $515 million in cash. . As Tang's other similar offerings indicate, Concentra offered a CVR that conferred the right to 80% of net revenue from licensing or operating any Lienbio software. In 2023, Tang Capital filed a total of five different Schedule 13Ds with the SEC to acquire five different companies on similar terms.
And then? We look forward to 2024.
Going forward, we expect increased M&A activity in the life sciences space in 2024. Low interest rates and a further slowdown in inflation should align with corporate valuations and expectations and boost investor confidence in the economy. Increased appetite for consensual activities. However, headwinds remain and the sector will continue to contend with regulatory uncertainty, geopolitical challenges and buyers seeking riskier assets. As noted in a recent Cooley Antitrust Group blog post , companies across the United States will be watching the upcoming presidential election and its impact on merger management.
Life sciences companies are under constant pressure to acquire and sell assets in a rapidly growing market to drive innovation, pool financial resources and generate healthy returns. The patent bottleneck approach will encourage large pharmaceutical companies to acquire new assets to supplement their pipelines and offset lost sales. Buyers will continue to focus on companies with commercially available products or advanced development for M&A. With the revival of weight loss drugs in 2023, we expect more investors to show interest in this sector next year. Digital health, medical devices and life sciences companies want to integrate artificial intelligence and machine learning into their tools and platforms, but must weigh the risks of passing legislation in a relatively new legal area. Companies will be willing to use innovative structures to meet their needs, including collaboration agreements, partnerships and divestitures.
And we won't conclude our forecast without predicting that there could be surprises. We'll let you know.
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