Biopharma M&A Firepower: Current Trends and Outlook

Ahead of the release of EY’s annual M&A Firepower report this week, Pharm Exec sat down with Arda Ural, EY Americas Industry Markets Leader for Health Sciences and Wellness, to review biopharma M&A activity in 2021 and to discuss the likely deal drivers of 2022.

Pharm Exec: How would you sum up 2021 in terms of biopharma deal activity?

Arda Ural

Arda Ural: In terms of the deal values and indication, typically you’re looking about $200 billion as a healthy benchmark, over the last ten years or so. This fell below 200 billion in 2021. Through to mid-October, I think we recorded a total value of about $108 billion in biopharma M&A deals. So, clearly the M&A market reflected some of the uncertainty of last year as a result of COVID-19. But it wasn't for lack of activity. When you speak with the corporate development community, they claim that they cannot be physically busier. There was a lot of activity going on. But being unable to travel, dealmakers were going back to their community of trusted industry colleagues to do deals.

If you look at the modalities, 2021 was predominantly a bolt-on year. It’s not just COVID that explains this. The slower transaction volume was a result of competition from a lot of other modalities, too. You had pharma buying up smaller biotech technologies, but now you were looking at IPOs, which were up tremendously in the first half of the year. A company with a new technology looking for capital could gain access to capital markets through IPOs. While this activity slowed in the fourth quarter, it remains a viable option.

SPACS (special purpose acquisition companies) came back after 20 years — and they came back with a vengeance. Now there are over 400 SPACS looking for deals. After launch, they typically have 24 months for their investors to go and find a company, a private asset, to take public. SPACS have been a fairly strong contender as an option for any kind of a biotech innovator wanting to find capital. Private equity also had a lot of capital, and follow-ons were strong.

If you look at the totality of what we call the Firepower, however, there was about $1.2 trillion worth of dry powder on the sidelines. What that means is the industry is ready to pull the trigger on more M&A going forward.

So, that is how I would summarize 2021. It was an interesting year to say the least.

What therapy areas are likely to attract the most M&A attention in 2022?

It’s hard to make any predictions for 2022 with the omicron uncertainty ahead of us, which may or may not have direct impact on the types of deals being done. Deal making is a very high-touch exercise, a high-contact sport. But one thing to pay attention to is the kind of assets people are chasing. We are seeing an enormous amount of assets— over 200 — in cell and gene therapy under clinical development. And I think the number of molecules in clinical development of all phases is around 1,800. So that is a massive inventory of assets maturing in the pipeline, which is well funded. The second area, which was almost science fiction until recently, is gene editing. In 2020, the Nobel Laureate was a gene editing person, Jennifer Doudna. I would add to that the RNA-based therapies. During COVID, the mRNAs became the gold-standard platform for fighting the infections, so they have very much validated themselves. There are over 200 molecules in clinical development in this area. Another area to watch is rare diseases. There are almost 7,000 rare diseases and only 10% have some kind of therapeutic management capability. The treatments are less price sensitive because these are not contested markets. They are markets with unmet needs, and thus the pricing and reimbursement power of the innovators is not compromised. Also, oncology and certain CNS diseases will remain areas of interest to buyers.

What is the deals outlook for the largest biopharma companies?

Over the next three to four years, Big Pharma will face significant headwinds in terms of patent expirations. This was something that pharma used to manage in the past, but this trend is somewhat different because it’s not just the small molecules but also the biologics that are expiring. We call this the innovation gap, meaning that the loss of the top line will not be quickly replenished by the pipeline. It’s not an indictment to say that pharma is not innovative enough here. It is actually spending 17% of its revenue on R&D, and that number has been increasing over the years. Ten years ago, it was 14%. But size does not necessarily correlate to productivity. How are the top 25 biopharmas going to replace the loss of revenue from more and more patent expirations? Well, they’re going to go after bolt-on acquisitions, which I mentioned earlier. The bolt-ons will focus on gene editing capabilities in rare disease, oncology and CNS, area with a lot of unmet medical need.

Having said that, we never say never to megamergers. They are driven by different dynamics, such as geographic expansion. The US is probably going to be the target for geographic-expansion megamergers based on its favorable pricing and fast access to market. And again, cell and gene therapy, gene editing, rare diseases, and oncology could be areas that motivate a megamerger. We didn’t see a megamerger last year, but that doesn’t mean we are not going to see one in 2022. It’s just they are driven by different motivations other than just innovation.

We’ve seen this year’s JP Morgan conference switch to virtual after initially planning an in-person event. Do you see a hybrid digital/in-person approach continuing for the business of deal making?

We can maybe draw a correlation from another EY study, How can your workplace be a flexible as your workforce? (December 2021). That report shows that the pandemic did not create the move to hybrid, but it certainly accelerated it. Previously, 40% of employees were already working in both office and remote locations, while about 45% were in the office full time and 15% were fully remote. During COVID, 27% were in the office full time and about 31% fully remote. This is not a pharma-specific study, but clearly pharma is not isolated from it. We will go back to normal, but it will be a new normal in terms of how we do business. People now realize that you don’t need to fly to Tokyo for a three-hour meeting; you can do it on Zoom instead. But for a deeper dialogue, for example, if you are negotiating the terms of the deal, you need to be able to look at people eye to eye. That part of deal making will continue to be in person. The hypothesis that maybe you don’t need to have all meetings in person has been validated through the COVID experience. It was an experiment that we didn’t ask for, but there have been some beneficial side effects.

How would you summarize your outlook for 2022?

Overall, I think the fundamentals of the industry are strong. But sustaining the desired growth over the next three to four years will not just come from internal innovation. Companies will have to deploy their balance sheet to be able to afford growth through external innovation deals. Funding will prioritize cell and gene therapy and gene editing, rare disease and oncology, but pharma is not the only game in town. There are IPOs, SPACS, follow-ons and private equity competing with pharma. And that will push up the premiums on the deals, as we saw in 2021 — we’re talking about a 150% jump for cell therapy, 94% for gene therapy. So, it’s going to be great for any innovator with a scientifically de-risked asset. It’s going to be a sellers’ market, for sure.

The EY Firepower report is now available at ey.com/firepower