Healthy outlook?

Deal advisers in the life sciences industry will not look back on 2024 with any great enthusiasm, as a year for which many in the sector had high hopes turned out to be rather a damp squib from an M&A perspective. By the close of the year, the global life sciences sector had seen 1,414 deals worth $135.9bn according to data from the London Stock Exchange Group; that compared with 1,941 deals worth $277.1bn in 2023. The UK life sciences market saw similar declines.

Part of the explanation for that global drop-off in value was a dearth of blockbuster M&A transactions. In the biotech space, for example, the largest deal of the year – Vertex’s $4.9bn acquisition of Alpine Immune Sciences – looked small beer compared with Pfizer’s $43bn takeover of cancer drug developer Seagen in 2023.

New look

There were, however, some bright spots in 2024. Notably, in the booming weight loss drugs market, Novo Nordisk spent $16bn in a complex deal to acquire three drug manufacturing sites from Catalent. Elsewhere, Sanofi sold its consumer drugs division to private equity firm Clayton Dubilier & Rice for €16bn. In January, Verdiva Bio, a General Atlantic-backed obesity drug biotech, raised $410m in one of the biggest Series A funding rounds ever, as it seeks to compete with Eli Lilly and Novo Nordisk. 

UK biopharmaceutical company AstraZeneca has also successfully bucked the trend by completing four deals during 2024, acquiring Fusion in Canada for $2.4bn, Gracell in China for $1.2bn, Icosavax in the US for $1.1bn and Amolyt in France for $1.05bn.

As noted above, UK companies have also been targeted. At the larger end of the market, Merck paid $3bn for the ophthalmology specialist Eyebiotech. Elsewhere, Endomag, which develops technology for breast surgery, agreed a $310m sale to Nasdaq-listed Hologic.

Nevertheless, reflects Alex Mackay, head of life sciences deal advisory at BDO, “It has been a more challenging year for some life sciences companies.” He points to headwinds through 2024, including higher interest rates, elections in the UK, US and Europe, as well as industry-specific issues: “There has been a greater focus in pharma on cost reduction and efficiency gains, so companies have been consolidating their service providers,” he says. “This has impacted some outsourced pharma services firms.”

Will the sector push onwards and upwards in 2025? Certainly, there are reasons to feel positive. The economic and political backdrops are both looking more supportive, with monetary policy conditions easing, while the second administration of President Trump is expected to put an emphasis on deregulation. That said, Trump’s appointment as health secretary of Robert F Kennedy Jr – renowned for his scepticism about vaccines – is something of a wild card for the sector, to say the least. 

The year got off to a flying start, with Johnson & Johnson announcing its $14.6bn acquisition of the neuroscience biotech and drugmaker Intra-Cellular Therapies – which would be the biggest deal in the sector for over a year.

PitchBook senior analyst Kazi Helal noted in the data organisation’s December report: “Investors will increasingly focus on late-stage, capital-intensive opportunities with strong clinical validation and clearer paths to commercialisation, consolidating resources into high-potential ventures.”

A plethora of new venture capital funding rounds targeting the sector were announced in January: Truveta ($320m), Tune Therapeutics ($175m), Cera Care ($150m) and Qventus ($105m).

The same month, Andreessen Horowitz announced it was teaming up with the world’s largest drugmaker Eli Lilly to deploy a $500m venture vehicle funded by the drug giant. And Hildred Capital Management has raised $810m for its third mid-market healthcare fund. Eli Lilly also announced its acquisition of cancer-focused biotech Scorpion Therapeutics for $2.5bn. And GSK announced it was paying $1.15bn for IDRx, which is developing treatments for rare tumours.

Positive mindset

Private equity investors continue to take an interest in the sector – particularly in service providers such as contract research organisations (CROs) and contract development and manufacturing organisations (CDMOs). 

“We’re unlikely to see a return of the complex mega-merger deals in the pharma sector, but I do think we’ll see more ‘tuck-in’ deals,” says Stephen Aherne, pharma and life sciences advisory partner at PwC. “Pharma companies will continue looking to make acquisitions to bring in new pipeline products or new platform technologies to supplement their existing portfolios.”

Aherne picks out areas including research, where biotechs are pioneering cutting-edge approaches such as targeted protein degradation to treat diseases previously regarded as untreatable: “We’re starting to see the rise of biotechs that can drug the undruggable.” He also points to intense interest from the life sciences sector in artificial intelligence (see box, below): “AI can transform drug discovery and drive efficiency at every stage of the value chain.”

Research is also important as pharmaceutical companies remain under pressure to find replacements for drugs set to lose exclusivity rights when their patents expire. The so-called ‘patent cliff’ will put $59bn worth of sales in jeopardy at the big pharma groups over the next 10 years, according to analysis by KPMG.

Alternative structures

Deal activity will not always be full-scale M&A. Asset sales continue and licensing deals also remain popular, where pharma companies acquire the rights to sell a drug developed by a biotech, rather than buying the business outright; the parties may even continue working together, with the biotech moving development forward through further trials and regulatory processes. These deals often allow for creative teams with milestone payments and earn-out periods.

“Many large pharma companies are reasonably agnostic about deal structures,” says Aherne. “In what can be a competitive market for the best assets, they’re keen to be seen as good partners, and there are strategies for de-risking transactions, whatever structure is chosen.”

Away from pharma deals for biotechs, private equity activity will also pick up in the coming months, predicts Suzy Davis, a partner in the private equity group at Taylor Wessing. “PE is cautiously optimistic, even if it is still taking its time over diligence and thinking hard about valuations,” she says. “Typically, it’s more attracted to generic pharma, or pharma services companies such as contract research organisations and the contract development and manufacturing organisations, where investors don’t have to take a binary bet on whether a particular drug is going to work or not.”

Other areas of interest include speciality pharma. PE firm Triton, for example, has backed Pharmanovia, which focuses on late-stage activities, developing, licensing, and acquiring niche speciality products and established brands. Meanwhile, Inflexion has acquired CNX Therapeutics, which sells essential medicines, as well as Rosemont Pharmaceuticals.

Complementary tech

Some PE firms are focusing on buy and build strategies, with Apposite Capital backing Scotland’s Kelso Pharma in its efforts to build a new pan-European specialty pharma business. This can also work well, Davis adds, where there is an opportunity to leverage complementary technologies: “There is a lot of sense in combining a more traditional medtech business, say, with an AI specialist.”

Alongside deal strategy, investors also have to consider valuation, which can be difficult to get right, particularly for early-stage companies that may not even be generating revenues yet. “We look at the valuations attached to comparable deals and the market view of what a particular type of opportunity is worth,” says Lucy Edwardes Jones, an investor at BGF, which currently has holdings in more than 23 life sciences businesses. “That’s a really useful starting point, and then we can build in other considerations – the progress the business has made against particular milestones, for example.”

For PE and venture investors in particular, there is also the imperative to keep one eye on a route to exit. Right now, says Taylor Wessing’s Davis, sales remain dominant in a tough market for IPOs. “Those processes tend to be dominated by other PE investors, though there is some trade interest, depending on the size of the business.”

BGF’s Edwardes Jones adds: “The exit process will vary by sub-sector: there is a relatively well-trodden playbook for smaller biotechs to attract interest from pharma as they progress discovery and development to a certain stage; in the pharma services market, you’re more likely to be looking at a sale to PE or a larger player.”

BGF’s Edwardes Jones adds: “The exit process will vary by sub-sector: there is a relatively well-trodden playbook for smaller biotechs to attract interest from pharma as they progress discovery and development to a certain stage; in the pharma services market, you’re more likely to be looking at a sale to PE or a larger player.”

However, she also thinks it makes sense not to rule out an IPO: “We are starting to see some signs of the IPO window reopening. Keeping an IPO on the table can be useful to help these firms get used to the kind of discipline and transparency that would be required of a public company.”

Patent cliff

At BDO, Alex Mackay also thinks 2025 could be a year of recovery for life sciences M&A activity: “We expect to see more deal activity as we have moved beyond the disruption; companies have shifted their focus from cost measures to place more emphasis on growth.” While some companies have taken advantage of the lull in dealmaking to strike good deals, others remain conscious of factors such as the looming patent cliff and the need to deliver on inorganic growth strategies, he says. “There is a real need to bolster M&A pipelines.”

In practice, says Adam Wyon, head of deal finance business development at AstraZeneca, different pharma companies are at different stages of the cycle. “We’re not under pressure to do deals because we have a strong pipeline of R&D coming through,” he says. “But for us, it doesn’t feel like there’s been much of a let-up: even if we haven’t made any really large acquisitions over the past year, we’re always ready to look at deals that give us access to something new, or that help us to accelerate or to innovate.”

Like others, Wyon expects licensing deals to continue to be prominent, pointing out that they often suit both parties. “They’re the meat and drink of the pharma sector,” he says. “They can help to derisk the drug development process – you’re providing a more modest consideration upfront, plus royalties from subsequent sales, so the asset effectively polices itself.”

Still, while funding such transactions may be less challenging than an outright sale, it’s worth pointing out that pharma companies’ balance sheets are currently very strong. EY’s annual Firepower report, published earlier this year, reported that the top 25 companies in the sector had around $1.3tn available to pursue deals.

Moreover, their coffers could be boosted by divestments, with many pharma companies continuing to review their portfolios and to sell non-core assets. For example, the world’s biggest generics drugs manufacturer, Israel’s Teva Pharmaceutical, has just announced the divestment of its Japanese business. Novo Holdings has recently agreed a $135m deal to sell its Xellia Pharmaceuticals subsidiary to the UK’s Hikma Pharmaceuticals. Pfizer is reported to be considering the sale of its hospital drugs unit.

Such deals will encourage optimism that 2025 could see a recovery in life sciences M&A activity. There are no guarantees, but many of the clouds that cast shade over M&A during 2024 have now started to lift. Still, advisers aren’t getting carried away. “I would love for the market to take off, but I don’t feel as if the floodgates are about to open,” says Taylor Wessing’s Davis. “We’re expecting slow and steady growth rather than a deals boom, but there could always be a surprise in store next year.”