Capturing broader geographical markets and customer demographics while economizing on costs are only some of the benefits. Pooling resources, expenses, technical know-how, and talent proves to be beneficial to the participants if they can achieve optimum synergies.

Although the biopharma and pharmaceutical industries continue to grow exponentially, particular sectors are likely to experience higher growth than others. A study of the vertical’s growth patterns starting from the pandemic reveals that M&A activity and investment have been gaining ground.

Let’s Check Out Some Statistics

Mergers and acquisitions increased in volume in 2023 despite the skyrocketing interest rates and federal regulations becoming stricter. Statistics indicate that the growth was more than 30% and surpassed $100B in disclosed value.

Experts also estimate that activity levels will likely grow from $225B in the previous years to $275B in 2024. They are also anticipating more reverse mergers and cash-out deals. Oncology, or the study, diagnosis, and treatment of cancer, is at the top of the list of deals, adding up to $49B in 2023 alone.

Rare diseases and immunology are two sectors coming up second and third by value of deals. mRNA therapy or treatment options using messenger genes to deliver genetic information to DNA are also gaining traction.

Since this is a capital-intensive industry, acquiring smaller startups is always preferable to investing in in-house labs. R&A requires significant resources but without any specific timeline for getting results.

Notable examples include Pfizer’s $43B acquisition of Seagen and Bristol Myers Squibb’s $14B M&A deal with Karuna Therapeutics. The $27.8B acquisition of Horizon Therapeutics by Amgen and AbbVie’s $10.1B Immunogen purchase are other deals making waves in the industry.

Specific Sectors Are Experiencing More Activity

The core areas of focus are gene therapy and oncology, and the volume of deals is comparable to pre-pandemic levels. Other spheres attracting interest include precision therapy, weight loss, and cardiovascular diseases.

Both big and mid-sized companies are also exploring segments like revolutionary GLP-1 medications to treat diabetes.

They are also looking into robotics and AI-driven capabilities to deliver customized treatment options to patients. And ensure better outcomes, lower costs, and shorter hospital stays.

Companies welcome the option of channeling significant cash reserves toward acquiring innovation and disruptive treatments to overcome growth challenges. The stress is heavily on amassing robust clinical data in the decision-making process.

Although the macro environment seems to have stabilized, geopolitical unrest and changes in federal regulations are also triggering uncertainty. Big pharma and mid-sized companies are relying on M&A as a margin accretion strategy rather than growth.

Margin accretion is often used as a measure of a company’s profitability and financial health. And entering into an M&A transaction can be the ideal solution.

Margin accretion is the increase in a company’s gross margin or net margin over time. Companies may achieve this by adopting a variety of strategies, such as increasing sales, lowering costs, or improving efficiency. Or even a combination of all.

M&A in the Pharmaceutical Industry Has Unique Structures

M&A in the pharmaceutical industry is also about adopting unique structures for entering into deals.

Options are opening up, like innovative joint ventures, profit-sharing deals, and an exchange of assets. Entering into collaborations and divestitures to comply with anti-trust regulations are also options.

As a result, companies can limit their capital exposure while delivering great returns per quarter to their shareholders. As for funding for the merger deals, private equity is displaying a keen interest in supporting contract development.

PE firms are also interested in investing in contract research organizations (CROs) or companies that provide research and development services. They deliver differentiated capabilities to biotechnology, pharmaceutical, and medical device agencies to assist them with disruptive technology.

Interestingly, acquirers outside the biopharma and pharmaceutical sectors are also looking for cross-vertical deals. The objective is to leverage their core competencies, like AI and data analytics, to gain a foothold in the high-growth medtech and biotech fields.

Competition is ramping up for high-quality biotech IP assets, and complying with changing federal regulations is becoming more challenging. Pharma companies of all sizes and scope must divert resources toward formulating a multi-faceted strategy.

The approaches they adopt will have to be technology-driven but flexible enough to ensure agility and adaptability with changing landscapes. Blending in-house and outsourced innovations is crucial.

Experts estimate that the US is likely to maintain its position as the hub for biopharma and biotech innovations. Off-shore buyers will continue to consistently rely on American manufacturers to source the drugs, equipment, and technology they need.

Factors Influencing Higher Volumes of M&A in the Pharmaceutical Industry

Several factors will trigger higher or lower M&A volumes in the pharmaceutical sector in the coming years. Here’s a quick look at some of them:

Setback? Inflation Reduction Act (IRA)

President Biden’s signing of the Inflation Reduction Act (IRA) is expected to have specific implications for the sector. For instance, Medicare and private health insurance providers can negotiate more economical drug prices with biopharma and biotech companies.

Manufacturers may have to pay back any price increases above the listed rates. The IRA has strict restrictions on the prices of drugs. Also, the number of drugs subject to price negotiations will reach 80 by 2030.

As a result, pharma companies are expecting that their revenues might drop by 31% through 2039. This factor can lead to reduced R&D for new drug discoveries since companies will be unwilling to invest resources.

Experts also anticipate that upcoming startups developing generic medicines may lack adequate incentive to dive into the field. Particularly companies developing small molecule medicines since the pricing for their products will be pre-determined early in the innovation cycle.

Similar regulations are coming into force in other countries. For instance, Germany’s Statutory Health Insurance System Financial Stabilization Act has frozen drug prices up to 2026. Pharma companies must also offer mandatory rebates of 7% to 12% and can enjoy free pricing for up to 12 months.

Another risk is the EU Pharmaceutical Legislation designed to shorten Regulatory Data Protection and orphan drug exclusivity. Regulations like these can result in fewer M&A in the pharmaceutical industry in the coming years.

Boost? Higher Capital Availability

The industry is undoubtedly anticipating the pricing setback. However, this risk is offset by the substantial amount of capital available for M&A deals. The top 15 pharma companies have a $0.8T deal capacity, which will likely grow to $1.2T by 2025.

The biopharma is also attracting investor interest spurred by successful franchises like Novo’s and Lilly’s GLP-1. These brands primarily focus on diabetes and obesity, but other market entrants are also making their mark.

Keep in mind that in fundraising, storytelling is everything. In this regard, for a winning pitch deck to help you here, take a look at the template created by Silicon Valley legend, Peter Thiel (see it here) that I recently covered. Thiel was the first angel investor in Facebook with a $500K check that turned into more than $1 billion in cash.

Remember to unlock the pitch deck template that is being used by founders around the world to raise millions below.

Boost? Higher Risk of LoE

Revenues worth $210B to $250B are at a high risk of LoE exposure in the biopharma industry in the US from 2023 through 2030. This risk has spurred a higher number of collaborations between the pharma and IT sectors to secure their data.

Staying compliant with regulations and mitigating financial losses is on the priority list for companies dealing with cyber threats. They must institute measures to prevent cyber attacks, data breaches, and hacking incidents.

IT agencies can assist with policies and procedures to protect not just the company’s data but also Personally Identifiable Information. But also its Intellectual Property and Intangible Assets.

Boost? Inadequate Funding for Emerging Biopharma Companies

The biotech, biopharma, health tech, and life sciences sectors are typically capital-intensive and need high injections of funding. R&D activities are time-consuming, with no fixed timelines for getting viable results. Or before developing market-ready products.

Bio-tech companies still in their pre-revenue stages own an estimated 280 assets currently in phase 3 of their ideation. However, the capital and investor ecosystem is not yet geared toward Emerging Biopharma Companies or EBPs.

As a result, these startups must opt to exit or collaborate with big pharma companies to stay afloat. This factor will result in a higher probability of an M&A in the pharmaceutical industry.

Setback? Federal Trade Commission Stance

Starting in 2023, the Federal Trade Commission has been instituting stricter regulations to address anti-trust issues. Earlier, the organization was concerned with the impact of large M&A deals on unfair pricing, customers, and competitors.

However, the FTC has now adopted a broader outlook to include how M&A transactions can enhance the negotiating leverage big pharma has. At the same time, companies have successfully completed deals by demonstrating regulatory compliance.

Both the aforementioned M&A deals, such as Amgen-Horizon and Pfizer-Seagen, are good examples that comply with the FTC’s anti-competitive rules. On the other hand, the FTC came down hard on the Sanofi-Maze Therapeutics deal.

Sanofi was negotiating to license the asset for Pompe disease, which was still in its clinical phase 1 trials. Moving forward, experts anticipate more rigorous scrutiny from the FTC, making it harder for dealmakers to get approvals.

Whether fundraising, mergers, or acquisitions, founders should know how to nail their pitch deck’s narrative when approaching investors or partners. Need more information on how to do that? Check out this video I created explaining how it’s done.

Boost? Innovation and New Treatment Approaches

The emergence of new treatment approaches and modalities has resulted in big pharma companies scrambling to expand their product portfolios. Some of the disruptive treatment modalities include:

• Precision therapies
• Radiopharmaceuticals that blend pharmaceutical drugs with radioactive isotopes
• Deploying ADCs to deliver health care more efficiently
• GLP-1s to treat diabetes and obesity
• Mechanisms of action (MoAs) for treating a range of CNS indications like depression, Alzheimer’s, and schizophrenia.
• NASH, or non-alcoholic steatohepatitis, is a liver disease

M&A in the pharmaceutical industry is quickly ramping up to grab smaller startups to develop these treatment solutions. Further, several patents are scheduled to expire in the second half of the decade, prompting the need for reinvention.

Companies must develop or acquire new IPs to maintain their leading position in the market to stay relevant and competitive. Not only can they retain their customer base, but also ensure profitability for shareholders. Fear of missing out (FOMO) on available opportunities is a powerful incentive.

Yet another factor is that these transformative therapies need an extensive infrastructure and market mapping. Engaging customers with advertising and marketing approaches is also essential, as is proper commercialization of the products and services.

All of these activities need resources that startups typically lack and need the backing and support of robust partnerships.

Forecasts for M&As in the Pharmaceutical Segment

Higher interest rates are unlikely to influence the pharma industry since investors and acquirers have significant resources available. Further, they are not reliant on debt financing, which is an added positive. Private equity investors are also displaying interest in the incredible potential of biopharmas.

This segment will likely see more bolt-on acquisitions, with more prominent brands buying out complimentary startups with innovative IPs. Valuable intangible assets are likely to drive up higher valuations as big pharma races to close the significant growth gap.

Yet another defining factor is that high inflation rates have resulted in slower activity in IPOs. As a result, startups needing capital to advance their clinical trials further must look to other sources of funding and resources.

Entering into M&A deals with corporate partners and acquirers could be the solution to develop market-ready products for commercialization. Expect to see a higher volume of deals in the coming years, with biotech, biopharma, and life sciences making great strides.

You may find our free library of business templates interesting as well. There, you will find every single template you will need when building and scaling your business completely for free. See it here.

The post M&A In The Pharmaceutical Industry: Balancing Innovation And Regulation appeared first on Alejandro Cremades.