Overview
In November, we were delighted to once again host our annual European Health & Life Sciences Symposium in Paris. The event attracted a large number of healthcare professionals, investors and dealmakers to the Shangri-La Hotel for a series of insightful panel discussions, the first of which focused on transaction trends in our industry over the past 12 months.
It was noted that the year 2023 began with great promise, as dealmakers looked forward to significant levels of M&A across the healthcare and life sciences landscape and predicted the return of capital markets activity. That did not materialise, however, and the depressed transactional environment continued through the year, with just a few interesting deals involving large pharma in the second half and signs of potential green shoots of recovery in licensing deals for pharma, medtech and biotech trading assets.
In Depth
Higher interest rates led to increased costs of capital and to some difficulties obtaining capital which, along with delays to R&D programmes, challenged biotech valuations. That, in turn, caused many earlier-stage companies to focus inward rather than prioritising transactions, leaving just the large pharma businesses with their own cash hunting for deals. Such buyers were looking for smaller strategic acquisitions where they could extract synergies, and companies that fit that criteria were able to attract higher purchase prices.
Several regulatory developments also impacted deal activity in our industry through 2023, most notably the threat of new drug pricing controls in the US. For the first time in the history of the United States, the passage of the Inflation Reduction Act saw Congress shortlist 10 drugs to become subject to significant price regulation from 2026, with that number rising to 60 by 2029.
Emily Cook, partner with McDermott Will & Emery in Los Angeles, says: “There is currently litigation in the United States by large drug manufacturers over new government pricing controls, which creates a lot of uncertainty as to the outlook for drug pricing. There is the spectre of significant price regulation coming relatively soon, even though what the actually negotiated rates might look like remains to be seen.”
She adds: “We are going to see significant changes to the way drugs are priced in the US market, with those that are particularly popular and being used heavily by the Medicare population no longer presenting the same opportunity to recoup costs over as long of a period as has been available.”
The companies that produce the 10 drugs currently in scope have seen an impact on their valuations given the likely outlook for their future profits, but we expect that impact on valuations to diminish over time as companies gain more clarity and can build future pricing models.
Despite the uncertainty, several large pharma transactions did get done towards the end of 2023, including Pfizer’s $43 billion acquisition of oncology business Seagen, and some of the valuations at the top of our industry remain strong. But with the costs of discovering and developing therapeutics and biologics continuing to grow just as venture funding scales back, large pharma increasingly recognises it has a role to play, not just as buyers of new drugs and innovative companies.
For biotechs struggling to raise funding for development programmes and to keep their businesses going until they start generating revenues, we have seen a growing appetite for out-licensing deals and we expect that trend to continue.
Similarly, another area where we are seeing some transactional activity is from private equity, which has not historically been interested in taking molecule risk or binary outcome risk around drug approvals but is now showing growing appetite for life sciences.
Kristian Werling, partner with McDermott Will & Emery in Chicago, says: “We are seeing the large private equity asset managers setting up dedicated life sciences funds and looking much more closely at this opportunity. Those investors are looking for growth and there is real potential for them to increase allocations into this space.”
Pricing controls in the US are not the only regulatory challenge currently facing dealmakers, as governments around the world increasingly consider biotech and pharma as strategic industries and ramp up their scrutiny on the foreign direct investment side.
Antitrust regulation also remains a key consideration in any sizeable M&A transaction, with some uncertainty around the US Federal Trade Commission’s recent behaviour with respect to large pharma. In May the FTC sued to block Amgen’s acquisition of Horizon Therapeutics, arguing Amgen might bundle its existing blockbuster drugs with Horizon’s rare disease products in reimbursement talks as a means to disadvantage competitors. That was a new argument from the FTC, which they eventually settled allowing the deal to go ahead, but it highlights another area of concern for those attempting to complete sizeable transactions.
Moving into 2024, therefore, we continue to see an array of new and emerging challenges shaping the life sciences transactional landscape. While we hope that valuations will strengthen in light of stabilising interest rates and recovering capital markets, the need for innovative new funding models and the requirement to overcome a variety of regulatory hurdles will mean the dealmaking climate remains somewhat uncertain.
We expect the interesting activity seen from large pharma in the second half of 2023 to carry on into 2024 and we are excited about the potential for private equity to become more active, both trends that should help drive a more active 12 months than those we have just seen.
