Life sciences M&A values halve, volumes plunge. Will we ever see deals pick up again?

Fewer, smaller, clearer: That was the deal picture for life sciences in 2022. Industrywide, M&A volume is down 48% while deal valuations plunged 28% this year, according to a new analysis from PwC. But pharma has much less uncertainty heading into 2023, so could we finally see the long-promised flood of deals?

There were, of course, some deals. The biggest in life sciences so far for 2022 was in fact a medtech transaction: Johnson & Johnson’s buy of Abiomed, valued at nearly $19 billion, was announced in early November. Second on the list was the odd deal from Pfizer and Biohaven, which saw the pharma behemoth carve off the smaller company’s migraine franchise, leaving the pipeline where it is. Third was another one from deal-hungry Pfizer: the $5.5 billion acquisition of Global Blood Therapeutics.

Even with those gems, the value of the 266 transactions was just $137.8 billion as of Nov. 15. PwC said 2022 has been a challenging year for M&A in the pharmaceuticals and life sciences sector. Companies struggled against macro headwinds and an overall market dislocation, the professional services firm said.

The predictions heading into 2022 were for a busy year of deals as the top 18 pharma companies by market cap had an estimated $1.7 trillion to throw around. But it just didn't happen that way. Companies instead bit on smaller companies in the single-digit billions, with the odd number in the teens.

Now, pharma is heading into the new year with a bit less uncertainty: The U.S. midterm elections are settled, and the Inflation Reduction Act’s impact on pricing is more understood. There’s still plenty of corporate cash to go around, and many of the largest pharmas are in need of a refresh to their pipelines. That means 2023 has the potential to be an active year, according to PwC.

Deals in the $5 billion to $15 billion range will continue to be the sweet spot, but PwC says the second half of 2023 could see some larger transactions. Pharmas will be particularly interested in companies working in oncology and immunology, but central nervous system, cardiovascular diseases and vaccines could also be on the list.

“Promising science that addresses unmet medical needs is incredibly valuable, but significant competition for differentiated and de-risked assets remains,” the PwC report said. “A clear and agile approach to evaluating options will therefore be critical in achieving desired outcomes.”

Companies looking to get bought will need to “create a brand as the partner of choice” to draw attention.

Deal activity in biotech slowed in 2022, but you don’t have to look too far back to see similar volumes. PwC likened volumes to the period of 2018-20, suggesting 2021 was an outlier. Companies looking to sell will need to be open to a long-term plan for building an ecosystem but still be nimble enough to respond to the macro business environment, PwC said.

“Even with rebalanced valuations, the premiums required to get deals done will continue to make it imperative that the underwritten biotech deal value is fully realized,” the report said. “Pharma companies need a more streamlined and less invasive approach to integration and to make the dealmaking experience more rewarding for buyers and sellers.”

Many biotechs opted for partnerships with bigger companies in 2022. Headlines at the annual J.P. Morgan healthcare conference in January were dominated by big-name pharma licensing pacts with smaller biotechs. PwC sees this trend continuing, especially for riskier or early-stage compounds, chalking it up to a challenging IPO market.

Medtech has had a particularly difficult year, despite topping the life sciences M&A list with Abiomed's sale. Valuations for the deals that did happen in 2022 were down significantly, and the entire sector had an uneven market performance. With valuations reset, PwC sees “opportunities for companies to outperform investor expectations” by focusing on differentiated areas like robotic surgery, structural heart disease and connected care.

The firm is optimistic on the deal outlook for the sector heading into 2023, as balance sheets and cash flow are strong across the industry. Cardiology and orthopedics will likely be hot areas for medtech deals. PwC recommended that medtech companies “move beyond the traditional playbook of incremental product improvements” and find new ways to accelerate growth.

CDMOs and CROs will also likely see strong deal activity next year, with private equity mainly driving the trend and snapping up underperformers.

“[Private Equity] dry powder has never been greater and the services subsector has long been a favorite,” PwC said.