Life Sciences 2024 Dealmaking Trends & Outlook

Introduction

The life sciences industry experienced a turning point in 2022 after robust deal activity in the two prior years. The persistent effects of high inflation and a sluggish public market for biotech stocks carried into 2023, forcing many companies to engage in strategic and often distressed dealmaking to preserve and obtain working capital. Toward the end of 2023, however, deal activity in the life sciences industry showed renewed life, with both an active middle market for M&A dealmaking and a modest uptick in IPOs and follow-on opportunities in the public equity markets for biotech companies. Barring additional headwinds, we expect this rebound to continue in 2024. This article will take a deep dive into current trends in the life sciences industry in 2023 and for 2024.

Market Trends

2023 marked a year of gradual recovery for the life sciences industry. In 2023, market activity generally bounced back to pre-pandemic levels, though still not close to the biotech market exuberance seen in 2021. According to a JP Morgan report, there were 12 biopharma IPOs in 2023 totaling $2.5 billion raised, with the highest quarter being Q3 with $1.2 billion raised.¹ For comparison, 2022 had 17 IPOs totaling $2.4 billion raised.² The overall number of public biotech companies shrunk 3% in 2023.³ Follow-on offerings gained momentum in the second half of the year, giving life sciences companies much-needed capital for dealmaking and R&D. So far in 2024, there has been a rebound of biotech IPOs with seven companies going public as of February 19.⁴ We expect this general upward trend to continue in 2024, as there is a two-year backlog of biotech companies queued up to go public and an expectation that interest rates will begin to fall. Although 2023 public market activity reached pre-pandemic levels and may continue to rebound, experts are not predicting a return to the record-breaking market activity of 2021.

Historically, biotech companies have not had broad access to debt financing. Therefore, biotech companies are not typically viewed as at risk of bankruptcy. However, low interest rates in 2021 motivated many biotech companies to take on debt, and debt financing became more popular than it had been in the life sciences industry. As interest rates rose throughout 2022, debt financing in the life sciences industry pulled back in response, and that trend remained steady through 2023.⁵ The unusually high rate of debt financing in 2021 culminated in 41 bankruptcies in the biotech industry in 2023.⁶ By comparison, there were only 20 such bankruptcies in 2022 and nine in 2021.⁷ It is possible that this increase in biotech bankruptcies will continue into 2024, as valuations, equity financing, and other dealmaking activity continue to be suppressed.

Venture investment into therapeutics totaled $17.0 billion across 350 rounds in 2023, according to data from JP Morgan.⁸ Further, across all sectors, down rounds and flat rounds were more prevalent in 2023 than previous years. These depressed valuations could reflect a sluggish market, or it could represent a recalibration from overzealous 2021 fundraising. If the life sciences sector of the public markets continues to struggle, venture equity investors will likely remain cautious about their current investment portfolios and consider alternative exit strategies. Despite cautious investors, life sciences venture capital funds raised $21.5 billion in 2023.⁹ This number was a dip from the $31 and $25 billion totals in 2021 and 2022, respectively, but remains healthy compared to pre-pandemic totals, which had never surpassed $14 billion.¹⁰ Because venture investors are sitting on a stockpile of cash, many expect investment in biotech companies to increase in 2024. Furthermore, if the life sciences sector of the public equity market continues to rebound, we expect venture investment to increase as well.

Dealmaking Trends

Life sciences M&A transactions were higher in 2023 compared to 2022. Although the year started slowly in January and February, March through June saw steady deal activity, at which point experts began projecting that 2023 could be the biggest M&A year since 2019. The excitement dwindled, however, as the deal market slowed through the rest of the summer, culminating in a nearly dead market by late September. Optimists pointed out that a large number of biotech companies announced that they were exploring “strategic alternatives” in the third quarter, speculating that a new deal surge could be on the horizon. That speculation proved to be prescient, as there were 27 M&A transactions in the fourth quarter, bringing the 2023 total biopharma M&A upfront to $128.8 billion.¹¹

There is reason to believe that life sciences M&A activity will continue apace. It has been reported that the top 18 pharmaceutical companies have over $500 billion in “firepower” (a metric used to determine a company’s potential capital resources) available to fund transactions compared to $411 billion in October 2020.¹² Given the abundance of biotech companies exploring “strategic alternatives,” significantly increased firepower in the industry, and the high volume of bankruptcy filings, there is promise that 2024 will continue to see an uptick in M&A deals as the “haves” seek to take advantage of the “have-nots.”

In 2023, large pharmaceutical companies focused on pursuing a series of smaller deals or “bolt-ons” rather than “mega” deals valued over $1 billion. In the first half of 2023, M&A sellers mostly consisted of small-cap public biotech companies and private sellers. According to PwC, the proportion of M&A mega deals declined 56% since 2021’s record high, while M&A deals with values less than $1 billion declined only 20%.¹³

Within this trend, we saw a rebound in transactions reminiscent of a bygone era, including the rare “merger of equals” of biotechnology companies, in which two pre-revenue development-stage biotech companies combine their operations to leverage economies of scale and preserve cash. For example, in July, TCR2 Therapeutics and Adaptimmune, both of which developed T-cell-focused drugs and reduced their headcounts to reduce cash burn, announced they would combine into one company for strategic purposes and to extend each company’s cash runway.¹⁴ Similarly, 2023 saw an increase in so-called “reverse mergers,” in which a private biotechnology company that had struggled to complete a conventional IPO instead “goes public” by merging with a dormant public company with cash on its balance sheet and no active development program. For example, Korro Bio merged into the publicly listed Frequency Therapeutics, which had shut down its lead program and laid off about half of its staff.¹⁵ This merger gave Korro access to public markets without undergoing a traditional IPO.

One potential reason for this trend toward smaller deals is a shift in the approach and activity of the Federal Trade Commission (“FTC”). In 2023, the FTC brought two high-profile enforcement actions: one against Amgen’s $28.3 billion acquisition of Horizon Therapeutics¹⁶ and the other against Pfizer’s $43 billion acquisition of Seagen.¹⁷ In both cases, the FTC explored nontraditional theories of harm. The FTC has departed from the traditional theories of competitive overlap to focus on pricing power as a major concern even when overlap is minimal, such as in the Pfizer-Seagen deal.¹⁸ Considering that transacting parties often use precedent to guide dealmaking, the possibility of nontraditional theories of harm has led to more uncertainty.

In addition to increasing enforcement activity, the FTC has proposed changes to the Hart-Scott-Rodino (“HSR”) Premerger Notification Form, which will greatly impact deal pace and compliance efforts.¹⁹ For transactions with a deal value above a certain value threshold, the proposed changes will require companies to produce a much broader spectrum of documents, data, and information than was previously required. It is expected that HSR notifications using the revised form will take four times as long as it used to, turning a weeks-long process into a months-long process.²⁰

This trend toward smaller transactions has root causes beyond aggressive FTC scrutiny. Commentators have speculated that smaller deals may be favored because larger companies with extensive operations and operating expenses are more difficult to efficiently integrate without losing shareholder value.²¹ To this end, many of the smaller deals completed in the current market involve targets with only pre-commercial products, which often require a less intensive integration effort. While acquiring revenue-generating businesses is still of paramount importance for large pharmaceutical companies, in recent years, acquirors have increased their focus on acquisitions of companies with pre-commercial products in the early/mid-stage of development. These R&D acquisitions augment a large pharmaceutical company’s pipeline through M&A dealmaking, which can prove to be both cheaper, and result in higher quality therapies, than internal R&D efforts.

Another factor contributing to the slight uptick in M&A activity is an increase in companies that have strategically engaged in divestitures. Large pharmaceutical companies have strategically divested assets to free up capital to invest in core focus areas and refinance the development of non-core assets. For example, Merck, Bristol-Myers Squibb, GSK, and Novartis divested their consumer groups in recent years. After completing these divestitures, all four companies completed large acquisitions, as Merck acquired Prometheus for $10.8 billion, Bristol-Myers acquired Karuna Therapeutics for $14 billion, GSK acquired Bellus for $2 billion, and Novartis acquired Chinook for $3.2 billion.²² In 2023, J&J spun off its consumer group and now has an additional $13.2 billion of capital from the spin-off company’s IPO.²³

We have also seen increased spin-outs to new companies (“NewCo”) backed by investors. For example, Cyclerion Therapeutics sold its sGC stimulator assets to a NewCo in exchange for cash and equity ownership. Investors in the NewCo agreed to invest $81 million to develop the assets, and Cyclerion received a cash payment at closing and 10% equity ownership in the NewCo.²⁴ Investors in the NewCo included current Cyclerion shareholders as well as Venrock, J Wood Capital, and Sanofi Ventures.²⁵ Other companies have announced similar spin-outs. For example, Endonovo agreed to sell their medical device assets to a NewCo to be controlled by Endonovo’s current President and Chief Commercial Officer of its medical division.²⁶

Licensing deal volume continued to decline in 2023 from a slow 2022. According to J.P. Morgan, there were 495 R&D partnerships and licensing agreements in 2023, compared to 585 in 2022, 822 in 2021 and 887 in 2020.²⁷ There were only 115 life sciences R&D licensing agreements signed in the third quarter of 2023, the lowest quarter since 2018, according to JP Morgan. This number declined to 108 licensing agreements in the fourth quarter of 2024.²⁸ The volume of in-license deals in the preclinical, Phase 1, Phase 2 and Phase 3 stages has remained steady, while volume at the platform and discovery stage saw a drop in 2023.²⁹

With a down market, depressed valuations, and high interest rates, life sciences companies have been turning to creative dealmaking to obtain capital. One way to do that, while aligning with partners with synergistic capabilities in key markets, is by out-licensing products in split territory deals. These transactions are typically executed after receipt of proof-of-concept data to share the costs of expensive later-stage clinical development. Similarly, biotech companies have pursued out-licenses of non-core assets to extend cash runways.

Another trend in creative dealmaking by biotech companies has been contracting with private equity investors. Typically, health care private equity firms focus on areas of the industry with steady cash flow, like patient care. However, private equity investors have capitalized on the widening gap between available capital for clinical research and the drug candidates competing for funding, resulting in a steady rise in private equity funding in this sector. Private equity investors have shown particular interest in financing R&D when the candidate is in Phase 3 clinical trials in return for upfront payments and success-based payments, typically milestones and royalty payments.

While life sciences companies have been seeking short-term cashflow in 2023, these businesses have also been investing in their future by the increased use of AI. Breakthroughs in large language models, such as GPT-4, are reshaping human-computer interactions and once again catapulting Artificial Intelligence and Machine Learning (“AI/ML”) into the mainstream. The Food and Drug Administration (FDA) published an initial paper on AI/ML in May 2023, noting that AI/ML will undoubtedly play a critical role in drug development, and the FDA plans to develop and adopt a flexible risk-based regulatory framework that promotes innovation and protects patient safety.³⁰ In 2023, the median upfront cash and equity for AI/ML-based drug discovery licensing deals was double that of 2022, making it comparable to 2021 medians.³¹ However, AI deal volume is down, as there were only 30 deals in the first three quarters of 2023 compared to 80 total in 2022, as reported by JP Morgan.³²

One would expect investment in AI to continue to grow in 2024. In 2022, Morgan Stanley estimated that over the next decade, the use of AI in early-stage drug development could translate into an additional 50 novel therapies worth more than $50 billion in sales.³³ According to a comprehensive report published by the Boston Consulting Group, AI was most frequently applied to understanding diseases and small molecules design and optimization from 2018 to 2022.³⁴ Design and optimization of vaccines and antibodies have accelerated rapidly, driven in part by research efforts in the context of the COVID-19 pandemic. Use of AI in biologics development is also growing, driven by increasing sophistication of AI technology and algorithms, growing computing power, increasing availability of data, and evolving discovery workflows. Safety and toxicity use cases has also shown budding growth, which may be driven by the lack of publicly available data to train AI models.³⁵

A final 2023 trend that is likely to continue is investment in drugs and other treatments for obesity, following on the recent blockbuster success of obesity drugs. Meanwhile, companies are testing obesity drugs for other indications, including Type II diabetes with chronic kidney disease, Alzheimer’s disease, and alcohol addiction.³⁶ There is a large market opportunity for obesity drugs because patients need them for a long period of time, and the cost of the drug often outweighs the potential cost of long-term health effects of obesity-related diseases. Therefore, increased payor support in addition to increased consumer demand is likely to carry interest in obesity drug development well beyond 2023.³⁷

The Effects of the Inflation Reduction Act and Other Regulatory Matters

The Inflation Reduction Act (“IRA”) continues to be very impactful on the biopharmaceutical industry, and a few trends have emerged in response to the IRA. The IRA authorizes the United States Department of Health and Human Services (“HHS”) to negotiate prices for selected drugs that are high-expenditure, single source drugs without generic or biosimilar competition.³⁸ The first group of drugs was selected for price negotiations in 2023, and the negotiated prices will apply in 2026.³⁹ The IRA has reportedly had a negative impact on R&D spending and deal valuations, as biopharmaceutical companies must anticipate lower returns for investments in innovative therapies.⁴⁰

Single-indication, rare disease assets are unlikely to be subject to IRA price negotiations, and therefore have attracted the interest of dealmakers.⁴¹ For example, there is a great volume of deal activity surrounding antibody drug conjugates (“ADCs”), which are designed to target a specific type of cancer, as ADCs target specific proteins expressed on specific cancer cells and are not designed to be used across multiple indications. This means they are unlikely to be top-selling drugs that the HHS will eventually select for IRA price negotiations. The number of ADCs in Phase 2 clinical trials has increased in the last few years, and there has already been increased deal activity surrounding ADCs.⁴² For example, AbbVie purchased ImmunoGen, a biotech company focused on the development of ADCs, for $10.1 billion.⁴³ The purchase was the third largest biopharmaceutical M&A transaction announced in 2023, trailing Pfizer’s proposed $43 billion acquisition of Seagen, another big player in the ADC space, and Merck’s $10.8 billion acquisition of Prometheus.⁴⁴

Outside the United States, the European Commission proposed shortening the period of regulatory exclusivity from 10 years to eight years for most medicines.⁴⁵ Under the proposal, companies could extend their period of regulatory exclusivity if they market their product in all EU member states, the product is directed to diseases with unmet need, they conduct comparative trials, or they market drugs that treat multiple diseases.⁴⁶ Industry participants have protested, emphasizing that the end of the exclusivity is the period of peak sales, and is the only real opportunity to recoup investment in R&D, marketing and sales.⁴⁷ Similar to the effect of the IRA, this shortened market exclusivity would likely reduce the amount companies and investors are willing to invest in researching, developing, and commercializing products in Europe. The European Federation of Pharmaceutical Industries and Associations has projected that, if the proposal were to take effect, Europe’s share in global research and development could be reduced by a third by 2040.⁴⁸ This decrease would translate to 2 billion euros per year in lost investments.⁴⁹

Conclusion

After the significant downturn in the life sciences industry in 2022, 2023 saw a slow rebound that appears to be accelerating. While high interest rates and other macroeconomic activity seemed to inhibit deal activity through 2023, there are increasing signs of robust M&A and licensing activity heading into 2024. With an improving public equity market for biotechs, and large pharmaceutical companies and VC funds sitting on significant cash and “fire power,” the life sciences industry has the potential to overcome headwinds like the increased FTC scrutiny, the IRA and similar government action designed to curb drug prices, and the persistently high interest rates. While the life sciences industry in 2024 is not expected to return to the exuberance of 2021, there is reason to think there could be significant improvement in dealmaking activity and value creation in 2024 as compared to 2023 and 2022.