Entering 2022, deal optimism was high
As deal volumes surged in 2020 and continued strong through 2021, there was optimism from pharmaceutical executives on how capital market activity would carry through 2022. While there was uncertainty about how the global economy would recover from the impacts of COVID-19 and its implications for capital markets, the continued growth of disruptive innovation across the global pharmaceutical pipeline remained strong and highly attractive to large pharmaceutical companies. However, it is clear that the persistence of inflation and the risk of a recession have since become a much bigger factor in mergers and acquisitions.
Growing uncertainty shaping deal strategy
The tailwinds that drove M&A in 2021 — the need for innovation and the need to fill pipelines — remain in force. But headwinds have grown. Inflation, rising interest rates, recession fears and falling equity values increase uncertainty, raising questions about the wisdom of deal-making now.
In this environment, it is not unreasonable for biopharmaceutical acquirers to adopt a wait-and-see approach for acquisitions and favour deal strategies that minimise risk, such as stage-gate capital investments. In fact, this trend is already showing up in deal data. While the total number of deals in Q1’22 (261 deals) was on pace with 2020 and 2021, more deals involved lower-risk deal strategies. Specifically, the industry appeared to be more focused on product acquisitions (19 in Q1’22). If the industry keeps up this pace of product acquisitions over the next three quarters, it will result in 79 of these types of deals — significantly more than what we saw in 2020 and 2021.
A look at trends associated with full-company acquisitions across biopharma reveals a different strategy trend in the first quarter of 2022 compared to we saw in 2020 and 2021. Unless full-company acquisitions accelerate in the second half of the year, 2022 will finish with fewer acquisitions than the last two years in terms of total deal volume and overall deal value.
Innovation via small biopharma deals remains key strategy
The industry's focus on adding new capabilities in cell and gene continues, with 16% of all pharmaceutical deals focused in this area based on data from Q1'22. At this rate, 2022 is on pace to match 2021 which was the most active year for cell and gene therapy deals.
An important differentiator between Q1'22 and previous years is the increase in strategic research and development collaboations. Over the past five years, only a few large pharma companies have successfully bolted on full company acquisitioins without facing risks, ranging from failed clinical trials due to safety issues to extreme talent flight.
The shift of deal strategy towards collaborations rather than full company acquisitions is likely an effort to continue building acquirers' cell and gene pipelines and expertise, while mitigating risks of failure seen across the industry.
Key takeaways
Despite the multiple risks and uncertainties plaguing 2022, biopharma has not seen a slowdown in deal activity. Rather, the industry has shifted its deal strategy in an effort to mitigate risks while adding important pipeline opportunities to its portfolio.
Megamergers (defined here as deals larger than $30 billion) will likely remain out of favor for the industry due to the risk-reward ratio of navigating a more assertive Federal Trade Commission in the US and the uncertainty of the global economy.
Creative deals with smaller, innovative biotechnology companies or assets offer a more judicious use of capital — the rich landscape of targets allows for more diverse deployment of capital across multiple, disruptive pipeline opportunities.
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