Guest Column | March 21, 2023

How Can Life Sciences Navigate M&A In 2023?

By Arda Ural, Ph.D., EY


The past three years have seen incredible tumult across the life sciences sector, from record cash flowing into biotechs to pharma’s herculean effort to develop COVID-19 vaccines and therapeutics and to the steepest bull market in memory.

As we close out the first quarter of 2023, it’s clear that what got us here won’t get us there. In other words, a combination of unique industry impacts, geopolitical tensions, and macroeconomic uncertainty means that life sciences leaders must rewrite their playbooks to succeed in the near term.

From my perspective, there are a few factors that will drive life sciences dealmaking in the year ahead. Read on for my thoughts on how pharma executives can conduct better deals despite an unpredictable business environment.

Factors Influencing Dealmaking In 2023

The possibilities of life sciences mergers & acquisitions (M&A) in 2023 can be summed up by two separate but interconnected facts. First, there is a record $1.4 trillion in firepower, our term for the capital on balance sheets to conduct acquisitions, bolstered by Big Pharma’s strong return of the past few years. This figure represents an 11% increase from 2021 and the highest level recorded since we began tracking the industry’s deployable capital 11 years ago. Additionally, the industry is currently facing a looming patent cliff, as biologics lose exclusivity and pharma’s topline takes a hit. Based on current projections, the industry is set to experience significant revenue erosion over the next decade, as leading products face competition from lower-priced generic and biosimilar challengers, putting up to $258 billion at risk, according to Evaluate Pharma.

Amidst this environment, we believe this year will see more large-scale transformative dealmaking, potentially heralded by Amgen’s multibillion-dollar move for Horizon and Pfizer’s planned acquisition of Seagen. Main obstacles to dealmaking include macroeconomic forces such as a potential recession, rising inflation and currency volatility, and legislation in the U.S. M&A financing will be even more complex against a background of rising interest rates and regulatory changes.

But despite these challenges, there are strong underlying reasons for companies to adopt a more aggressive M&A strategy. As life sciences organizations seek to secure growth and future-proof their business models, M&A will take a central strategic role. We expect that companies will unleash their untapped firepower to bring new assets and innovations to portfolios, in recognition of future losses of exclusivity, as well as to access tech and data tools that can transform and improve their operating models. The industry has not implemented large-scale cost takeout programs using intelligent automation of back-office processes or digitalization of sales or marketing, and macro trends may force the industry’s hand to finally act.

Further, we believe the industry can expect to see limited cash runways and falling valuations leading to pressure on smaller companies to exit, while the closing IPO and SPAC windows narrow access to public markets for small companies. Overall, despite falling valuations, high premiums remain for the most sought-after assets, and alliances may be a safer option than M&A.

Three Steps to Successful Dealmaking

Given the systematic reasons for life sciences organizations to seek growth through dealmaking, alongside pervasive macroeconomic uncertainty, it is imperative that leaders give serious strategic thought as to how they can identify and execute the most effective M&A deals possible.

First, leaders should attempt to de-risk deals as much as possible. Life sciences organizations have long aimed to reduce risk from M&A by concentrating on late-stage, relatively well-validated clinical assets and on therapeutic areas with high-growth projections. In terms of choosing targets, our data suggests that companies are increasingly moving toward earlier-stage assets. In 2022, pre-Phase 3 targets made up 50% of M&A deal volume for the first time since we began tracking such data in 2011. Leaders should acknowledge that they must pay a premium for de-risking acquisitions or move earlier in the R&D cycle to access innovations at a lower price. Another option is to assess which therapeutic areas may represent the most ROI. In recent years, primary therapeutic area targets have been in oncology, immunology, central nervous system, and infectious diseases.

In addition, leaders must assess which deals have worked in the past and why. As one example, although there are no hard-and-fast rules to executing a successful deal, our analysis of M&A trends suggests that bolt-on transactions yield better results when the target company is in a therapeutic area adjacent to the core portfolio of the acquiring company. These findings suggest that companies will see more success if they build depth and expertise in specific therapeutic areas, rather than diversifying across a broad range.

Finally, it is imperative to ensure the right processes are in place to integrate new acquisitions. Successful M&A depends not only on completing deals efficiently and cost-effectively but on having the right teams and operations set up to achieve rapid integration for the companies coming together. Leaders can follow this five-point plan for a more seamless transition:

  1. Define and identify the guiding principles and value drivers of the deal to ensure alignment throughout the process.
  2. Create an end-to-end plan to guide the company through each phase of the M&A process, with governance and integration leaders and teams to take responsibility for each stage of the process.
  3. Focus upfront on successful cultural collaboration between the companies and finding the right level of integration versus independence (some acquisitions may suit full integration; others will add more value if they preserve their own culture).
  4. Use technology and tools to monitor work streams, manage timelines and identify and deliver synergy value.
  5. Change management and communication should be top of mind to achieve buy-in for a common purpose/vision, help align the broader organizations, and reduce the risk of workforce uncertainty and demotivation.

I should reiterate that every deal is different, and life sciences executives should closely monitor external factors that may be deterrents to successful dealmaking, including inflation trends and policy maker interventions on drug pricing, market access, and antitrust regulation. But while 2023 has the potential to be a transformative year for life sciences M&A, leaders should approach dealmaking thoughtfully and with intention if they are to succeed.

About The Author:

Arda Ural, Ph.D., is the EY Americas Industry Markets leader for EY’s Health Sciences and Wellness Practice. He has nearly 30 years’ experience in pharma, biotech, and medtech, including general management, new product development, corporate strategy, and M&A. Prior to joining EY, he was a managing director at a strategy consulting firm and worked as a VP of strategic marketing and a BU lead at a medtech company. Ural holds a Ph.D. in general management and finance and an MBA from Marmara University in Istanbul, as well as an MSc and BSc in mechanical engineering from Bo─čaziçi University.

The views reflected in this article are the views of the author and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization