By Susan Dettmar, principal, US M&A consultative services leader, and Kushan Biswas, Life Sciences M&A senior manager, Deloitte Consulting LLP
Each year during the second week of January, health care executives from around the globe descend on San Francisco to discuss ground-breaking innovations, investment opportunities, and potential disruptive plays across the life sciences sector. During this year’s J.P. Morgan Healthcare Conference, we hosted a number of sessions with clients. A few topics—continued investment in oncology and gene therapies, more divestitures to free up cash flows, and the rapid proliferation of digital health—dominated our conversations with investors and executives from life sciences companies. There appears to be a strong demand to learn more about each of those topics. Here’s an overview of what we heard:
Three deal archetypes could drive M&A in 2019
We expect many life sciences companies will explore the following three deal archetypes over the next few months:
- More divestitures as life sciences companies reprioritize portfolios: As noted in Deloitte’s 2018 R&D productivity research report, research and development (R&D) returns among 12 large pharmaceutical companies declined to 1.9 percent in 2018, down from 10.1 percent in 2010. This is the lowest level reported over the past 10 years. The weaker return on R&D investments could lead some companies to sell non-core assets to free up research dollars. This strategy could help strengthen their core portfolio and invest in higher-growth therapeutic specialties.
- Greater collaboration between pharma and technology companies: Many life sciences companies are trying to determine how to pull real-world evidence from the enormous volume of digital data that is being generated. The potential of digital biomarkers to translate the wealth of data captured via digital tools and applications into actionable insights is opening new frontiers for diagnosis and treatment. We expect life sciences firms will try to collaborate with technology companies that can help improve their drug discovery efforts.
- More investments in bolt-on acquisitions: As life sciences companies try to catch up to market leaders, especially within oncology, we expect some of them will look to acquire smaller companies. These bolt-on acquisitions could help companies build scale in certain therapeutic areas, broaden the pipeline, or create a platform to explore therapeutic combinations.
Oncology continues to be top therapeutic focus
In the midst of these deal archetypes, oncology continues to be the top therapeutic focus for many biopharma companies. As we noted in our November blog, the potential of immuno-oncology—which leverages the immune system to treat various forms of cancer—has prompted some biopharmaceutical companies to move investments from other areas of research. Here are three trends we are seeing in oncology:
- The curative potential of immuno-oncology (I-O), especially checkpoint inhibitors and adoptive cell transfer (ACT) therapy, continues to drive alliances and M&A activity among biopharma companies. ACT uses the patient’s own immune system to destroy cancer cells.
- A number of life sciences companies appear to be caught in a conundrum. They are trying to figure out how to effectively invest in autologous therapies (where the patient’s cells are modified) and allogeneic therapies (where donor cells are modified) for ACT therapy. While allogeneic treatment options continue to attract investments, the assets are primarily in pre-clinical or early clinical stages. It will likely take time for this technology to evolve and prove its efficacy. Allogeneic therapies are less complex and have fewer supply chain processes compared to autologous therapies. However, added challenges with allogeneic therapies include graft versus host disorder (GVHD) and host rejection of the therapeutic product. On the other hand, autologous therapy for CAR-T already has a number of approved assets in the market, although the uses are narrow. That said, clinical trials with CD19 antigen—the most frequently used biomarker in CAR-T therapy—dominates the current pipeline for I-O and has surpassed those for checkpoint inhibitors PD1 and PD-L1.
- While oncology continues to be top of mind for most life sciences companies, we also heard about potential investment opportunities in other therapeutic specialties such as inflammation, dermatology, and cardiovascular diseases. A growing elderly population, combined with a long life expectancy, is prompting life sciences companies to prioritize investments in age-related diseases.
Digital health is a top priority for many life sciences firms
We had a number of discussions with life sciences companies, technology startups, and investment firms about how they could meaningfully invest in technological advancements, particularly digital health, to improve R&D productivity. Here’s what we heard:
- Some biopharma companies are increasingly interested in leveraging biomarkers to match patients with clinical trials, improve the accuracy of clinical trials, and more effectively predict adverse events. We expect to see significant investment in artificial intelligence (AI) and machine learning to improve existing prediction tools. We would not be surprised to see future alliances between biopharma and technology companies to help identify better biomarkers.
- We anticipate a steady flow of investment dollars into bioinformatics to help unravel novel insights from the expanding pool of genomic data. Inevitably, we will likely continue to see a higher number of partnerships between technology and life sciences companies as they combine their competencies to reduce the overall cost of computing and accelerate the pace of drug discovery.
- There was quite a bit of buzz around digital therapeutics. The potential for digital or software solutions that improve clinical outcomes—and augment or replace a traditional drug—appears to have piqued the interest of venture capital and investment firms. Health plan and health system executives also seem to be interested in digital therapeutics, which could help to reduce care costs while improving care quality among people who have chronic diseases.
Personalized medicine could attract significant attention
As noted in Deloitte’s 2019 global life sciences outlook, richly networked ecosystems are expected to emerge linking genotypic and phenotypic information with health care records. As more patient-centric treatments develop, we expect to see continued interest in the disruptive potential of genomics as an enabler for such treatment types. Here’s also what we heard during the conference:
- While biopharma companies are focused on developing personalized therapies by interpreting genetic data, technology companies are showing significant interest in building bigger biobanks (which store genomic data) and trying to link it to electronic health records (EHRs), which store health data. We don’t yet have standards that can bring all of this patient information together. We expect to see consortiums emerge to standardize how systems and platforms capture health care and genomic information to promote personalized medicine.
Gene therapies have emerged as one of the key investment areas within personalized medicine. The development of CRISPR (Clustered Regularly Interspaced Short Palindromic Repeats) was groundbreaking. This technology allows undesirable traits to be deleted while offering the potential to add desirable traits. However, most gene therapies continue to focus on diseases that have single-gene mutations. A majority of diseases involve the mutation of multiple genes, which means they typically fall outside the treatment sphere of gene therapies. We expect gene therapies will continue to be focused on rare diseases, and will likely dominate certain niches within the market until the technology advances enough to make it feasible to treat polygenic disorders. Once this occurs, we could see the deal-making floodgates open.
Overall, we had some great discussions on topics that are likely to influence the future of the life sciences industry. Relatively low interest rates, combined with a perceptible market correction, has lowered valuations. We would not be surprised to see the frenzied pace for life sciences M&A continue well into 2019.