Emerging trends in life sciences suggest cautious optimism for M&A in 2019

By: Susan Dettmar and Kushan Biswas

In January 2019, Deloitte and health care executives from around the globe discussed innovation, investment, and disruptors in life sciences at the annual J.P. Morgan Healthcare Conference in San Francisco. Investment in oncology and gene therapies, divestitures to free up cash, and digital health dominated discussions.

Divestitures, pharma-tech collaborations, and bolt-on acquisitions could drive M&A in 2019

We expect many life sciences companies to explore these deal archetypes in 2019:

• More divestitures as life sciences companies reprioritize portfolios. In 2018, research and development (R&D) returns for 12 large pharmaceutical companies declined to the lowest level reported in the past 10 years. With weaker R&D returns, companies are more likely to sell non-core assets to fund research that strengthens core portfolios and higher-growth therapeutic specialties.
• Greater collaboration between pharma and technology companies. The potential of digital biomarkers to translate data from digital tools and applications into actionable insights is opening new frontiers for diagnosis and treatment. We anticipate life sciences and technology companies collaborating to improve drug discovery efforts by pulling real-world evidence from digital data.
• More investments in bolt-on acquisitions. To compete with market leaders, especially in oncology, we expect some organizations will acquire smaller companies to build scale in therapeutic areas, broaden the pipeline, or create a platform to explore therapeutic combinations.

Oncology continues to be top therapeutic focus

Oncology continues to be the top therapeutic focus for many biopharma companies. The potential to leverage the immune system to treat cancer (immuno-oncology or I-O), especially checkpoint inhibitors and adoptive cell transfer (ACT) therapy, has some companies moving investment from other research and continues to drive alliances and M&A activity among biopharma companies.

Life sciences companies are evaluating investment in autologous therapies (modified patient cells) and allogeneic therapies (modified donor cells) for ACT therapy. While allogeneic treatment continues to attract investment, assets are primarily in pre-clinical or early clinical stages, and the technology will require time to evolve and prove its efficacy.

Therapeutic specialties such as inflammation, dermatology, and cardiovascular diseases also offer investment opportunities, and with a growing elderly population and longer life expectancy, more life sciences companies are prioritizing age-related diseases.

Digital health is a top priority

Life sciences companies, technology startups, and investment firms are all interested in meaningful technology investments, particularly digital health, to improve R&D productivity. Biopharma companies are increasingly interested in leveraging biomarkers to match patients with clinical trials, improve clinical trials accuracy, 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 steady investment in bioinformatics for novel insights from genomic data, and more technology and life sciences companies combining competencies to reduce computing costs and accelerate the pace of drug discovery.

Digital therapeutics has piqued the interest of venture capital and investment firms, as well as health plan and health system executives, who see the potential to reduce care costs while improving care quality.

Personalized medicine could attract significant attention

More patient-centric treatments will drive continued interest in genomics. While biopharma companies focus on developing personalized therapies by interpreting genetic data, technology companies are interested in building bigger biobanks of genomic data and linking it to electronic health records (EHRs). We expect richly networked ecosystems to emerge, linking genotypic and phenotypic information with health care records, with consortia to standardize how health care and genomic information is captured for personalized medicine.

Gene therapies have emerged as a key investment area within personalized medicine. Clustered regularly interspaced short palindromic repeats (CRISPR) is groundbreaking, allowing deletion of undesirable traits and potentially addition of desirable traits. While most gene therapies focus on single-gene mutations, most diseases involve mutation of multiple genes. Until the technology advances to treat polygenic disorders, we expect gene therapies to remain focused on rare diseases and dominate market niches. At that point, the deal-making floodgates could open.

As these trends evolve, relatively low interest rates, combined with a perceptible market correction, have lowered valuations. We would not be surprised to see the frenzied pace for life sciences M&A continue well into 2019.