Shifting tides in life sciences M&A

Authors: Heiko Dorenwendt, Jennifer Laing, Janea Schaeffer

Shifting tides | Market dynamics overview

In the past few years, a unique confluence of market trends in the life sciences industry has emerged:

• A decrease in investment due to low-risk appetites alongside sharp inflationary pressures;
• Division of the life sciences market into the “haves” and “have-nots” due to COVID-19 developments, with stark contrasts in cash reserves and investment interests between the two; and
• Finally, the Federal Trade Commission’s increased, broad-based scrutiny of deals has led to an atmosphere of regulatory uncertainty, particularly around large deals

While we’ve seen some of these variables in play before, some haven’t surfaced in years, if not decades—and they most certainly have not collided all at once in the life sciences arena.

In spite of these uncertainties, we continue to see scientific advances (mRNA vaccines, gene editing) and care innovation that has the potential to deliver transformative therapeutics.

What does this mean for dealmaking?

The rapid convergence of these factors has created an influx of distressed assets. Acquisitions and partnerships represent a vital lifeline to keep science alive, particularly for the pre-commercial, clinical-stage players for whom cash is critical to fueling years of clinical trials and ultimately a product launch. In 2023, small deals are pacing at 160% of their 2022 levels (in terms of deal volume). Given the higher volume of affordable targets looking for deals, the market competition is intense in pockets.

It’s not just the size of the deals that is changing. Deal structures and payment terms are evolving to match the needs and expectations of both buyers and sellers. Partnerships and mergers of equals provide much-needed capital, pipeline, and scale, often in exchange for shared control of the joint entity. Similarly, milestone payments are increasingly common, as buyers appreciate less upfront cash outlay and incentives that align with the seller. Often anchored on development or sales targets, milestone payments drive focus for the combined organization and de-risk the transaction value—because a missed milestone means no payment.

Finally, the current atmosphere of regulatory uncertainty is also affecting pharmaceutical mergers and acquisitions. The Federal Trade Commission (FTC) is in the midst of a multiyear investigation into whether dealmaking at life sciences companies has dampened innovation and has had an adverse impact on pricing. Recent FTC inquiries on large deals increases the hesitancy of life sciences companies to pursue large deals and has also led to longer deal approval timelines and higher transaction costs.

“A smooth sea never made a skilled sailor.” —Franklin D. Roosevelt

The pressure to conserve capital and keep options open has driven burgeoning companies to evolve their operations. Previous deal tactics and risk profile considerations are likely to not apply, at least in part. For this reason, those embarking on transactions should be diligent in assessing the current state of their targets. Conversations around due diligence and value drivers should be deliberate—even in cases where the deal size itself doesn’t appear to warrant the attention.

We have observed behaviors that increase risk of realizing value through an acquisition: 

• Contract labor being leveraged even for key value-driving functions (such as regulatory or R&D) in order to retain optionality for the organization. The retention of contract resources has always been a “watch area” throughout the organization, but it has taken on new importance in delivering the strategic value of the transaction.
• Finance organizations are hyper-focused on maintaining liquidity and access to capital, which takes attention away from other key financial processes and requires immediate attention to cash needs during the uncertainty and exchange of a transaction.
• COVID-19’s impact on supply chains persists. Heightened focus on reliability and issues of scale and lead times may affect growth plans.
• The prolific use of outside IT vendors to mitigate internal capabilities and talent acquisition adds time and complexity to planning and executing integration.

How Deloitte helps clients harness the opportunity

Deloitte offers a holistic suite of end-to-end M&A services guided by experienced industry professionals. We are working with our clients to bring these new risks to light and are working to employ leading practices and approaches that can help mitigate them. Depending on your “stage” in the M&A life cycle and your core objectives, we can work with you to assess your portfolio and help you determine what areas you may want to consider refocusing on within your business. We can provide due diligence, program management, and value capture data to help identify targets that will fuel growth strategy.

The future of next-gen deals

The trends we’ve seen emerge over the past two or three years will likely persist. With the current inflationary environment and FTC scrutiny of big deals, smaller deals will continue to remain popular. This means that many exciting opportunities are available. We find that small companies can be innovative changemakers for their industries, particularly when brought to scale through partnership. With next-generation diagnostic technologies and cell gene therapies becoming reality, companies may have a unique opportunity to get in on the ground floor of a medical revolution that could improve our collective health in unprecedented ways.

About Deloitte 

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