Deals are back

• Seven Irish life sciences M&A transactions in 2023, with total value up 596% year on year to €1.5 billion
• Global life sciences M&A spend rises to US$191b in 2023, up 34% from 2022, as topline pressure and the looming patent cliff add urgency to dealmaking
• The return of big pharma pushed global average deal size up 77%, and this trend will continue to drive increased M&A spending in 2024

The global life sciences industry has once again embraced big deal making, with mergers and acquisitions (M&A) investment totaling US$191 billion in 2023 (to the 10th of December), compared with US$142b in 2022, according to the 12th edition of the annual EY M&A Firepower report, which tracks global M&A investment in life sciences.

Though deal volume fell in 2023, with the total M&A spend representing only 118 completed deals compared with 126 in 2022, the average deal size increased significantly in 2023. The industry’s return to M&A globally is being driven by topline pressures, with many key products losing their patent protection in the next five years (“patent cliff”) and the need to do the right deals now to deliver new revenue growth and value into the future. The industry also holds near-record levels of Firepower – defined as a company’s capacity to do M&A based on the strength of its balance sheet.

In Ireland, seven M&A transactions occurred in the life sciences sector, which represented a decline compared to 2022 when 10 deals were completed.  However, the aggregated disclosed enterprise value of these seven deals was €1.5 billion, which represented year-on-year growth of 596%. It should be noted however, that Amryt Pharma’s sale to Italian pharmaceutical company Chiesi Farmaceutici, transacted at an enterprise value of €1.3 billion, made up the bulk of the sector’s Irish M&A in 2023. In relation to Irish equity capital fundraising activities, there was a notable increase in the number of deals in 2023 in the Sector, with 12 companies successfully raising growth capital totaling €142 million.

Aidan Meagher, EY Ireland Tax Partner and Head of Life Sciences, says:

“In 2023, we witnessed the resurgence of significant dealmaking globally within big pharma. Faced with the imminent patent expiration of several key products in the next five years, the biopharma industry recognises M&A as a strategic avenue for securing growth. The challenge for companies across the sector - both here in Ireland and globally - is to ensure they make the right deals now to deliver lasting value into the future. Identifying the best partners, dealmaking structures, innovations, therapeutic areas and strategic approaches is crucial as we navigate a period of upheaval in the global business and regulatory environment.

“It’s important to recognise, however, that life sciences companies must understand that doing the right deals is a process rather than a single transaction. They will need the right people, processes and governance to make each partnership work on its own unique terms. Even with the unsettled operating environment we expect to see continuing into 2024, the life sciences companies that can recognise and deliver on these dealmaking imperatives will be well placed to secure value far into the future.”

Fergal McAleavey, EY Ireland Corporate Finance Partner, says:

“While the total number of life sciences deals in Ireland was down in 2023, we saw a really significant increase in the disclosed enterprise value of these seven deals to €1.5 billion, driven principally by Amryt Pharma’s sale to Italian pharmaceutical company Chiesi Farmaceutici. Interestingly, almost one in three (29%) of the deals in 2023 were backed by international private equity firms, up from one in ten in 2022. This reflects global Private Equity firms’ continued interest in the Sector and their favourable view of Ireland as a suitable place for investment.

“In relation to equity capital fundraising activities we saw 12 Irish lifesciences companies successfully raising growth capital last year, with Shorla Oncology, Vivasure Medical, Fire1, LUMA Vision, Neuromod Devices and Bluedrop Medical all having raised in excess of €10m during 2023. This investment will give these innovative companies the opportunity to continue to scale and build their businesses and bodes well for the continued growth of a vibrant life sciences industry here in Ireland.”

Big pharma deploy their firepower

The EY global research found that one of the fundamental reasons behind the 2023 rebound is the increased involvement in M&A from the life sciences sector’s biggest players – the pharma multinationals. These companies dominated industry dealmaking, with more than two-thirds (69%) of M&A investment coming from big pharma, compared with just 38% in 2022. Eleven large pharma companies all signed at least one deal of US$1b or more in value, Merck broke the US$10b barrier with its acquisition of immunology specialist Prometheus in April, while the largest deal by a significant margin was Pfizer’s acquisition of Seagen for US$43b in March.

These major investments meant that despite the dip in deal volume, the average biopharma acquisition size increased by 77% in 2023 (US$1.23b in 2022 vs US$2.18b to Dec 10, 2023). Big pharma is set to keep signing these bigger deals in 2024, signaling a major return to M&A.

Will the trend continue into 2024?

According to the report, there are three key reasons to expect the rising trend in M&A spending to continue and accelerate in 2024 and beyond: the biopharma industry still holds near-record levels of M&A Firepower; the industry faces major revenue challenges in the next five years and needs to secure inorganic growth; and economic conditions mean there is a buyer’s market favoring acquiring companies.

Despite its increased M&A investment, the industry still commands more than US$1.37t in dealmaking capacity – higher than at any point in the history of the Firepower report apart from 2022.

Securing value through M&A

However, while there is money to invest in acquisitions, the challenge for companies across the life sciences sector is ensuring they do the right deals to secure value in the future.

The uncertainties facing biopharma dealmakers go beyond the general volatility in the global operating environment, and include the regulatory risks posed by new legislation such as the US Inflation Reduction Act (IRA). This initiative will potentially constrain companies’ ability to set drug prices in the future, making it more difficult to accurately evaluate portfolio and pipeline assets of potential targets.

To realise value from their acquisitions, life sciences companies need to focus on the north star of delivering better outcomes for patients – including an improved, more personalised health experience. They must also work to ensure they have the right processes, discipline and execution to deliver value creation from dealmaking.

M&A targets: oncology and rare diseases

The huge growth potential of the oncology market is reflected in companies’ M&A spending over the past five years, with oncology dominating industry acquisitions in both value and volume terms – in 2023, M&A investment in oncology assets reached US$65.2b. The intense competition for these assets has also resulted in companies paying higher multiples than for targets in other therapeutic areas. With multiples for oncology acquisitions over the past decade averaging 11.9 times total target company revenues, acquirers must work to ensure they extract value from their deals in this space.

As well as oncology, the changing regulatory landscape is leading to other assets becoming attractive acquisition targets. With legislation such as the IRA unlikely to affect the price point for orphan drugs, companies specialising in rare diseases have become significant M&A targets, commanding high multiples and driving some of the biggest deals of the past 12 months.

Securing dealmaking value in a shifting life sciences landscape

While there is ultimately no one-size-fits-all answer for which deals will deliver the best returns, the EY M&A Firepower reports highlights five strategies that give companies a better chance of securing value in the future and ensuring their M&A strategies help build that value:

1. Build more focused business models
   
2. Identify the therapeutic areas where you can add value
3. Be aware of emerging disruptive new opportunities
4. Find the right balance between acquisitions and partnerships
5. Build the right execution strategies to deliver value from M&A

The full EY report is available at ey.com/firepower.

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Notes to editors

About the EY M&A Firepower report

Now in its 12th year, the EY M&A Firepower report measures companies’ capacity to fund transactions based on the strength of their balance sheets. It has four key inputs: 1. cash and equivalents; 2. existing debt; 3. debt capacity, including credit lines; and 4. market capitalization. In constructing the model, the following assumptions were made: first, a company will not acquire targets that exceed 50% of its existing market capitalization; second, the debt/equity ratio of the combined entity created by a transaction cannot exceed 30%.

While some life sciences companies have made acquisitions that go beyond these upper limits, the intent is to apply a uniform methodology to measure relative changes in Firepower. EY Firepower measures capacity to conduct M&A transactions financed with cash or debt. It does not measure the ability to conduct stock-for-stock transactions. However, increases in a company’s stock price do boost its Firepower under the EY Firepower’s formula, largely because equity enables companies to borrow more to finance transactions.

Irish data was sourced from Capital IQ and Mergermarket data.

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