After deal value peaked in 2021 and then plummeted in the wake of the pandemic, dealmaking in the life sciences sector revived in 2023. Acquiring precommercial biotech assets to fuel growth renewed deal success for pharmaceutical companies, and proactively shaping the business portfolio to improve profitability provided the key for medical technology companies. This year promises considerable deal activity across the sector.
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Life sciences sector performance
For a decade, both the pharmaceutical and the medical technology (medtech) industries saw unprecedented M&A activity. Between 2011 and 2021, the number of deals in the life sciences sector increased 13 percent a year, and that rate doubled between 2019 and 2021. Deal value peaked at $517 billion in 2021.
While deal volume slowed in recent years, like overall M&A activity, dealmaking in life sciences saw an upswing in 2023. The value of transactions jumped 23 percent from a year earlier, exceeding the value realized in 2020, before the pandemic (exhibit).
The pandemic shocked the economic system and brought M&A activity to a virtual halt. As the system has revived, so has the pressure on companies to deliver profitable growth. But rising interest rates have complicated debt financing. Struggling to secure financing for their pipelines, small biotechnology companies (biotechs) looked to the financial clout of big pharma companies and private equity (PE) players for R&D and product development support. Medtechs responded to the pressure by optimizing their portfolios—divesting slow-growing, less profitable assets and making growth-oriented acquisitions to improve their financial profile.
A few large transactions, like Pfizer’s acquisition of cancer drugmaker Seagen for $45.7 billion in early 2023, had outsized impact on the jump in transaction value and slightly increased average deal sizes across the biotech and pharma sub-sectors. But most of the deals in the sector remained smaller biotech-related transactions aimed at generating growth. Of the 745 transactions in 2023, 91 percent had a value below $1 billion, and 54 percent fell below $100 million. Biotech and pharma deals accounted for the lion’s share of deal volume—61 percent and 23 percent of value, respectively. At the same time, smaller medtech transactions delivered 29 percent of the deals, but only 15 percent of deal value.
Programmatic approach to dealmaking
Many life sciences companies have embraced a programmatic approach to M&A. They execute a steady stream of relatively small, strategic transactions—acquisitions to fill gaps in their portfolios or to enter promising new segments and divestitures to cull businesses that underperform or no longer meet their needs. As our two decades of research on M&A strategies show, this approach creates the most value across industries. On average, programmatic dealmakers enjoy higher TSR than companies making selective or large transactions.
The programmatic approach works especially well in the pharmaceutical industry. The steady stream of small deals enables major players to make very focused acquisitions—a specific drug, for example. At the same time, their global reach can open vast markets for the products of small biotech companies.
In search of growth: Pharma deals target precommercial biotech assets
Pharma companies have an almost insatiable appetite for biotech assets. Because biotech valuations have declined almost 70 percent since their peak, many of these assets are increasingly attractive for achieving the following goals.
Accelerate R&D. Pharma companies acquiring biotech assets can reduce the projected timeline for assets in the pipeline by at least 30 percent, on average. Success requires R&D integration that taps the power of the acquirer’s R&D system while preserving the target’s unique capabilities.
This balance is not easy to achieve. It requires a thoughtful approach that empowers the target to continue leading the process while using the acquirer’s resources and know-how to speed it up. The acquiring and target companies must align early on the priorities and the resources that will have the greatest impact on accelerating progress, as well as the greatest potential risks and ways to avoid them.
One successful acquirer made the strategic decision to ring-fence the target’s R&D but bring late-stage assets into its own development pipeline to benefit from its scale and accelerate clinical development. Meanwhile, another acquirer stuck with the target’s development plan and experienced significant delays, as the target’s capabilities were still immature.
Accelerate launching and commercially scaling products. Pharma companies bring field forces and the ability to rapidly scale commercial presence. They can also professionalize market access, patient services, and other critical drivers of product uptake.
The best acquirers use commercial playbooks to speed the scaling of biotech assets. Acquisition by the larger company can enable the smaller company to capitalize on the scale and capabilities of the acquirer’s commercial team to strengthen its launch capabilities and accelerate the timeline. But realizing these benefits requires the target’s launch team to work closely with the acquirer from the beginning and to secure protection from the disruption caused by the broader integration process in order to preserve its unique capabilities.
Winners typically use a clean team to develop plans so they can start acceleration as soon as the deal closes. The clean team plays a particularly important role when the acquiring and target companies compete in a therapeutic area (TA), which prohibits them from sharing commercial information until the deal closes. The clean team can collect and analyze information like customer and geographic footprints that will be ready to share on day one.
Culture looms especially large in pharmaceutical deals because so many deals involve large companies acquiring small companies. Many small companies owe much of their success to their distinctive culture and ways of working. The acquirer is buying not only the target’s tangible assets, but also the talent and culture that nurture the company’s innovation engine and entrepreneurial spirit. Thoughtful talent retention and cultural integration are essential to sustaining the value of the smaller company.
A recent McKinsey roundtable explored common challenges to successful cultural integration. Identifying and engaging the truly critical talent lays the foundation for success. That talent typically belongs to a few individuals who are the knowledge and innovation leaders of the biotech (versus the broad institutional knowledge of a large pharmaceutical company).
But these individuals are often “corporation-averse.” They chafe at bureaucracy and a process-heavy work environment. They value having skin in the game, multitasking, making quick decisions, and taking an agile, entrepreneurial approach to getting things done. Even compelling incentives like an attractive financial package and recognition of their contributions to the biotech’s success may not retain them.
In search of profitability: Medtech deals manage the portfolio proactively
The current market environment is putting strong financial pressure on many medtech companies. Their share prices have declined over multiple periods, and investors are demanding higher returns.
Medtech companies are responding by changing their approach to value creation. Yesterday, many pursued growth by acquiring non-core complementary assets. Today, rising interest rates are forcing them to focus on improving their margins to secure higher valuations in the capital markets. Medtech companies typically approach deals with one or more of three goals in mind.
Reshape the portfolio. Medtech companies focus on the weighted average market growth rate of the businesses in their portfolio. They look at growth across the portfolio and spin off lower-growth businesses in pursuit of higher aggregate growth. Tuck-in acquisitions at the product level are also prevalent across the industry.
Would-be acquirers are getting more selective. They are searching for specific products, innovations, or capabilities that can close the gaps in their core product categories or, more importantly, strengthen their growth profile.
Allocate capital to digital offerings. Most medtech companies are seeking to expand their value propositions beyond the benefits of their physical products by investing in digital commercial strategies and digital tools (investments often enabled by reshaping the portfolio). They are building digital health ecosystems—connecting multiple devices to create a platform where physicians and patients can interact, and data integration delivers more value for both than the physical product alone can. The results: better medical outcomes at lower cost to serve and more satisfied physicians and patients.
One multinational medtech giant built a fully integrated ecosystem that connects devices, data, applications, and services for continuous improvement of patient outcomes. The combination of specialized medical expertise with leading-edge digital technology enables evidence-based decisions that ensure more efficient delivery of the highest-quality care on a single, secure platform.
Many medtech companies are acquiring software players to accelerate their platform building. These acquisitions eliminate the need to build digital capabilities in-house and depend on yearslong internal cycles of software development.
Take advantage of more creative transaction structures. Third-party capital is increasingly available from private equity firms and some hedge funds. These firms often invest in opportunities that do not match the immediate priorities of medtech companies, but they recognize that many medtech companies have more investment opportunities than funds to invest, so they are increasingly approaching these companies about providing funding.
Meanwhile, many would-be acquirers are exploring less traditional transaction structures. Joint ventures are becoming common across the medtech industry. Companies are forming long-term strategic partnerships with digital players, co-acquiring companies with PE firms, and raising external capital to fund R&D programs—in exchange for product royalties.
M&A outlook for 2024
Several factors fueled the revival of M&A activity in 2023. Pharma and medtech companies have exceptionally strong balance sheets. They are taking a hard look at new technologies, artificial intelligence, and digital to build and expand their capabilities. Targets are increasingly willing to do transactions at stabilizing values.
These factors have staying power, and many life sciences companies are publicly hunting for deals and seeking to shed noncore assets in their quest for value creation. This year promises an active market for M&A in the sector.
To prepare to play and win in this market, life sciences companies should do some soul-searching. For pharmaceutical companies, this means asking: What assets will build my pipeline and make me a leader in fast-growing segments like cell and gene therapy and biologics? Can my capabilities make the deal economics work?
For medtech companies, this means asking: How can I fuel growth and access faster-growing market segments? Can digital capabilities accelerate my entry into solution businesses? Should I spin off portions of my portfolio?
