Biotech M&A activity has slowed down due to large-cap pharma digesting past deals and macroeconomic factors, analysts at Bank of America noted.
In a report looking at biotech deal trends, analysts highlighted a shift towards smaller acquisitions and a focus on privately held biotechs.
“Overall, we continue to see M&A as an important (external) source of validation for biotech valuation and trends in biotech innovation indicate (to us) that M&A activity levels should persist,” the analysts wrote.
Total dollar outlay for 2024 M&A deals dropped to $26 billion in the first nine months, down from $42 billion during the same period in 2023 and below the five-year median of $36 billion. The average deal size has also decreased, reflecting a shift toward smaller acquisitions.
Despite fewer competitive processes and lower dollar outlays, strong deal premiums persist. Long-term, biotech M&A should rebound as large-cap pharma continues to need innovation and drug replenishment, supported by favorable interest rate trends.
Here are the key takeaways from Bank of America’s report on biotech M&A trends:
M&A activity is slowing. Large-cap biopharma is focusing on digesting major 2023 deals and has a preference for smaller, bolt-on acquisitions rather than larger ones. This could also be tied to elevated borrowing costs.
Shift toward smaller deals and private biotechs. There's been a noticeable move toward smaller-sized deals in 2024, particularly with privately held biotechs. This is likely due to a weak IPO market, creating more opportunities for private acquisitions over public ones.
Fewer competitive processes. The percentage of deals that are competitive has dropped, with fewer biotech M&A processes seeing competitive bidding, leading to less price appreciation among the deals that do occur.
Solid deal premiums despite fewer large acquisitions. Even though deals are smaller and fewer in number, biotech companies are still commanding strong premiums (+80%) over trailing stock averages.
Future M&A prospects depend on interest rates and innovation. Declining interest rates could help revive larger M&A deals, but large-cap pharma’s ongoing need to address patent expirations on major brands should support M&A in biotech over the long term. Biotech innovation remains a key driver.
Uncertain short-term M&A outlook. The analysts remain cautious about near-term deal activity, particularly around year-end 2024 and early 2025, due to current market conditions and deal digestion by large-cap pharma. However, the long-term need for innovation should keep M&A viable.