According to the 12th edition of the annual EY M&A Firepower report, which tracks global M&A investment in life sciences, instead of investing multibillions to acquire de-risked, market-ready assets, 51% of 2024 biopharma deals targeted earlier-stage (pre-Phase III) assets, trying to tap innovation at an earlier point in the development cycle. The slow pace of activity in 2024 may have resulted from the ongoing regulatory challenges from the pro-active Federal Trade Commission (FTC) and the ongoing implementation of the Inflation Reduction Act (IRA) in the US, and as a natural “reset” after the heightened activity of the previous year.
The life sciences AI opportunity
According to the EY Report, a surge in life sciences artificial intelligence (AI) partnerships highlights the opportunities the technology offers to life sciences companies, resulting in over $55 billion in potential deal value, spread over more than 330 deals in the past five years. Recursion Pharmaceuticals completed the largest life sciences AI M&A deal to date in August 2024, acquiring Exscientia for $712 million and most leading life sciences companies have now established one or more AI partnership.
AI seems to offer gains across the value chain from operations to commercial strategy. However, the Report details three challenges the industry will face to successfully partner with these technology companies: finding the right data strategy, learning to use AI end-to-end, and getting education and integration strategies in place across the firm.
China: widening the search for innovation value
As life sciences companies widen the search for new value drivers beyond the traditional fields of innovation, the EY M&A Firepower report reveals China is becoming an increasingly important research and development (R&D) target for companies seeking to license-in antibody-drug conjugates (ADCs) and other novel oncology treatments. The first-ever full buyout of an innovative Chinese biotech by a big pharma saw AstraZeneca pay $1.2 billion to acquire Gracell Biotechnologies Inc in 2024. Additionally, one of the US biggest potential value biobucks deals (potential milestone payments if the alliance meets its clinical and commercial goals) of 2024 was Novartis/Shanghai Argo Biopharmaceutical Co Ltd ($4.2 billion).
The report also notes that approximately 85% of China out-licensing deals are focused on oncology. However, challenges to the growth of China's life sciences innovation economy include the US BIOSECURE Act, due to take effect in 2032 and the uncertainties of the China-US relationship under the incoming US administration.
2025 dealmaking
The EY M&A Firepower report reveals there are strong structural reasons to expect a return to dealmaking; the industry is still holding $1.3 trillion in dealmaking Firepower, meaning dry powder is there to make bigger deals – though the Firepower is unevenly distributed, with Novo Nordisk and Eli Lilly dominating. The industry also faces upcoming revenue challenges, with patent expiries set to wipe out $300 billion in revenues by 2028, and growth gaps of $240 billion looming by 2030.
Additionally, the incoming administration in the US may offer significant tailwinds to the industry in the form of in corporate tax rate cuts and a potential roll-back of the IRA's drug pricing provisions and the FTC's interventionist stance, as part of a general deregulatory shift. However, despite these drivers, the Report found potential restraints to the 2025 market; the reduced number of high-quality de-risked assets, the ongoing margin pressure on life sciences companies reducing appetite for big spending and the fact that the most prized targets are still commanding high premiums in the market (a median of 75% in 2024, well above historical norms).
Subin Baral, EY Global Life Sciences Deals Leader, says: “For large pharmaceutical companies, 2024 may have been a ‘digestion year,' as they integrate the acquisitions made the previous year. At the same time, the appetite for M&A remains strong, with biopharma companies signing more deals in 2024 than the previous year.”
“Companies have focused on smart, bolt-on moves, looking for value in less obvious places. That strategic mindset will continue into 2025, though there is also growing optimism around the business environment in the coming year, which could see the industry unleash more of its $1.3 trillion Firepower. With nearly two-thirds of all major pharma company revenues set to come from dealmaking in the next five years, deals will remain at the center of life sciences strategy.”
Looking ahead to 2025:
- Deals will continue at the center of life sciences strategy, and companies need a robust partnering approach to shape their future with confidence.
- Smaller, smarter deals offer strong potential returns on investment for companies with the agility to tap these strategic opportunities.
- Therapeutic area focus will remain a key priority in dealmaking, and we expect portfolio prioritization to continue with companies divesting non-core assets and investing in priority areas.
- Opportunities outside traditional technological and geographical areas of innovation – such as AI startups and China biotech – offer an accelerated route to growth.
- Across all dealmaking strategies, end-to-end execution is critical to realizing a strong return on investment, with culture and change experience at the center of execution strategies.
