2023 Predicted to See a Rise in Healthcare Mergers and Acquisitions

This year was supposed to be a big one for healthcare deals. However, the pandemic has put a damper on many of these plans.

On one side, you had cash-rich pharma companies staring down a $200 billion patent cliff. On the other side, you had plenty of cash-starved smaller-size biotech companies, whose valuations took a hit during the market downturn. These companies were offering discounted assets, which made them attractive to the larger pharma companies.

The health sector's aggregate deal value dropped 56% to $202 billion in 2022, according to a report from S&P Global Market Intelligence. This is a relatively slow year compared to previous years.

Some of the sluggishness in M&A activity in 2022 can be attributed to an imbalance in expectations between buyers and sellers. After a volatile year in the stock market, some CEOs of target companies were hesitant to accept a reset in valuation. Meanwhile, acquirers saw the 2021 highs as ceilings, not as a realistic starting point for negotiations. Johnson & Johnson CFO Joseph Wolk told analysts in October that this discrepancy made for a difficult deal-making environment.

The gap between acquirers and their targets is narrowing, with this trend culminating in some of the largest healthcare deals in recent memory. On November 1st, Johnson & Johnson announced their intent to buy heart pump maker Abiomed for $16.6 billion in cash. This $380 price per share represented about a 50% premium over Abiomed’s closing price the day before the deal was announced, but it wasn’t far from the company’s 52-week high set in November 2021. A similar dynamic was at play for the year’s largest healthcare deal announced earlier this month: Amgen‘s $28 billion acquisition of Horizon Therapeutics. While the $116.50 per share reflected a nearly 50% percent premium over the closing price prior to news of the talks, it was right around what Horizon was trading about a year ago.

The two sizable deals in the last two months of 2022 signal that the bid-to-ask spreads are starting to narrow, meaning 2023 might be a much better year for M&A. While Amgen might be tapped out given how levered it becomes after the Horizon deal, many drug and medical device companies are just getting started, with lots of balance-sheet capacity and plenty of appetite as top-selling drugs lose patent exclusivity.

J&J is expected to be one of the top acquirers next year, despite the Abiomed deal. It was one of Horizon’s original suitors and is widely expected to continue pursuing deals, as its top-selling immunology drug Stelara loses patent protection. Another big deal maker in 2023 will likely be Pfizer. While it potentially has the most deal capacity—and the biggest need given the risk to some of its product lines—Pfizer seems to be choosing to do a string of smaller acquisitions, rather than a megadeal. In 2022 alone, Pfizer bought Arena for $6.7 billion, Biohaven for $11.6 billion, Global Blood Therapeutics for $5.4 billion, and ReViral for less than $1 billion. Between cash on hand and its ability to take on debt, Pfizer has more than $100 billion in additional firepower, Goldman Sachs estimates.

Merck is reportedly in talks to acquire Seagen for around $40 billion. While the talks have reportedly hit a snag, management has reportedly left the door open to doing a large deal. This is likely in response to the expected revenue hit the company will take once its blockbuster cancer drug Keytruda goes off patent later this decade.

PricewaterhouseCoopers has predicted that the value of M&A deals in the pharmaceutical and life-sciences industries will reach between $225 and $275 billion next year. With a large amount of capital available and plenty of potential targets to choose from, it seems likely that there will be an increase in deal-making activity in the coming year.