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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, offering discounted assets.
Yet 2022 turned out to be relatively slow. The health sector’s aggregate deal value dropped 56% to $202 billion year-to-date, S&P Global Market Intelligence wrote in a report published Dec. 19.
Some of the sluggishness had to do with an imbalance in expectations. Because the stock market was so volatile in 2022 after a stellar 2021, some chief executives of target companies were hesitant to accept a valuation reset right off the bat. Meanwhile, acquirers saw 2021 highs as ceilings, not as a realistic baseline from which to launch negotiations. Johnson & Johnson Chief Financial Officer Joseph Wolk told analysts as much during an earnings call in October, when he said that sellers hanging on to their 2021 record highs didn’t make for a conducive deal-making atmosphere.
Yet that is finally starting to change, with the gap between acquirers and their targets narrowing. Soon after Mr. Wolk’s comments, J&J on Nov. 1 announced one of the largest healthcare deals this year, agreeing to buy heart pump maker Abiomed for $16.6 billion in cash. The $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.
Despite the Abiomed deal, J&J is expected to be a top acquirer next year. 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 possibly 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.
A megadeal could come from Merck. The company was in talks to acquire Seagen for about $40 billion before those talks hit a snag. But management has left the door open to doing a large deal as it looks to replace the expected revenue hit once Keytruda, its blockbuster cancer drug, goes off patent later this decade.
In all, next year could bring M&A deal value in the pharma and life-sciences space to somewhere in the range of $225 billion to $275 billion, PricewaterhouseCoopers wrote in a report. With so much dry powder and plenty of targets to look at, deal-making next year looks set to heat up.
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