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# Shifting from megamergers to strategic collaboration: M&A predictions for biopharma

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In 2021 we saw deals move away from the massive megamergers of 2019 to smaller collaboration and partnership agreements. In this article, European Pharmaceutical Review’s Hannah Balfour discusses the key deals of last year, whether the trend of high volume but small value will continue in 2022, and the motivations underpinning the recent changes in merger and acquisition (M&A) contracts with Subin Baral, EY Global Life Sciences Deals Leader.

“We never say never to mega deals – there is always potential for megamergers… But when we look at the trend, we expect volume: the collaboration activities, the partnership activities, the bolt-on acquisitions will be preferred in the coming years.” – Subin Baral, EY Global Life Sciences Deals Leader.

Through the last two years of the COVID-19 pandemic, a mainstay of the drug development community’s response has been collaboration. We have seen it in a variety of forms, including between Big Pharma and smaller companies, such as the Pfizer/BioNTech collaboration which led to the Comirnaty® messenger RNA (mRNA) vaccine for COVID-19, drug developers and regulators or government, increasing numbers of deals for outsourced development and manufacturing activities, and so on.

But will collaboration continue to be a critical paradigm for biopharmaceutical development?

## A seller’s market

EY’s recent 2022 M&A Firepower report reveals that though the number of M&A deals that occurred during 2021 was greater than in previous years, the total value was the lowest since 2017.1 Overall, there were 90 M&As in 2021, a >20 percent increase in activity from the 70 and 69 that occurred in 2019 and 2020, respectively. However, their total value was $108 billion, a 60 percent decrease from the peak of$261 billion in 2019.

The existence of this valuation premium puts pressure on buyers to demonstrate quick returns on any acquisitions they make, acting as a deterrent to transactions”

This trend of increasing activity but decreasing value, which Baral expects will continue through 2022, is due to it being a seller’s market. He pointed to several factors promoting a shift in negotiation power away from Big Pharma companies towards smaller enterprises: “One is the patent cliff. All the big pharmaceutical companies are exposed to this cliff looming from 2025 onwards.” According to Baral, the internal pipelines of these large companies are not sufficient to overcome the growth gap potentially created by the fall in revenues after branded medications go off-patent, making them heavily reliant on external innovation.

However, it is often not as simple as directly acquiring companies and assets, because the valuations for these smaller companies are extremely high. Given the ample capital that is accessible for these smaller enterprises to enable their continued development, they are “not in a desperate mood to sell” explained Baral. He added: “The existence of this valuation premium puts pressure on buyers to demonstrate quick returns on any acquisitions they make, acting as a deterrent to transactions – and increasingly making partnerships and collaboration the preferred method.”

## M&A looking forward

Baral concluded that he anticipates 2022 will see very similar deals to 2021, with a lot of bolt-on acquisitions and a focus on collaborations and partnerships. “What is changing is there is ample capital in the market, so the power is shifting a little bit from Big Pharma to the mid-sized biopharma companies. They have a little more bargaining power now, with the innovation deficit and access to capital. Pharma companies are in desperate need to fill their pipelines for the looming patent cliff, so we expect a lot of deal making in 2022 and 2023. Now, they are not all going to be megamergers, but the valuations are high,” commented Baral.

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