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General trends in life sciences M&A
Although the COVID-19 pandemic that defined 2020 continued to shape much of the life sciences industry in 2021, the way that it did was markedly different. While 2020’s M&A landscape was characterized by whiplash volatility from choppy deal activity in the first half of the year to a surge in volume in the second half, that momentum accelerated in 2021, with no signs of slowing down heading into 2022.
This frenetic deal activity – pharmaceutical and life sciences transactions as a whole were up 46% in deal value and up 52% in deal volume from 2020 – was driven by a number of key macroeconomic and sector-specific trends that we expect to continue into 2022, including:
- Midsize pharmaceutical buyers pursuing opportunistic acquisition strategies, with robust capital markets and high valuations having limited the pool of attractive assets available in recent years. These players have looked further afield to add new capabilities and pipeline assets. Examples of this strategy include Horizon Therapeutics’ acquisition of Viela Bio for $3 billion to strengthen its early‑stage R&D capabilities and expand its pipeline, and Jazz Pharma’s acquisition of GW Pharma for $7.2 billion to enhance product diversification by adding the first and only FDA‑approved prescription cannabidiol medicine to its portfolio.
- Increased focus on digitization, with life sciences companies placing a premium on innovative and tech‑driven assets. A survey conducted at the beginning of 2021 found that 61% of surveyed life sciences executives believed they had overperformed on digital transformation during the pandemic relative to their competitors and 67% expected to increase that investment. Examples of this strategy coming to bear in 2021 included Thermo Fisher Scientific’s acquisition of PPD for $17.4 billion in a bid to acquire cutting edge research capabilities.
- Complex deal structures rising in prominence, from spinoff transactions – which we anticipate will continue to play a central role in M&A transactions in 2022 as large pharma companies focus on core competencies of their businesses – to continued use of earnout structures and other creative bridges for valuation and risk sharing, such as Vividion Therapeutics’ $2 billion agreement to sell to Bayer that featured up to $500 million in potential milestone payments. DeSPAC transactions also hit an all‑time high in early 2021 – and will likely continue to be a path utilized by early-stage life sciences companies to access the public markets, despite late 2021’s cool-down of the SPAC market.
Certain headwinds and other complicating factors, however, may have tamped down M&A activity in 2021, including:
- Antitrust regulators continuing to produce uncertainty, with the Federal Trade Commission announcing a number of key policy changes – the full impact of these policy changes on transactions remains to be seen.
- Underwhelming biotech stock price performance, with the Nasdaq Biotechnology Index finishing flat (and more than 25% below the S&P 500) and the SPDR S&P Biotech ETF down 18%, its worst year ever. Against this backdrop, an M&A exit at a compelling premium is often seen by company boards and management teams as a way to significantly de‑risk further market and operational uncertainties associated with continuing as a standalone business; however, sellers and buyers continue to have a disconnect regarding the implied value of biotech targets.
- Biopharma favoring partnerships over M&A, with biopharma transactions in 2021 being a volume story. A lot of potential acquirers opted for partnerships or smaller bolt‑on transactions over 2019’s mega‑mergers. A healthy 90 biopharma M&A transactions were announced in 2021 (compared to 69 in 2020 and 70 in 2019, the most transactions since 2016). But deal value – which totaled $108 billion as of December 15, 2021 – was slightly down from 2020 and significantly down from 2019.
Complex transaction structuring takes center stage
Spinoffs and carve outs gain prominence
In 2021, life sciences companies continued to look for ways to create value by focusing on core businesses and balance sheet strength, including by pursuing complex transactions such as selling single assets or groups of related assets in divestiture (or “carve out”) transactions and creating new independent companies to hold certain divisions or lines of business, and then selling such entities to third parties or transferring such entities to a company’s existing stockholders in a “spinoff” transaction. For example, early in 2021, Zimmer Biomet Holdings announced that it would spin off its spine and dental businesses into a new publicly traded company as a way to “optimize resource allocation” among its remaining businesses. Similarly, bluebird bio spun off its oncology business so that it could continue to focus on severe genetic disease, and Becton, Dickinson and Company announced that it would spin off its diabetes care business in an effort to strengthen its growth profile and enable a greater investment focus on its core businesses.
Larger life sciences companies are also pursuing complex transactions, with parallels to a broader trend among global conglomerates that announced spinoffs last year, including Dell, Daimler and General Electric. In November, Johnson & Johnson announced that it will split itself into two publicly traded companies, separating its pharmaceutical and medical devices businesses from its consumer products business. In June, GlaxoSmithKline announced its plans to spin off its consumer healthcare business to focus on its pharmaceutical and vaccine businesses. Still, while GlaxoSmithKline recently confirmed that the spinoff of its consumer arm is on track to close in 2022, the transaction continues to face challenges from activist investors Elliott Management and Bluebell Capital Partners, which seem skeptical of the benefits of a spinoff and are pushing for a sale of the consumer business to a strategic or private equity buyer.
These divestiture transactions often result in new, leaner players with extra cash to fund future operational and strategic objectives. As a result, we expect companies that have completed divestitures to look for ways to put their cash to work for them, including by acquiring assets in adjacent therapeutic areas to help fuel future growth and in the tech space to enhance or complement their core offerings and products, continuing the trend of bolt‑on transactions dominating the life sciences landscape into 2022.
CVRs and earnouts remain popular mechanisms to bridge value
Contingent value rights and earnouts also continued to be a popular approach in life sciences transactions in 2021. As we noted in our 2020 year‑end review, CVRs and earnouts help bridge the valuation gap between buyers and sellers and permit risk sharing when there is uncertainty regarding key value drivers, such as clinical trial risks, outcomes of regulatory reviews and introduction of new products into untested markets.
While these mechanisms may help parties reach a deal today, the future payments contemplated can be hotly contested, renegotiated and sometimes litigated. In September, the Delaware Court of Chancery reviewed a claim brought by former securityholders of Syntimmune, a biopharmaceutical development company, alleging that buyer Alexion Pharmaceuticals had failed to use the contractually agreed-upon “commercially reasonable efforts” (a highly negotiated definition in the transaction agreements) to facilitate achievement of certain post-closing milestones during the first two years of a seven-year earnout. Alexion argued that with five years remaining in the earnout period, the claim was not yet ripe for review. Vice Chancellor Zurn, siding with the plaintiffs, permitted the case to proceed. The case serves as a reminder that, depending on the underlying contractual language, CVRs and earnouts may require ongoing observance by buyers of contractual commitments – together with any associated costs and expenses.
We continue to counsel buyers and sellers alike that CVRs and earnouts, particularly the scope of the required “efforts” commitments, are likely sources of possible post‑closing friction. In December, the Delaware Court of Chancery addressed another earnout dispute in a case arising from Auris Health’s 2019 sale to Johnson & Johnson for $5.75 billion (including earnouts). In declining to dismiss the stockholder representative’s claim for breach of the implied covenant of good faith and fair dealing at the pleadings stage, Vice Chancellor Will noted that where an FDA policy change allegedly caused an unanticipated impact on the earnout terms in the definitive agreement, “the implied covenant claim comes into play” and allowed the case to proceed. As another example of the ways in which CVRs can lead to litigation, also in 2021, Celgene stockholders began a legal battle against Bristol Myers Squibb for its alleged missteps related to CVR payments, although analysts expect the parties will likely settle, similar to Sanofi’s 2019 CVR settlement.
Further, even when there are not earnout disputes, the fact that a drug candidate is subject to milestone payments or royalties if milestone events are achieved may keep drug candidates that have been shelved for development for their original intended purpose from being potentially developed for other uses. There is a history of drugs failing for one use and then being successfully developed for other uses. The prevalence of structured acquisitions, however, may be limiting the development of such shelved drugs because the economics of the milestones specified in the merger agreement may not be warranted by the risk‑adjusted market opportunity for a potential new use. While merger agreements may purport to give the securityholder agent the authority to amend the terms of the agreement after closing, there is not a clear path under Delaware law to change the economic terms of a merger agreement after closing without soliciting the consent of all of the former stockholders and other equity participants – which, in many instances, may make amending the milestones practically impossible.
Despite these cautionary tales, the use of CVRs and earnouts continues. CVRs facilitated notable public company life sciences transactions in 2021, including Flexion’s $427 million sale to Pacira (which featured approximately $400 million in potential value in CVRs) and Adamas’ $450 million sale to Supernus (which included up to $50 million in CVR payments). And, by some measures, almost 75% of private‑target life sciences transactions include an earnout, a trend that we don’t expect to change in 2022.
SPACs still going strong
Although the SPAC craze was (re)ignited in 2020, the volume of SPAC activity hit all‑time highs in 2021. 2021’s SPAC activity was most intense in the first quarter, with 298 SPAC IPOs priced and 97 deSPAC transactions announced in the first quarter alone. With a saturated market, PIPE investors growing more critical, many deals seeing redemption rates of 50% or more of the trust account and increased regulatory scrutiny by the SEC, the volume of SPAC activity steadily decreased in the second and third quarters, with 64 SPAC IPOs priced and 70 deSPAC transactions announced in Q2, and 88 SPAC IPOs priced and 61 deSPAC transactions announced in Q3. In 2021, there were 47 deSPAC transactions announced in the healthcare sector (17% of the total announced deSPACs in 2021), second only to the technology sector (30% of the total), compared to 17 healthcare deSPACs announced in 2020, which also accounted for 17% of the total deSPAC transactions announced that year.
While some of the SPAC novelty may have worn off, as of December 31, 2021, there is an estimated $138 billion in SPAC trust accounts available for M&A transactions – much of which will need to be returned to stockholders in 2022 if business combination deadlines expire absent a completed acquisition transaction or a stockholder approved extension. Although many potential SPAC targets have taken a more sober perspective in recent quarters, given the amount of capital available and the interest from SPAC acquirers in the industry, and with the recent choppiness of the traditional IPO market continuing into 2022, we expect that more life sciences companies (particularly very early stage ones) will seriously consider the opportunity to access the public markets by way of a SPAC transaction this year.
Not to be outdone by the SPAC market, reverse mergers – whereby a private company goes public by merging with an existing publicly traded company (in the case of a traditional reverse merger, the public company is not a special purpose acquisition company but a company with existing operations at the time of the merger) – also gained significant traction in 2021, with a record high of more than 150 reverse merger deals announced. Although this structure has been around for decades, Aadi Biosciences’ reverse merger with Aerpio Pharmaceuticals and Brooklyn ImmunoTherapeutics’ reverse merger with NTN Buzztime in 2021 underscore that life sciences companies are taking advantage of this otherwise nontraditional path to going public and will likely continue to do so this year.
Antitrust uncertainty continues
Antitrust played a notable role across the 2021 M&A landscape, with the FTC making a number of moves in the first year of the Biden administration, including:
- Suspending early termination of the statutory 30-day waiting period, which was previously granted more than 75% of the time it was requested.
- Issuing ongoing investigation letters notifying parties that the expiration of the Hart-Scott-Rodino (HSR) Act waiting period does not preclude the FTC from later reviewing and potentially unwinding transactions that have already closed.
- Rescinding a previous policy, the result of which requires buyers who enter into a consent order in connection with a divestiture to obtain prior FTC approval for future transactions in the relevant market (not just transactions large enough to meet the filing requirements under the prior policy).
- Withdrawing approval of the 2020 Vertical Merger Guidelines, arguing that the guidelines included “a flawed discussion of the purported procompetitive benefits … of vertical mergers.”
But perhaps the most significant antitrust development in life sciences M&A has yet to come to fruition. In March, the FTC announced a working group of federal, state and foreign agencies to review fundamental aspects of antitrust enforcement (e.g., theories of harm, evidentiary burdens to challenge transactions, types of remedies on offer and characteristics that make successful divestiture buyers), all as part of the FTC’s stated intent to take “an aggressive approach to tackling anticompetitive pharmaceutical mergers.” As of the end of 2021, the working group had not announced any proposals or findings.
Pending further guidance from the FTC, significant uncertainty hangs over the life sciences M&A landscape. Transaction parties have responded with increased focus on deal certainty through contractual regulatory covenants and reverse termination fees, which have seen an increase in size and frequency as compared to prior years (with such increase outpacing the broader M&A market). But even with these new regulatory headwinds affecting risk allocation over closing certainty and, in some cases, closing timing, the degree of any shift in actual antitrust approval outcomes remains to be seen. While many $1 billion-plus deals are still successfully clearing the HSR process without more burdensome second requests, others remain in a protracted regulatory review process. Of course, in an environment of such regulatory uncertainty, it is not possible to measure the true chilling effect that antitrust regulators may have on potential acquisitions to date without knowing the number transactions that do not proceed for fear of testing the regulatory review process.
Outlook for 2022
At the start of 2021, we predicted that COVID-19 would continue to influence M&A activity in the life sciences industry, that the industry’s relative immunity to activism would begin to wear off, and that we would see more early-stage life sciences companies going public by way of a SPAC merger. In fact, COVID‑19’s effects transitioned from market volatility to one of sustained high‑intensity dealmaking, as life sciences companies sought to deploy capital and keep pace in an environment of record growth.
Looking ahead, we expect to continue to see a steady flow of life sciences M&A and deSPAC activity, with the current level of deal volume continuing and even increasing in the coming months. We expect to see spinoff and carve out transactions of company products and programs continue as life sciences companies focus on their core competencies, as well as a continued focus on bolt-on transactions that help these companies achieve their goals in an optimized way. We also expect biotech companies to be attractive acquisition targets this coming year despite (and, in some respects, because of) the performance of biotech companies in 2021. The strong capital markets environment that has prevailed during the past few years has enabled a large number of development-stage and one‑product, commercial-stage biotech companies to go public that may be facing longer odds of becoming profitable as standalone businesses.
In this environment, strategic and PE acquirers will be well positioned with significant amounts of capital to deploy for acquisitions. Even setting COVID‑19 fueled revenue aside, cash is still king. Of the 20 largest public deals in the healthcare sector in 2021, 14 featured all‑cash consideration and only one – the $2.1 billion strategic combination of One Medical and Iora Health – used all stock. This comes as no surprise as well‑heeled acquirers look to expand their commercial and pipeline products in the most accretive manner. That said, we have seen a notable uptick in late‑stage biotech companies interested in exploring ways to use stock consideration to diversify their pipelines while conserving cash for advancing non‑M&A priorities. Everything will be on the table in 2022.
At the same time, regulatory obstacles may continue to create headwinds for strategic acquisitions in the life sciences space. Not only could we see increased antitrust scrutiny creating longer post‑signing regulatory reviews and potentially more blocked deals, but many jurisdictions – such as China and the UK – are implementing national security and investment regimes that could potentially curb cross‑border transactions just as we are seeing more broad‑based partnerships in the life sciences space.
Overall, as COVID‑19 has become “the new normal” and the world deals with new emerging strains of the virus, supply chain complications and regulatory headwinds, we expect innovative companies at the cutting edge of research and development, especially those in the life sciences sector, will continue to receive outsized attention in an environment that rewards high growth.
 Pfizer alone recently projected $100 million in vaccine revenue per day for 2021. See Rebecca Robbins, Pfizer’s Covid vaccine could break sales records again next year, New York Times (Dec. 18, 2021), available at https://www.nytimes.com/2021/11/02/business/pfizer-covid-vaccine-revenue-profits.html.
 Of the total executives surveyed (i.e., not limited to life sciences), 52% felt that they had overperformed on digital transformation and 63% of respondents planned to increase that investment. Additionally, most executives were focused on M&A to increase the company’s operational capabilities (34%), bolt‑on transactions (43%) and acquiring technology, talent and innovative capabilities (25%). Will COVID‑19 turbo-charge M&A and transformation?, EY.com (Feb. 2021), available at https://assets.ey.com/content/dam/ey-sites/ey-com/en_gl/topics/ey-capital-confidence-barometer/ccb23/pdfs/ey-ccb23-global-report-v02.pdf.
 See Josh Nathan‑Kazis, Why a Wave of Mergers Next Year Could Lift Drug and Biotech Stocks, Barron’s Magazine (Dec. 18, 2021), available at https://www.barrons.com/articles/drugs-biotech-stocks-sector-outlook-51639781578.
 Merlin Piscitelli, Looking Ahead to Factors Shaping Market Activity, PharmTech.com (Sept. 2, 2021), available at https://www.pharmtech.com/view/looking-ahead-to-factors-shaping-market-activity. See also Pamela Spence, How the Pandemic has Changed the Rules for Life Sciences Deals, EY.com (Jan. 11, 2021), available at https://www.ey.com/en_us/life-sciences/how-the-pandemic-has-changed-the-rules-for-life-sciences-deals.
 Angus Liu, Bristol Myers Will Likely Settle the $6.4B Celgene CVR Lawsuit, Fierce Pharma (June 29, 2021), available at https://www.fiercepharma.com/pharma/bristol-myers-will-likely-settle-6-4b-celgene-cvr-suit-at-a-discount-and-here-s-why-analyst.
 2021 SRS Acquiom Life Sciences M&A Study, SRS Acquiom, at p. 6 (Sept. 2021), available at https://www.srsacquiom.com/resources/life-sciences-deal-terms/ (noting that 218 of the 295 life sciences deals in the SRS Acquiom dataset – i.e., private‑target life sciences company transactions announced from 2008 to date – included an earnout).
 Deal Point Data (SPAC Transactions Overall and in Healthcare Sector – 2021 and 2020), accessed Dec. 30, 2021.
 Deal Point Data (SPAC Status), accessed Jan. 1, 2022.
 Deal Point Data (Publicly Filed Transactions Involving Public and Private Targets in Healthcare Sector (excluding SPAC transactions), accessed Dec. 30, 2021.