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Although 2022 saw a general decline in M&A activity in the life sciences industry compared to 2021’s frenetic pace (when deal volume was up 52% from 2020), life sciences deal flow in 2022 on balance remained strong despite the headwinds. Creativity was the year’s primary theme as biotechnology companies increasingly sought alternative cash-raising opportunities in a challenging capital markets environment, such as using carve outs and bolt-on transactions to cash-rich buyers as a lifeline to keep program runways intact, stock-for-stock mergers with other biotechnology companies as a way to combine cash balances and fund key programs (including through private-to-private or public-to-private combinations), and divestitures or out‑licenses of product candidates to streamline operations.
Amid depressed valuations, biotechnology companies also saw an increasing number of demands from activist investors that in certain cases led to more deal activity. But it wasn’t all carve outs and concerned investors – even with the headwinds in the industry and beyond, there were still several traditional public M&A deals involving biotechnology or medical device companies, as large pharmaceutical companies continued to have cash to deploy for acquisitions. For example, the sale of Horizon Therapeutics to Amgen for approximately $28 billion was the third-largest all-cash transaction in the pharmaceutical sector in history.
This post takes a deeper dive into what we see as the pivotal events and deals that propelled the life sciences industry in 2022, and our view on what to expect looking ahead to 2023. Will 2023 see a resurgence of traditional public M&A deals or will macro factors and the looming threat of regulatory review continue to push biotechnology companies down creative paths? Let’s dig in.
2022 drivers and headwinds
Choppy access to capital markets and financing to fund ongoing operations
Many life sciences companies faced challenges raising money in the capital markets in 2022. Although there were 104 initial public offerings of biotechnology companies in 2021 that raised nearly $15 billion in funds, 2022 saw only 22 such IPOs collectively raising less than $2 billion. “It’s a more challenging market environment right now than we’ve seen in many years,” said Charlie Kim, who co-chairs Cooley’s capital markets practice. Moreover, going-public transactions between life sciences companies and special purpose acquisition companies (SPACs) decreased significantly in 2022, with fewer investors willing to participate in private investments in public equity (PIPEs) as part of a de-SPAC transaction. Lastly, many public life sciences companies that had their market capitalizations fall in 2022 also found it more difficult or more expensive to secure debt financing as compared to a year or two ago, and many private life sciences companies saw that venture capital debt carried with it more dilutive terms in 2022.
With this limited access to equity and debt markets, in addition to divestitures to raise cash balances through the sale of non‑core assets, many life sciences companies have contemplated strategic M&A transactions to combine cash balances and to focus on key programs. A survey in the first quarter of 2022 of 100 biotech financing executives found that 33% were planning to pursue acquisitions in 2022 versus 6% for IPOs (comparatively, in 2021, 24% of those surveyed were considering IPOs).
Carve outs and bolt-on transactions provide liquidity, streamlining and focus
Against this backdrop, the increasing popularity in carve outs and spinoffs in 2021 continued into 2022, as the industry looked for sources of liquidity and turned away from high-risk deal strategies in light of the macroeconomic and regulatory headwinds. Instead, life sciences companies focused on leveraging corporate carve outs and spinoffs to create liquidity through asset sales, develop leaner operations and focus their investments on key product candidates.
Indeed, while deal volume was down 30% from 2021 and deal value was down 41% from 2021, multiple carve outs were announced or completed this past year. A few examples include Jazz Pharmaceuticals’ divestiture of Sunosi(solriamfetol) to Axsome Therapeutics to “enable Jazz to sharpen its focus on its highest strategic priorities.” Axsome used the acquisition of Sunosi “to augment and accelerate [its] commercial preparedness” ahead of two potential near-term commercial launches of its existing medicine candidates. Biopharmaceutical company Chimerix agreed to sell its worldwide rights to brincidofovir, including TEMBEXA, to Emergent BioSolutions in a transaction intended to enhance Chimerix’s balance sheet while allowing Chimerix to participate in the longer-term economics of the drug through milestone payments and royalties. Novartis announced plans to spin off its generics and biosimilars division into a publicly traded stand-alone company.
The trend is not limited to traditional carve outs and spinoffs, as Colossal Biosciences, the startup looking to resurrect the woolly mammoth and the Tasmanian tiger, announced that it was creating a spinoff software company focusing on computational life sciences – the first, but likely not the last, spinoff from a company that plans to commercialize its scientific innovations by spinning off independent companies – and Erytech Pharma sold its cell therapy development and manufacturing facility to Catalent and entered into a supply agreement to support Erytech’s late‑stage development product.
Buyers look to take advantage of depressed valuations – cautiously
Life sciences dealmaking in 2022 also focused on strategic deals involving smaller, early‑stage assets (or bolt-on transactions), as buyers sought to build out their existing operations by acquiring new assets, and sellers sought to find homes for potential programs that faced fundraising difficulty in the then-current capital market environment. From a buyer’s perspective, the challenges facing cash-poor and pre-clinical companies presented opportunities to acquire intellectual capital and assets at market troughs. While large pharmaceutical companies continued to deploy their cash balances, small-cap biopharma companies constituted a large portion of buyers, seeking to acquire not only potential products, but also key researchers and scientists to come over in the transaction.
That said, some buyers took a wait-and-see approach in 2022. These buyers seemed reluctant to acquire development-stage programs with high funding requirements and inherent risks of failure that would cut into profits (and not necessarily solve more near-term revenue issues) during a particularly volatile macroeconomic environment. We also are aware of a number of deals where buyers walked away late in discussions due to unexpected FDA or other regulatory risks, the potential impact of a transaction on profitability or the lack of board support. We are particularly interested in seeing whether these buyers move off the sidelines this year or continue to focus on their own programs and operations in 2023 and acquisitions of elusive targets with commercial or more de-risked assets. At the same time, there may be a mismatch on valuation expectation between buyers and companies with commercial assets, which may make it difficult for deals to get done even if both sides are willing to entertain a transaction. The need for big pharma to fill looming revenue gaps as medicines lose marketing exclusivity is balanced against increasing caution in boardrooms about making large, risky bets.
Antitrust scrutiny on the life sciences industry looms over deal activity
Life sciences, particularly pharmaceutical and medical devices companies, remains a focus of the antitrust agencies. The US Federal Trade Commission, which reviews pharmaceutical and medical device deals, is stepping up enforcement in the industry, even though life sciences deals already represented half of the FTC’s antitrust enforcement actions between 2016 and 2020. In response to calls from the White House, the FTC also is going beyond traditional enforcement and exploring entirely new approaches to enforcement in the life sciences industry. For example, the FTC hosted a June 2022 workshop, “The Future of Pharmaceuticals,” which was the culmination of the work of the international task force of agencies formed in 2021 to review the fundamental aspects of antitrust enforcement and update their approach to analyzing the effects of pharmaceutical mergers. The workshop explored new potential theories of harm, such as reviewing overall sizes and drug portfolios of the merging companies rather than specific product‑level overlaps, as well as considering the effect on innovation caused by mergers. With new general merger guidelines anticipated in 2023, companies should expect to see more from the agencies pushing the boundaries of traditional antitrust enforcement. While parties may opt to test these new theories in court, companies should be ready for extended review periods and a skeptical FTC.
Not to be outdone by their US counterparts, regulators outside the US also are taking more interventionist roles in merger review. Regulators worldwide have increased their cooperation with each other, presenting a unique challenge for the life sciences industry given its worldwide footprint and its highly regulated nature. In Europe, companies can expect parallel EU and UK investigations and active enforcement of foreign direct investment screening in multiple European jurisdictions, with more than one-quarter of the transactions screened by member states blocked, withdrawn or authorized with conditions in 2021.
Looking forward, we expect increased scrutiny and longer review periods from US and foreign regulators to continue, even for transactions that traditionally would not have been challenged, such as transactions with little to no product overlap. Given the uncertainty in the enforcement environment, life sciences acquirers should be prepared for litigation – both on the domestic and foreign front – and for contentious deal negotiations over regulatory and interim operating covenants.
Collaborations and licensing deals (and option deals) prioritized to mitigate economic headwinds and risks of failures
In the uncertainty of 2022, potential acquirers placed increasing emphasis on strategic research and development collaborations, rather than acquisitions of entire companies, to mitigate the risks of failed clinical trials, uncertain regulatory approval pathways, talent flights and other risks of failure associated with traditional M&A transactions. Facing volatile capital markets and the prospect of less upfront capital in traditional M&A, biopharma companies turned to collaborations and licensing partnerships and option transactions combining a collaboration agreement with an option for the buyer to acquire the company or asset for a fixed price (typically a combination of upfront cash and milestones) during the option period. Licensing partnerships values slightly increased in 2022 ($179 billion in 2022 versus $178 billion in 2021), even as M&A deal values dropped. Mirroring the shift to bolt-on acquisitions of early-stage companies in traditional M&A, licensing deals trended toward preclinical assets. Biopharma and diagnostics partnership deals involving preclinical assets outpaced clinical-stage partnerships, which were down about 30% through August 2022 compared to 2021. However, given the headwinds facing the acquisition market, smaller life sciences companies were willing to enter into option deals even for Phase 2 assets. (Examples include Horizon Therapeutics’ collaboration and option agreement with Q32 Bio for the development of a Phase 2 antibody to treat autoimmune diseases, and Exelixis’ collaboration and warrant agreement with Cybrexa Therapeutics for a clinical-stage peptide-drug conjugate.)
Buyers appeared more willing to take on risk in licensing partnerships than in traditional M&A. For example, in August 2022, Roche entered into a strategic collaboration and licensing agreement with Poseida Therapeutics, pursuant to which Poseida will receive equal amounts upfront and in near-term milestones, signaling the industry’s willingness to make bets on Phase 1 therapies despite current market uncertainty. Similarly, in a licensing deal that epitomized the current shift – prompting industry observers to ask, “Why not just buy the whole thing?” – Bristol Myers Squibb expanded its existing strategic alliance with Immatics to pursue development of two preclinical programs. Of course, we continue to see many parties discussing licensing deals deciding to do just that – turning to a full acquisition after initial licensing discussions. Ultimately, whether a full acquisition is possible depends on the parties’ appetite for risk and their ability to come to a consensus on valuation (and how deal consideration will be paid), which has often been particularly difficult in the public arena even when utilizing contingent value rights and at current market trading levels.
Activism in the life sciences industry sharply rises
2022 saw a significant uptick in shareholder activism activity. In particular, activist campaigns with an M&A thesis – including forced sales, breakups, take-private deals, “bumpitrage” and “constructivist” PIPEs – picked up by the end of the year and comprised 41% of all activist campaigns for the year. 2022 was the busiest year for activism in the past four years, and the healthcare and life sciences industry was no exception. Although specific year-end numbers are not yet available, data from the first half of 2022 showed a 26% increase in activism in the life sciences space compared to the same period in 2021.
Life sciences companies with large stock price declines (including biotechnology companies, recently de-SPACed companies, and otherwise newly public companies and “pandemic plays”) face enhanced risk of activism. Activists may be able to take advantage of high trading volumes to accumulate positions without early detection. 2022 presented a fertile environment for activist activity, with the perfect storm of declining public equity markets, undeployed capital seeking returns, and regulatory change such as the implementation of universal proxy cards in corporate-director elections. In this environment, many boards of directors of public companies in the life sciences space have recognized that structural defenses, such as classified boards, may not provide complete insulation from activist campaigns in the face of sustained and effective public pressure, and they have proactively sought to enhance preparedness by working with their advisory team to analyze the public company’s corporate governance profile, review fiduciary duties, evaluate potential strategic measures, put in place a shelf “poison pill,” and adopt a defense-oriented communications plan in case the company receives an unsolicited offer or is otherwise subject to activist pressure.
As activist activity heated up in 2022, we observed countless activist encounters behind the scenes, where companies were able to reach a private resolution, or their ongoing discussions have remained private for now. In these situations, we have seen an increasing number of first-time “activist” shareholders engage with companies amid a clear specter that a public fight could be possible at any moment.
Looking ahead to 2023
Although deal momentum in the life sciences industry showed no signs of slowing down at the end of 2021, in 2022, the industry faced unexpected headwinds due to macroeconomic factors and an array of new industry-specific challenges. Moreover, 2022 saw a marked drop in de-SPAC transactions due to increasing redemption rates and regulations and regulatory obstacles for the industry more generally continued to mount, as regulators placed increasing scrutiny on the life sciences industry and strengthened multijurisdictional collaboration, with a particular policy emphasis on drug pricing.
There are, however, reasons to think that M&A in the life sciences industry is on the upswing. The outlier years of 2020 and 2021 aside, M&A deal flow in 2022 returned to pre‑pandemic levels and remains part of an overall trajectory of growth in life sciences dealmaking. Even as the public markets continue to improve, given the continuing challenges facing many companies looking to go public through traditional IPOs or de-SPAC transactions, there may be more venture-backed private companies available for sale in structured transactions that enable buyers to manage risk. In light of ongoing risks and a depressed stock market, many public biotechnology boards also may have adjusted their expectations on exit values with expectations no longer tied to 52-week highs in 2020 or 2021. Overall, as supply chains continue to recover, markets price in the effects of 2022’s inflation and interest rate hikes, and the regulatory environment stabilizes, we are cautiously optimistic that 2023 will see healthy levels of dealmaking activity in the life sciences industry.