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Healthy activity levels expected in 2024
2023 was a reasonably strong year for the pharmaceutical and life sciences sector with both deal value and volume of M&A close to pre-pandemic levels. In 2024, we expect similar levels of activity, in the $225 billion to $275 billion range across all subsectors. Executives will continue to deploy cash balances and seek out areas of innovation and clinical differentiation to help address remaining growth challenges in the latter half of the decade.
Despite some stabilization in the macroeconomic environment and the potential for a soft landing in sight, continued geopolitical and regulatory uncertainty seems a given in 2024. Against this backdrop — and coupled with the reality of higher interest rates — we expect dealmakers to increasingly focus on margin accretion in M&A, rather than relying prominently on growth-driven dealmaking. As regulators’ perspectives on key deal factors become better understood, there may be a return of larger deals, along with continued interest in the $5 billion to $15 billion deals to fill targeted strategic gaps.
Pharmaceuticals and life sciences deals outlook
Differentiated science and clinical advances continue to come in waves and we expect to see dealmaking in areas with meaningful incremental innovation in 2024. Pharma and biotech dealmaking will continue to focus on precision medicine in areas such as oncology and immunology, but we also expect to see a heightened focus on weight loss and cardiovascular, a therapeutic area that went through a renaissance in 2023.
As we saw in 2023, competition for innovation remains increasingly fierce on the back of resetting biotech valuations and a focused approach to deliver value on M&A remains an imperative. IPO markets are critical for biopharma and we expect the window to gradually reopen in 2024, likely skewing toward companies with strong clinical data. Looking beyond traditional M&A, the sector will also seek out increasingly creative structures that allow for greater R&D funding while still maintaining control over the development of critical compounds, leaving the door open for an increased role for private equity and structured solutions such as private credit. Along with asset swaps, profit-sharing arrangements, innovative joint ventures (JVs) or collaborations and divestitures, creativity will be essential to executing on strategic priorities in 2024, including delivering top quartile returns to shareholders while limiting capital exposure.
In medtech, to address investor concerns about the potential impact of GLP-1 medications along with the anticipation of sustained, higher interest rates, companies are increasingly focused on managing cost structures to unlock capital to invest in growth opportunities and innovation. While M&A activity in the subsector remained muted in 2023, we expect deals will return as a catalyst for growth in 2024. In addition to seeking out innovative products, medtech companies will continue to look to M&A to drive business model reinvention. Acquirers will seek out new capabilities related to robotics, AI and data to enable strategies centered on new sites of care and increased collaboration in healthcare to drive better patient outcomes. To overcome high valuation expectations from sellers and a higher cost of capital, acquirers will need to maintain a sharp focus on value creation, linking deal theses to integration planning and investing in integration capabilities to drive sustained outcomes.
Private equity remains interested in contract development and manufacturing organizations (CDMOs) and contract research organizations (CROs) with differentiated capabilities, particularly in rapidly evolving areas like gene therapy. There is also potential for cross-sector deals as buyers outside pharma and biotech look for ways to leverage their manufacturing and other core competencies to gain exposure to high-growth areas in the sector. As in prior years, private equity acquisitions of underperforming public companies in market areas that benefit from secular growth trends will continue, particularly with strongly functioning investment grade credit markets and abundant private capital.
Sub-sector outlook
Pharma
The stakes for M&A for the pharma sector will be even higher in 2024. The competition for high quality assets will remain incredibly fierce and the regulatory landscape remains challenging. It will be critical that companies invest appropriately in a multi-pronged, technologically enabled and agile inorganic strategy. Companies taking a multi-faceted and capability-driven approach, wedding the “not innovated here” and “innovated here” approaches, will emerge in a stronger position. The traditional M&A approaches that got us here will not be the strategies that get us to tomorrow. We expect an increasing focus in M&A on delivering margin accretion.
As was the case in 2023, we expect the US will remain the center for most global innovation in the sector and that foreign buyers will continue to lean in actively to take advantage of opportunities. With the implications of the Inflation Reduction Act (IRA) now better understood, we expect that companies will direct innovation dollars increasingly towards biologics at the expense of small molecules.
Biotech
The pace of technological innovation remains high in biotech and impressive strides continue to be made in areas of significant unmet medical need. M&A levels were healthy in 2023 with a focus on companies that have technological differentiation or superior clinical profiles compared to the standard of care. We expect this trend to carry into 2024. Our expectation is the challenging macro-environment and uncertainty that persists will push dealmakers into more creative options to deliver growth. Licensing and collaboration agreements, JVs, structured transactions, R&D funding structures, ecosystem building as well as spinoffs and divestitures will all be considered by dealmakers as they blaze new trails to deliver growth in 2024.
Medtech
While M&A activity in the subsector remained muted in 2023, we expect deals will return as a catalyst for growth in 2024. Medtech companies will continue to evaluate their portfolios and seek to divest businesses that are no longer a strategic fit and reinvest in differentiating capabilities and growth opportunities. The IPO market will also impact M&A activity in the sector and innovation in the industry more broadly. While a slow IPO market may create M&A opportunities in the near term, multiple exit opportunities will be required to attract investment in early-stage companies.
Other/Services
Activity levels in 2023 were healthy across the services sectors as continued investment in CROs and CDMOs as well as take-privates by private equity took center stage. We predict M&A activity in these sectors to remain strong in 2024 as achieving scale and market leadership is critical and private equity (PE) firms will remain actively involved with plenty of dry powder. Increased focus on GLP-1s in the cardiovascular category and continued innovation into 2024 in that area will drive further investment and M&A in ancillary sectors such as CDMOs. The completion of spinoffs of pure play over-the-counter and consumer health businesses in 2022 and 2023 is also expected to provide a tailwind to increased M&A as these enterprises seek transformation in differentiated categories that benefit from secular growth areas such as vitamins, minerals and supplements.
You can read the full report here.
Compliments of PwC – a Premium member of the EACCNY.