Cash-rich pharma firms look set for a buying spree, as favorable biotech valuations and patent expirations incentivize dealmaking

Dealmaking activity in the US healthcare sector was robust in H1 2022 in the face of various macroeconomic headwinds. There were US$92.4 billion worth of deals announced in H1 2022. This was a 51 percent decrease from a record 2021, but it is still firmly ahead of pre-pandemic levels of activity.

A total of 481 announced deals, meanwhile, represents a 29 percent drop in volume year-on-year, although it is still a 37 percent increase compared to H1 2020.

Cash-rich big pharma snaps up biotech firms

51% Percentage decrease in the value of deals targeting the US healthcare sector in H1 2022 compared to H1 2021

The value of 481 deals targeting the US healthcare sector in H1 2022

A resurgence of activity among big pharma firms snapping up biotech assets was a major feature of H1 dealmaking. This trend resulted in the highest-valued deal of the year so far: Pfizer's US$11.6 billion bid for biotech firm Biohaven. The deal, which is Pfizer's highest-valued deal in more than five years, comes at a time when cash-rich big pharma firms are looking to take advantage of softening biotech valuations.

Many biotechs are struggling with falling valuations, as investors who had acquired shares during the pandemic amid soaring valuations sold off earlier in the year. Some investors believed that biotech stocks—especially those at early stages of the clinical trial and approval process—were overvalued during the pandemic and were keen to cash out once the initial hype had settled.

This situation vastly contrasts to big pharma firms, many of which are sitting on large war chests of capital amassed during the pandemic and are keen to put this to work. This large amount of cash, combined with falling valuations in the biotech sector, is likely to continue to generate deals over the coming year.

Patent cliff looms on the horizon

Big pharma firms may also be motivated to undertake acquisitions as they survey potential patent cliffs (or expiration of patent rights), with the industry's top drug companies expected to lose more than US$200 billion in revenue by 2030 due to loss of exclusivity. According to consulting firm ZS Associates, the top-ten pharmaceutical manufacturers have more than 46 percent of their revenues at risk between 2022 and 2030. Bristol Myers Squibb, Pfizer and Merck will be among the most exposed over the next decade.

This challenge may catalyze M&A in the industry, as large firms look to recoup lost revenue streams.

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