As deal volumes surged in 2020 and continued strong through 2021, there was optimism from pharmaceutical executives for how this capital market activity would carry through into 2022. While there was uncertainty about how the global economy would recover from the impacts of COVID-19 and the implications for the capital markets, the continued growth of disruptive innovation across the global pharmaceutical pipeline remained strong and highly attractive to large pharmaceutical companies. However, it is clear that the persistence of inflation and the risk of a recession have since become a much bigger factor in M&A.
At the start of 2022, there was good reason to believe this optimism from pharmaceutical executives was justified, and that we should share their belief that deal volumes in 2022 could exceed what we saw in 2020 and 2021. Several competitors in the pharmaceutical industry were flush with capital either from COVID-19 therapeutics and vaccines or from new and old blockbuster therapies.
The tailwinds that drove M&A in 2021—the need for innovation and the need to fill pipelines—remain in force. But the headwinds have grown. Inflation, rising interest rates, recession fears, and falling equity values increase uncertainty, raising questions about the wisdom of deal making now.
In this environment, it is not unreasonable for biopharmaceutical acquirers to take a wait-and-see approach for acquisitions and favor deal strategies that minimize risk, such as stage gate capital investments. In fact, this trend is already showing up in deal data. While the total number of deals in Q1’22 (261 deals) was on pace with 2020 and 2021— more deals involved lower risk deal strategies. Specifically, the industry appeared to be more focused on product acquisitions (19 in Q1’22). If the industry keeps up this pace of product acquisitions over the next three quarters, it will result in 79 of these types of deals, which is significantly more than what we saw in 2020 and 2021. If we look at the trends associated with full-company acquisitions across biopharma, it looks like the first quarter of 2022 started with a different strategy trend than we saw 2020 and 2021. Unless the full-company acquisitions accelerate in the second half of the year, 2022 will finish with fewer acquisitions than the last two years in terms of total deal volume and overall deal value.
Qualitatively, if we look at examples of the three largest corporate acquisitions that were completed in Q1’22, only one acquisition involved a company with a late-stage asset. When we look at the continued deal activity in cell and gene, we see more evidence of the industry’s continued focus on adding new capabilities. One important emerging difference between Q1’22 versus previous years was the larger number of Strategic R&D Collaborations—we believe the emphasis on collaborations rather than full company acquisitions signaled a broader industry shift.