Biopharmaceuticals deal trends: Hunt for innovation

The industry’s relentless competition for transformative assets will continue to drive deals in 2021

Jeff Stoll, PhD

Jeff Stoll, PhD

Principal, National Strategy Life Sciences Leader, KPMG US

+1 857-334-8768

Kristin C. Pothier

Kristin C. Pothier

Global & National, HCLS Deal Advisory & Strategy Leader, KPMG US

+1 617 549 2779

Steve Sapletal

Steve Sapletal

Principal, National Life Sciences Advisory Leader, KPMG US

+1 612-708-2556

Alasdair Milton, PhD

Alasdair Milton, PhD

Managing Director, Healthcare and Life Sciences Strategy, KPMG US

+1 617-988-5419

Last year was a record one for deal making in the biopharmaceutical industry despite the COVID-19 economic disruption. Major pharma companies closed 1,138 deals compared with 634 for 2019. Driving this surge was the combined effect of the industry’s perpetual need to find assets that can provide future revenue and the maturity of technologies developed in an era of innovation unlike it has ever seen. We expect deal making to continue to thrive this year, led by small and mid-size transactions.

The growth in 2020 was particularly dramatic for transactions using creative deal structures. Strategic R&D collaborations more than doubled from 161 in 2019 to 367 last year. Asset licensing deals jumped from 360 to 593. There was only one headline-grabbing mega-merger (an acquisition we define as $30 billion or more), but acquisitions under $30 billion increased to 121 in 2020 from 79 in 2019.

In an annual KPMG survey of executives across healthcare and life sciences, more than 80 percent of 31 biopharma executives surveyed also said valuations had increased in 2020, and nearly a quarter estimated that values jumped by 20 percent or more. A large majority (61 percent) said intense competition for high-value and innovative assets was a primary driver of valuations.

Indeed, across the biopharmaceutical industry, companies must sustain innovation or risk significant revenue cliffs as patent protections expire. This inherent characteristic of the industry means that this acceleration of the competition for innovative assets, particularly first-in-class or second-in-class assets, will remain a major driver of the deal market. Pharma acquirers are also relying more on creative deal structures that defer deployment of capital into the future to mitigate the risk associated with the acquisition of clinical-stage assets.

Implications for 2021

KPMG believes biopharmaceutical companies in 2021 will continue to vigorously compete for the most promising new technologies, especially in oncology, immunology, neurology and infectious diseases. We also believe that companies will continue to focus on creative deals for early-stage pipeline assets in 2021 and beyond. Lastly, another common theme in 2021 will be more divestments of non-core pipeline or lower-performing commercial products by large pharmaceutical companies looking to improve their capital positions.

Indeed, in our survey of biopharma executives, 52 percent indicated they would increase the number of M&A transactions by 10 percent or more in 2021. As in 2020, they cite the limited number of high-value or innovative targets as the biggest driver for their M&A plans. More than 20 percent of executives also expect valuations to increase by 10 percent or more in 2021 compared with 2020.

Against this backdrop, here are the key takeaways for biopharmaceutical companies for deal making in 2021:

  • Adopt a diversified strategy focused on a wide range of technology types: To improve the likelihood of building a robust late-stage pipeline and future revenues, focus on deal strategies that de-risk investments with lower upfront payments and allow the company to make more, smaller bets.
  • Consider the possibility that another earlier-stage technology will win: Buyer beware.
  • Align the integration strategy with your growth strategy: The wrong integration strategy can undo an expensive acquisition by losing the core technical talent necessary to realize the full value of the deal.
  • Be on the lookout for increased divestitures in 2021: Divestitures may provide opportunities for creative private-equity firms and mid-market pharmaceutical companies.

For more detailed analysis, please download and read our full report, Biopharmaceuticals deal trends: Competition for innovation overcomes economic headwinds.