Recent and upcoming trends in life sciences M&A and R&D

November 2024  |  SPECIAL REPORT: HEALTHCARE & LIFE SCIENCES

Financier Worldwide Magazine

November 2024 Issue

The life sciences industry continues to innovate amid new challenges and emerging trends. The last decade has seen the industry shift its product development strategy from investing in traditional research and development (R&D) to investing in mergers and acquisitions (M&A). We have also seen the M&A market fluctuate in response to the state of the world after a global pandemic. As the market recovers from the devastating impact of the coronavirus (COVID-19) pandemic, we are seeing a major re-evaluation of business strategy and approach in the face of practical challenges, such as rising interest rates, supply chain challenges, national security, and increased costs in materials and labour, as well as challenges unique to the life sciences industry, such as the impending patent cliff. These challenges have and continue to influence R&D investment and drive investors’ M&A activities and strategy going into the second half of this decade.

Shifts in R&D and M&A

R&D has long been the cornerstone of innovation for the life sciences industry. Over the last 20 years, heavy investment in R&D by industry and investment firms has resulted in major scientific breakthroughs and significant improvements to patient outcomes, making it possible for companies to pursue cures for chronic diseases like hepatitis C and sickle-cell anaemia, and formulate life-saving vaccines for epidemics and pandemics like COVID-19. There is no doubt that this investment in R&D has brought new products to market, driving scientific improvement and contributing to a healthier population.

Successful investment in R&D has helped life sciences companies, including many pharmaceutical firms, access new technologies and maximise growth over the last 20 years, resulting in an increase of new drug approvals from 2010-19. At the same time, we have also seen returns on investment decline and clinical development stagnate despite the billions of dollars that pharmaceutical firms invest per year into R&D. The explanation is multifaceted, but at its core, the process of developing new drugs can be costly, lengthy and uncertain as many potential drugs fail to bridge the gap from R&D to the commercial market. Though it seems counterintuitive, this is a reality of R&D – each investment in the development of a new drug is a risk, and pitfalls can surface at each step from concept to market. Success in clinical trials and a market’s demonstrated desire for a treatment to address a pervasive medical condition does not mean that an approved drug will meet performance and revenue expectations.

After decades of heavy R&D investment, we saw investors and firms re-evaluate their R&D and go-to-market strategies and turn to M&A activity to address competitive pressures, diversify their portfolios, scale their pipelines, and keep up with healthcare reform. This trend toward investment in M&A activity intensified in the years leading up to 2019 and saw pharmaceutical buyers investing heavily in mega deals in search for the next blockbuster drug, such as GLP-1s, that can capture the US and global market. We continue to see this shift as investors seek to break out of the healthcare space in light of declining rates of return on investment, and venture into the historically risky but still familiar, life sciences industry.

Impact of COVID-19

COVID-19 saw an initial halt of activity as the world sought to understand this novel coronavirus. Once it became apparent that the population needed new treatments, we saw an influx of investment dollars into the healthcare and life sciences industries. Investors funnelled billions in R&D investment as the US Food and Drug Administration (FDA) utilised emergency use authorisations and fast-track designation to expedite review and approval of drugs developed to treat and manage COVID-19 and other serious and life-threatening diseases. At the same time, investors also acknowledged the volatile market and diversified by investing dollars in M&A activity to achieve desired results in a few short years, leaning on acquisition of established products and assets to further expedite the go-to-market timeline. By acquiring products in later stages of clinical development or assets already in the commercial market, investors could de-risk their investments, as compared to investing in traditional R&D, by relying on the target’s or asset’s proven track record. COVID-19 was the pressure cooker which surfaced new technologies to tackle society’s newly discovered diseases and reignited the industry’s desire to fuel and fund innovation.

Automation technology in life sciences

R&D investments have honed in on finding novel solutions to diseases that previously had low market share, in part due to focus on personalised care and treatment. This includes utilising new technologies like artificial intelligence (AI) and biomarkers, which allow companies to invest generally in the technology, but yield results to target individual patients and tailor treatment plans to specifically address each person’s unique needs.

While automation technology, such as machine learning (ML), is not new to the life sciences industry, the last few years have seen significant growth in M&A activity pertaining to products utilising AI and ML. This growth encompasses AI/ML innovations deployed in R&D, as well as in devices, such as wearables and software as a medical device. AI and ML has accelerated the growth of life sciences companies of all sizes and has been, and is anticipated to remain in the future, a consistent focal point for strategic growth. Automation technologies incorporated into devices have provided more personalised and accurate care, thereby improving patient outcomes. When used for R&D and other functionalities for life sciences companies, automation technologies have been highly sought after for their ability to lower costs and increase efficiencies.

Focus on precision medicine

In recent years, the focus of life sciences companies has pivoted from rare diseases to specific disease states such as oncology, immunology and Alzheimer’s, a shift which has largely been driven by a greater emphasis on precision medicine. Scientific breakthroughs in genetics and targeted therapies have opened the door to tailored and personalised therapies that are more effective. Targeted therapies have been particularly promising in oncology, where genetic developments offer an opportunity to treat cancers that are either resistant to or have no other treatment. Innovations in biomarker testing have supported the growth of precision medicine by providing insight into a patient’s therapeutic and clinical needs, as well as anticipated outcomes. The growth of biomarkers, which have been hailed as the future of clinical trials and drug development, corresponds with the advancement of laboratory developed tests, which are necessary to evaluate biomarkers. Precision medicine has fuelled a large amount of M&A activity in 2024 and is expected to continue to do so in the coming years.

Policy and regulatory scrutiny

In addition to market pressures, policy can often influence investors’ actions, especially when such policies provide incentives that can maximise profit and revenue margins. We saw this with the Orphan Drug Act of 1983. Passed to facilitate the development of drugs for rare diseases, such as Huntington’s disease and ALS, the Orphan Drug Act sought to motivate development of orphan drugs by providing significant incentives to pharmaceutical companies including tax credits for qualified clinical trials, exemption from user fees, and potential for seven years of market exclusivity post-approval, all of which drove investment in the rare disease space. We see this now in the market’s shift toward developing more affordable and accessible drug products to align with payers’ goals to better manage healthcare costs. The FDA continues to focus on generic drugs as the Biden administration and the Centers for Medicare and Medicaid Services each released policies and identified efforts in search of methods to decrease healthcare costs.

Regulatory scrutiny can also impact investors’ actions. In the last few years, the FTC has investigated a number of large acquisitions due to concerns about antitrust issues. Many transactions drew scrutiny on deal size alone, though in some cases the FTC asserted prior histories of engaging in anticompetitive practices, going so far as to file lawsuits to block transactions. The FTC has historically paid special attention to acquisitions involving commercial assets over transactions involving clinical-stage assets, further supporting the idea that acquisitions of later stage or commercial assets may be a surer investment as compared to early stage or R&D assets, though recent trends show the FTC taking a more aggressive approach and investigating all types of acquisitions. FTC scrutiny alone has not prevented companies from investing in M&A, but pharmaceutical firms without the ability to account for the additional regulatory hurdles have shown hesitancy in pursuing deals of the same size, turning their focus to smaller acquisitions and targets. More recently, we have seen Congress address concerns of national security in the life sciences industry via proposal of the BIOSECURE Act. If enacted, the Act would no doubt have consequences for the global supply chain and collaborative relationships that US life sciences companies currently have with partners in foreign countries.

Future growth and development in the life sciences industry

In a market that strives for scientific advancement and improvement, converging trends have put pressure on companies traditionally focused on R&D to invest in M&A activity and new technologies in an effort to innovate in the face of new challenges. We anticipate the convergence of the trends discussed in this article to result in a continued increase in M&A activity in the middle market with companies and firms targeting assets in later stages of clinical development or products which are in the commercial pipeline or on the market. Investors will continue to seek avenues for investments that are most likely to yield returns in light of the practical challenges facing life sciences companies. As the market continues to evolve in the post-COVID-19 world, we will see innovators, market players, legislators and enforcement agencies both competing and collaborating on where to drive industry’s focus in the latter half of this decade.

 

Scott Liebman is a partner and Justine Lei and Arushi Pandya are associates at Sheppard Mullin Richter & Hampton LLP. Mr Liebman can be contacted on +1 (212) 634 3030 or by email: sliebman@sheppardmullin.com. Ms Lei can be contacted on +1 (212) 634 3035 or by email: jlei@sheppardmullin.com. Ms Pandya can be contacted on +1 (202) 747 3228 or by email: apandya@sheppardmullin.com.

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BY

Scott Liebman, Justine Lei and Arushi Pandya

Sheppard Mullin Richter & Hampton LLP

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