Five ways biopharma companies can navigate the deal landscape

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Dealmaking has long been a hallmark of the biopharma industry, playing a crucial role in most firms’ growth strategies. Historically, the sector has seen more and bigger transactions than even the tech industry. Because innovation comes slowly in biopharma, mergers, acquisitions, and other partnerships to boost the new-product pipeline have been an existential necessity for successful companies.

That’s been especially evident in recent years—with some notable shifts. M&A activity has increased over the past five years, but steady growth in deal volume and relatively stable deal value (except in 2019) indicates that the relatively small number of mega deals seen in the early 2010s have given way to a greater number of smaller transactions (Exhibit 1). Partnerships have increased over the same period, including some notably unconventional pairings in therapeutic areas not known for collaboration and between players teaming up for the first time. There have also been upticks in deals focused on digital assets, as the industry’s demand for big data and advanced analytics intensifies, and on more localized deals around the globe, as companies look to emerging markets as growth engines.

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Biopharma mergers and acquisitions activity continues to increase, but so have other deal types.

Combined, these macro trends suggest a potential inflection point for the industry. Companies that recognize the new opportunities in this dealmaking landscape and pursue them programmatically—that is, through a minimum of two small or midsize deals a year with a market capitalization of 20 to 30 percent—will be best able to strengthen their portfolios with accelerated growth and value creation.

Five macro trends in biopharma dealmaking

Companies in the biopharma sector have had significant levels of available cash to make deals. McKinsey’s analysis shows that the top 12 biopharma companies will have more than $290 billion in cash available to invest at the end of 2022, nearly double their pre-COVID-19 levels.

But there is more to this story than the size of biopharma coffers alone. After all, these companies could use their cash to pay down debt or deliver dividends to shareholders. Digging deeper into the data, we have uncovered five key dealmaking macro trends.

Trend 1: Seeking portfolio transformation

Active portfolio management is a key value driver for any company, and it’s essential for success in the biopharma industry, as it accelerates growth and fuels value creation. It allows companies to focus on their scientific and operational strengths, realign with areas of greatest patient need and growth potential, optimize synergies among various assets, and update their portfolio as key drugs lose exclusivity. Companies that rotate their portfolios through programmatic M&A and partnerships typically outperform their peers, achieving higher total shareholder returns than those that pursue alternative growth strategies like selective dealmaking and organic growth (Exhibit 2). Even during the COVID-19 pandemic, programmatic M&A outperformed other growth strategies across industries.

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Biopharma companies pursuing programmatic M&A and divestitures outperform those pursuing other deal types.

Divestitures—the flip side of M&A—are also an important element of active portfolio management. Divestiture activity has picked up over the past few years as most biopharma companies have continued to focus on their strategic cores in terms of both therapeutic areas and innovation (Exhibit 3). Since 2019, many of the industry’s largest players, including Lilly, Merck, Novartis, and Pfizer, have divested or spun off noninnovative pharmaceutical assets, such as established medicines and generics, and nonpharmaceutical assets in consumer health, animal health, and medical technologies. Some more recent announcements, such as Johnson & Johnson’s spin-off of its consumer health business and Novartis’ spin-off of Sandoz, confirm a continuation of this trend, which can boost efficiency and performance.

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Most biopharma companies increased the proportion of sales from pharma over the past 20 years, often through divestments or spin-offs.

Trend 2: Buying innovation

Biopharma players are increasingly looking for growth acquisitions to enrich their pipelines. Over the past decade, the percentage of revenue from externally sourced pharmaceutical innovation, particularly preclinical, has increased, and this trend is expected to continue (Exhibit 4). By buying innovation, biopharma companies can acquire at least partially derisked revenue and increase their chances of R&D success. Smaller biopharma companies are expected to drive more than two-thirds of revenue growth over the next five-plus years, making partnerships and acquisitions even more attractive for larger firms.

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External innovation drives revenue growth.

Trend 3: More conventional—and more unconventional—partnerships are setting the stage for future deals

In addition to increasing their M&A activity, biopharma companies have also intensified their partnership activity over the past several years. The COVID-19 pandemic led to an unprecedented increase in unconventional partnerships between players that have not worked together before and in therapeutic areas not usually known for intercompany collaboration, like infectious diseases. Companies are also pursuing partnerships to explore new areas through shared capabilities and to derisk their investments—for example, by using deferred payments and options in licensing deals.

As the industry contends with rising discovery costs and external innovation becomes a more significant component of revenues, this dealmaking approach should continue to increase. It will become a popular element of the biopharma dealmaking toolbox.

As the industry contends with rising discovery costs and external innovation becomes a more significant component of revenues, dealmaking activity should continue to increase.

Trend 4: An appetite for data and analytics capabilities

The power of big data and advanced analytics in the healthcare industry is not new, but as demand for them has surged, more deals have focused on digital assets. In 2020 alone, the top ten biopharma companies saw 28 deals totaling more than $2 billion in value—twice the value compared to five years ago.1

While the pandemic fueled some of this activity, it is likely to continue as the industry’s need to manage decentralized clinical trials and adopt new digital management tools escalates. Biopharma companies will continue building their digital and AI capabilities across the value chain to create differentiated solutions. Indeed, since the beginning of 2022, several large biopharma players announced new partnership deals and achievements focused on data and analytics. Sanofi, for example, signed a research collaboration and licensing agreement with the AI company Exscientia. AstraZeneca announced the discovery of a novel AI-generated chronic kidney disease target from its collaboration with BenevolentAI.2

Trend 5: Opportunities are growing in emerging markets

The growth potential of emerging markets is increasingly attractive for the biopharma sector. Dealmaking in various forms—including creating local innovation hubs, clinical and commercial partnerships, broader joint ventures, and traditional M&A—is likely to increase.

China-based biotech firms have seen a 100 times increase in total market value to more than $300 billion from 2016 to 2021.3 Biopharma companies are exploring China and other emerging markets, not simply as avenues for commercial expansion but also for acquisition and partnership targets to boost innovation.

Implications for biopharma companies

These trends underscore some best practices for biopharma companies pursuing inorganic growth as they explore mergers, acquisitions, divestitures (M&A&D), and partnerships to increase innovation and focus. To take advantage of them, consider the following practices.

  1. Take a programmatic M&A&D approach to portfolio rotation. Companies can focus their portfolios on the high-value market segments with the highest odds of success, making strategic bets based on growth potential—in attractive new modalities like cell and gene therapy and adjacent therapeutic areas, for example. Creating a portfolio road map with targeted sequencing of strategic M&A and divestitures is critical. The latter can be a key lever for increasing the portfolio’s focus and freeing up cash for deals.

    Challenge: Actively rotating the portfolio requires an appetite for risk. It can be easier to default to known therapeutic areas or franchises, but while established medicines provide steady cash flows, they offer limited growth. To succeed in portfolio rotation, biopharma players must be prepared, both financially and culturally, to disrupt the status quo.

  2. Make external sourcing of innovation a core capability. It’s important for biopharma companies to actively refresh their portfolio road maps to target high-growth external assets that can supplement the overall strategy. Companies should build out their M&A and integration capabilities to more rapidly identify, execute, and integrate these deals and drive value over the long term.

    Challenge: Looking outside for innovation opportunities requires a mindset shift away from relying on legacy capabilities and ways of working. Unfortunately, nearly half of biopharma growth deals lose value after two years,4 so leveraging and rapidly integrating (where beneficial) the unique talent and science of an acquired entity is critical to capturing the total value of external innovation. The best programmatic dealmakers can chart a path incorporating a “best of breed” approach across assets, talent, and processes to maintain the innovation engine and accelerate the value capture.

  3. Pursue partnerships as aggressively as M&A. Targeting clinical and commercial collaborations at every stage of product life cycles can improve deal flow and derisk the pursuit of external innovation. Various payment structures and other levers are available to enhance near-term value and retain the option for acquisition later.

    Challenge: Successful partnerships must be structured thoughtfully. They require a long-term commitment from both parties, early agreement on guiding principles such as asset prioritization, and a good cultural fit to deliver long-term value. The unique nature of these transactions forces companies not only to size up a potential partner but also to make clear to that partner the value they bring to the table.

  4. Explore data and analytics deals to boost innovation. M&A and partnerships are constructive avenues for gaining the leading-edge data and analytics capabilities biopharma companies need to foster innovation and strengthen their pipelines. To ensure maximum value, companies should be clear about what they want to achieve—for instance, service-offering expansion, acquisition of specific data, or pursuing digital therapeutics—and match the digital play to those outcomes.

    Challenge: Digital and analytics are hot topics, but the results of these deals can vary. In particular, companies seeking to shift to a product-plus-software model, which demands new capabilities such as AI and digital, often lower ROI expectations to start, and different customer expectations and behaviors will face significant challenges. When executed well, connected products can offer unmatched competitive differentiation, but companies must define their digital strategy and business model ahead of any transactions.

  5. Explore emerging market deals for innovation and expansion. Companies should prioritize opportunities that provide locally sourced innovation and a stronghold for commercial expansion. To maximize their chance of success, they can explore bolder transaction types like joint ventures and spin-offs in addition to traditional M&A and partnerships.

    Challenge: While deals that expand a company’s reach beyond the United States or Europe hold the promise of accelerated growth, they often require a different capability set and risk appetite. Companies that pursue these deals also must be comfortable with an unpredictable return profile, especially given recent changes in some countries’ pricing regulations—for example, volume-based pricing in China. Furthermore, geopolitical disruptions can strain long-term cash flows, restricting M&A and dealmaking appetite in the respective regions. Companies that can invest with a growth mindset, frame these deals appropriately, and take advantage of varied deal structures can create a strong foothold for long-term value creation.


The coming years will be an active time of accelerated dealmaking with great promise for value creation in the biopharma industry—especially given the accumulation of cash by large companies and the lower prices of many potential targets resulting from the recent market downturn. Companies that can activate a portfolio rotation effort through programmatic M&A&D and deploy thoughtful dealmaking approaches, responding to market trends and opportunities, will be best positioned to advance their overall strategies and outperform their peers. As noted, doing so will not always be easy. But with a concerted effort by the C-suite and the strategy and business development teams, companies can maximize value by making deals effectively.

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