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Near Term Investment Outlook for 2023: A Perspective from Advisors Potentially Affecting M&A Landscape

Curator: Stephen J. Williams, Ph.D.

The following is an adaptation from various reports and the forseen changes in forecast for different sectors as well as the general investment landscape for the near future (2022-2023). Of course projections may change given changes in undewrlying fundamentals.

Many financial advisors and professionals feel the U.S. is in a late-cycle for its economy, with a significant slowing of corporate earnings in the midst of higher than usual inflation {although inflation estimates are being halved from its current 8-10% for next year}.    Consensus investment strategies deemed favorable include US (not international) equities with high quality assest and away from cyclicals.  This represents the near end of a business cycle.  As growth returns and interest rates increase we may seen the entrance into a new business cycle, although this may not happen until later 2023.  In general, it is advised investors move out of cyclicals as the economy continues to slow and into large and mid cap US equities.

This change in landscape may be very favorable to the overall Health Care and Information Technology sectors.  In health care, Life Sciences Tools and Services as well as Medical Devices are expected to outperform.  In IT, IT Services, software and Networking are favored sectors while communication services like Publishing Services are considered to be Neutral to Unfavorable.

What does this mean for Life Sciences and Health Related small companies looking for an Exit or M&A strategies?

With higher interest rates, credit markets may continue to deteriote and companies may have to look toward Global Macro to find any funding through cash or credit markets.  Equity Hedge strategies may be neutral to unfavorable with Event Driven opportunities like distressed deals  unfavorable but most analysts do consider Merger Arbitrage as Event Driven strategy to be favorable.  A competitive and narrow merger and acquisition environment is expected to last through 2023.

A general consensus for a neutroal environment is seen for most Private Equity, although a more favorable environment for small and mid cap buyouts may exist.  Recent short term weakness in the IT sector has led to diminished exit valuations however this may be a good entry point for Growth Equity and Venture Capital.  Private Debt strategies look unfavorable due to potential US recessions and potential underwriting issues.  Therefore Favored Private Capital strategies include Private Equity for Small and Mid Cap Buyouts and Growth Equity and Venture Capital.

Sources:

https://www.wellsfargo.com/investment-institute/2022-midyear-outlook/

Deals to pick up in second half of 2022

All of the stars are aligned for there to be a flurry of deals activity across all areas of the sector despite the slow start to the year so far. Many large pharma players are flush with cash (particularly those that have COVID-19 treatments in their arsenal), biotech valuations have been normalizing after years of a boom market and the 2025 patent cliff is rapidly approaching, all making for a strong deal environment.

Given the broader labor changes, supply shortages and constantly changing supply chain strategies and operations, the focus on quality can be challenging to sustain. Yet the downside can have massive impacts on businesses, including the potential inability to manufacture products.

The long litany of macroeconomic and regulatory headwinds has CEOs looking for transactions that are easily integrated and will get cash off their balance sheet as inflationary pressures mount. 


Pharmaceutical & life sciences deals outlook

Increased scrutiny from the US Federal Trade Commission (FTC) around larger deals could mean that 2022 will be a year of bolt-on transactions in the $5 to $15 billion range as pharma companies take multiple shots on goal in order to make up for revenues lost to generic competition in the remainder of the decade. However, don’t rule out the potential for larger deals ⁠— consolidation is good for the health ecosystem and drives broader efficiency.

Expect to see big pharma picking up earlier stage companies to try and fill the pipeline gaps that are likely to start in 2024. While market conditions suggest bargain prices for biotech are possible, recent transactions indicate that pharma companies are still paying significantly above current trading prices (ranging from approximately 50 to 100% of current trading), but below the peak valuations of recent memory.

In the first few months of the year, semi-annualized deal value was down 58% from the same period last year, with companies investing just $61.7 billion so far. Only 137 deals were announced during that time, compared to 204 in the year-prior period.

Talk of drug pricing regulations continues in Washington as Congress bats around a pared down version of the Build Back Better plan. Expect some of that tension to ease in the fall if a new Congress takes on a different agenda.

Other areas of the sector like medical devices face similar headwinds from regulators, and continue to deal with a greater impact from semiconductor shortages. Even though semi-annualized deal value in the medical device space is down 85% from the same period the prior year, expect these companies to remain focused on M&A as the subsector searches for alternative forms of revenue ⁠— particularly from new consumer-centric technologies.

Macroeconomic headwinds and geopolitical tensions have created volatility in spending at CDMOs and CROs, limiting their willingness to deploy capital as the uncertainty persists. 

Source: https://www.pwc.com/us/en/industries/health-industries/library/pharma-life-sciences-deals-outlook.html

From the JP MorgAN Healthcare Conference

Deals Or No Deals, J.P. Morgan Sets The Tone For 2022

Collaborations, Not M&A, Dominate

  • 12 Jan 2022
·         OPINION
  • Mandy Jackson

Mandy Jackson@ScripMandy Mandy.Jackson@informausa.com

Executive Summary

No big buyouts were revealed during the annual J.P. Morgan Healthcare Conference for a third year in a row. Big pharma firms are in acquisition mode, but execs stress desire for easy integrations and scientific alliances. 

Biopharmaceutical industry players – and reporters – eagerly await merger and acquisition announcements going into the annual J.P. Morgan Healthcare Conference, hoping to scrutinize which big pharma is buying which other company for signs of what the deal-making environment will be like in the coming year. And in 2022, for the third year in a row, the meeting started with no big M&A deals.

Instead, Pfizer Inc.Novartis AGAmgen, Inc.Bristol Myers Squibb Company and others announced collaboration agreements. (Also see “Deal Watch: Bristol, Pfizer Lead Off J.P. Morgan Week With Two Deals Apiece” – Scrip, 11 Jan, 2022.)

They and their peers insisted during J.P. Morgan presentations and Q&A sessions as well as in interviews with Scrip that they do intend to invest in business development in 2022, but with a primary focus on smaller bolt-on acquisitions as well as licensing deals and collaboration agreements. Bolt-on deals have been the focus for the past few years. (Also see “The Pandemic Hurt, But EY Expects More Biopharma Deal-Making In 2021” – Scrip, 11 Jan, 2021.)

Amgen CEO Bradway On Deals: Good (Smaller) Opportunities Are Vast

By Mandy Jackson11 Jan 2022

Amgen is enthusiastic about deals of all sizes, including a new Arrakis collaboration, and is interested in large transactions like its Otezla buy – but Bradway said right-priced opportunities are fewer and farther between. 

Read the full article here 

While investors and others are clamoring for potential buyers to execute large transactions, Amgen CEO Robert Bradway made the astute – and as he pointed out, obvious – observation that there simply are more small, early-stage ventures to partner with than there are large, later-stage companies to acquire. Bradway also noted that while Amgen would like to buy another growing commercial-stage product like Otezla (apremilast), not only are few available but there are few assets at a price that still leaves value on the table for both companies’ investors.

Source: https://scrip.pharmaintelligence.informa.com/SC145698/Deals-Or-No-Deals-JP-Morgan-Sets-The-Tone-For-2022

Impact of New Regulatory Trends in M&A Deals

The following podcast from Pricewaterhouse Cooper Health Research Institute (called Next in Health) discusses some of the trends in healthcare M&A and is a great listen. However from 6:30 on the podcast discusses a new trend which is occuring in the healthcare company boardroom, which is this new focus on integrating companies that have proven ESG (or environmental, social, governance) functions within their organzations. As stated, doing an M&A deal with a company with strong ESG is looked favorably among regulators now.

Please click on the following link to hear a Google Podcast Next in Health episode

https://podcasts.google.com/feed/aHR0cHM6Ly9mZWVkcy5idXp6c3Byb3V0LmNvbS8xMjgyNjQ2LnJzcw?sa=X&ved=2ahUKEwil9sua2cf5AhUErXIEHaoTBQoQ9sEGegQIARAC

Other Related Articles on Life Sciences Investing Published in this Open Access Scientific Journal Include the Following:

Podcast Episodes by THE EUROPEAN VC
Tweets and Retweets by @pharma_BI and @AVIVA1950 for #NEVS at 2019 New England Venture Summit, December 4, 2019 at the Hilton in Boston, Dedham, MA, hosted by youngStartUp #NEVS
Leaders in Pharmaceutical Business Intelligence & youngStartup Ventures: Venture Summit Virtual Connect West, March 16th -18th 2021 featuring a dedicated Lifesciences / Healthcare Track  
Leader Profile: Family Offices – Impact Investing and Philanthropy – Health and the Life Sciences
37th Annual J.P. Morgan HEALTHCARE CONFERENCE: News at #JPM2019 for Jan. 10, 2019: Deals and Announcements
Real Time Coverage of BIO International Convention, June 3-6, 2019 Philadelphia Convention Center; Philadelphia PA

and  other related articles https://pharmaceuticalintelligence.com/page/3/?s=Life+Science+Investing

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