In the midst of uncertainty around the U.S. economy, dealmaking in the life sciences industry held steady in the third quarter, with 194 deals unveiled or closed. That’s one of the findings from KPMG’s third-quarter 2023 report on life sciences merger and acquisition (M&A) activity. Dealmaking varied based on the actual sector, but the industry may be poised to ramp up activity as the year comes to a close, according to one industry expert.
Third-quarter 2023 was the fifth in a row that the industry’s major sectors — medical devices, pharmaceutical services, and diagnostic and lab services — remained steady, notes Kristin Pothier, leader of KPMG’s Global and US Healthcare & Life Sciences Deal Advisory & Strategy.
“Overall life science deal volume in Q3’23 fell by about 5% below the average of the previous four quarters, but with 597 deals in the first three quarters, 2023 is likely to end with total volume in line with 2019 and 2020,” she explains. With 137 deals, “strategic buyers took up the slack in Q3 as financial investors made just 57 deals,” which was the lowest volume for private-equity (PE) investors — 29% — since third-quarter 2020.
The strategic investors’ 71% of life sciences deals was “their highest share in 12 quarters,” she points out, noting that “several trends drove this disparity. Macroeconomic uncertainty, high rates, antitrust scrutiny and wide bid/ask spreads made some targets less attractive to PE buyers, whereas many corporate acquirers needed bolt-on acquisitions to grow, for example by entering new markets, accessing new technologies or offering new products or services.”
Medical devices had 74 deals, marking the lowest volume since the first quarter of 2020 for that sector, “but several factors are expected to drive a rebound in 2024, including the post-pandemic return of elective surgeries and advances in AI-supported devices,” she tells AIS Health, a division of MMIT. “While 2023 was the year that artificial intelligence (AI) became a household name, its effects on life science deals this year were not as impactful as one might assume. Looking ahead to 2024, advances in AI-supported devices in surgery, diabetic care, cardiology and other areas could yield more opportunities.”
For example, the report notes that Medtronic launched a pilot program in collaboration with Cydar Medical involving 40 sites in the U.S., United Kingdom and Europe focused on improving endovascular aortic care through AI technology.
‘Pandemic Whipsaw’ Is Plaguing Many Pharma Services Firms
The pharma services sector’s 54 deals tied it with the fourth quarter of 2022 as the lowest quarterly volume since the third quarter of 2020. Many of these companies “are still recovering from the pandemic whipsaw,” states the report, adding that contract development and manufacturing organizations (CDMOs) that preciously were producing large amounts of products for vaccines likely have a surplus of manufacturing capacity.
However, “demand for many pharma services continues to be strong, particularly in cell and gene therapy manufacturing and contract research organizations. Private equity is increasingly ready to get back into pharma services, with hub services and technology solutions and services that support clinical trials expected to see more activity,” observes Pothier.
There were 66 diagnostic and lab services deals in the third quarter, making it the most volume in more than a year, she says, but those were “roughly half the number of deals than occurred in 2021 and the first half of 2022.” The report notes that many companies focused on COVID-19 tests are now out of business.
“The holy grail would be for a company to produce a diagnostic test that would be fast, affordable, accurate, convenient, and less invasive,” it maintains, adding that some companies “are beginning to approach those milestones.” For example, Simple HealthKit is partnering with Walmart to provide in-home diagnostics for diabetes, respiratory conditions and sexual wellness. People can order a test with physician oversight at Walmart.com, perform the test at home and send the sample to a Simple HealthKit lab. Tests are processed and results are given within 24 hours after the sample is received, and people with abnormal results can be connected with care free of charge.
According to KPMG, the largest deals either unveiled or completed during the third quarter of 2023 were:
- Elliott Investment Management L.P., Patient Square Capital and Veritas Capital’s $7.1 billion purchase of Syneos Health, Inc., which closed Sept. 28.
- Danaher Corp.’s purchase of Abcam plc for $5.7 billion, which was finalized Dec. 6.
- Sartorius’ $2.6 billion acquisition of Polyplus, completed July 18.
- Coloplast’s $1.3 billion deal for Kerecis, unveiled July 7.
- Permira I.P. Limited’s $900 million deal for Ergomed plc, revealed Sept. 4.
Obesity Therapeutics Show Promise
Asked about any potentially surprising occurrences during the quarter, Pothier points to continued developments in the obesity management industry. Pharma companies “have struggled for some time to create effective drugs for obesity due to lack of meaningful efficacy, major safety concerns and the perception that obesity is not a real disease. However, recently approved GLP-1 agonists have shown promise in treating obesity and metabolic dysfunction throughout the body. The market for obesity therapeutics is forecasted to grow from $2.4 billion in 2022 to over $77 billion by 2030, but companies need to be thoughtful in treating patients with obesity effectively.”
While she acknowledges the “uncertainty in the U.S. economy and abroad,” Pothier declares that “there is still reason to believe that life sciences M&A can pick up in Q4. The main reason behind this is because for most large companies, organic growth is more expensive, uncertain and time-consuming than well-executed acquisitions. Many life sciences companies abroad want to enter the profitable U.S. market, for example, while some buyers in the U.S. may want to make plays in overseas M&A markets that are less competitive.”
There are a few takeaways and considerations from the report she adds. For one, as innovative technologies become available, life sciences companies “need to adapt their business to new customer types and customer preferences.” Firms also should consider partnerships, which “can facilitate the development of end-to-end services that can close gaps in your operation.” In addition, they should look beyond the U.S. to the global market. “Some of the biggest life science deals of the year involved ex-U.S. companies that have significant cash to invest and/or differentiated products and services,” she notes.
Finally, businesses should “focus on extracting value from acquisition,” Pothier recommends. “Given the high number of acquisitions already completed over the last few years, high multiples, high interest rates and other challenges, life sciences companies may want to focus their energies on value creation and integration of already-acquired companies.”
Contact Pothier via Ed Jones at email@example.com.