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Will The Return of Mergers and Acquisitions Continue? Q&A With Arthur Wong, Managing Director, Healthcare, S&P Global Ratings


Wong discusses trends regarding M&A and how he expects this to continue and change in the coming months.



After the COVID boom, mergers and acquisitions (M&A) in pharma and life sciences saw a decline as the industry corrected itself. Last year, M&A started to make a comeback. Arthur Wong, managing director, healthcare, at S&P Global Ratings, spoke with Pharmaceutical Executive and provided an in-depth analysis of how the trend is continuing and adapting in the new year.

Pharmaceutical Executive: What trends are you seeing when it comes to M&A?
Arthur Wong: Last year, pharma companies basically stopped M&A, so the big trend right now is the return of M&A. This underscores how important it has become for the industry, especially for companies looking to hit their target growth in the future. That’s due to the increases of patent expirations that the industry is facing, starting in the 2024 to 2028.

We’re also heading into the period, theoretically, when the Medicare drug price negotiations kick in in either 2026 or 2028, depending on whether it’s a similar or small molecule.

The major players are looking at that period and that’s what’s caused a spurt of M&A. It’s returned strongly in 2023, and we expect that to continue in 2024. Given how strongly it’s returned, especially with the number of companies who have made major moves, the first half of 2024 will be back to the tuck in mode. This is just because a lot of companies have made their major acquisitions.

Coming out of the JP Morgan conference, we saw that companies are back again and getting an early jump in 2024 on the M&A side. Again, broadly for healthcare, but it’s led by big pharma and biotech companies again. Neither the high interest/elevated interest rate environment, the FTC scrutiny have thrown enough cold water on M&A and this underscores that a lot of these companies are still very high investment grades, so they can take the higher interest rate environment.

PE: What does this say about the industry’s reliance on M&A?
Wong: It underscores the urgency for M&A, especially for companies that are trying to deliver to equity holders the growth that they’re targeting, especially over the next four or five years. One of the stats that I looked at shows that last year there was $50 billion of product that was exposed to generics or biosimilars. I think that’s the highest it’s been in the last ten years.

Starting in 2025, each year is going to be increasing. That shows the level of magnitude in terms of the risk that the industry is facing. Given how large some of these companies have grown, none of these companies are going to have an adequate enough internal R&D pipeline that will drive that growth. That’s also what’s pushing these companies to go outside, whether its partnerships or M&A.

Leading up to last year, M&A in pharma was relatively quiet, likely due to the COVID 19 pandemic and companies not being able to do their due diligence to figure out what’s going on with the Inflation Reduction Act (IRA). They’re well beyond that by this point, however, and it’s come back in full force. Companies are also sitting on a big cash pile, although a lot of that cash pile has been in use over this past year. The ammo to do acquisitions is still relatively high. They’re going to deploy that.

PE: What is happening during the first half of the year, and how do you think this will change as the year progresses?
Wong: The first half of 2024 may take a bit of a pause due to how hot and heavy 2023 ended, but we could see it going back into big acquisitions in 2024. Several companies still haven’t made their major moves yet. They’re all seeing the same thing: $50 billion plus of annual patent expirations.

The other trend that we’re increasingly seeing is that these companies with their acquisitions is that they’re getting into therapeutic areas that they don’t have traditional strengths in. Everyone’s acquiring oncology or adjacencies, but we’re starting to see them get into areas like neurosciences or other areas that may have once had strong for them and fell away. It’s going to entail greater risk and more skepticism on our part. It also shows how competitive some of these core areas are. They need to look at areas outside of their comfort zone because they can’t leave any stones unturned.

Another trend that I might be seeing (although this may have always been the case) is that companies are buying more mature products just to lower the risk. Companies can’t be spending the amounts that we’ve seen only on Phase II, which is traditionally considered the sweet spot to do acquisitions. They’re starting to increase their mix of straight up acquisitions and collaborations with products that have already been submitted to FDA or are on the market, just to balance it out.

Those acquisitions generally require a higher price tag, which is why I’m seeing the outlay is pretty high. Even with the cash piles that these companies have, $10 billion doesn’t buy as much as it once did. They can expend their cash piles pretty quickly.

I also think that we’re going to continue to see a trend of a deterioration of the ratings, even of these big pharma and biotech companies. They’re still going to be high investment grade, but we’re seeing a steady march down from A to A-, things like that. I think that will continue because how much more frequently companies must do acquisitions. Leverage has traditionally been one to one-and-a-half times, and this has increased to up to two times, and now we’re seeing companies asking for above two.

Not to dramatize it, they’re still high investment grade companies, but we’re starting to see a slight march downward by the group.

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