How Does the Shift to Early-Stage M&A Change Due Diligence?

Kirsten Jacobs, PhD, chief strategy officer, PharmaLex

Eva Keck, vice president, PharmaLex

The life sciences industry is shifting its dealmaking focus from high-cost acquisitions to smaller and more targeted deals. Even big pharmaceutical companies are moving away from mega mergers, which are a huge undertaking, and switching toward early-stage assets and smaller deals that allow them to manage risks and large investments.

According to analysts’ reports, the average deal size in 2024 was down 41% from the previous year with expectations that in 2025 the market focus will remain on pre-Phase II or III assets.¹ An analysis by Capital IQ and EY found that more than 50% of companies are looking to source assets up to Phase II and more than 65% up to Phase III. Furthermore, data shows that of the more than 1,000 deals made in 2024, most were either between emerging biopharma companies or between these small companies and large companies.²

The objective for buyers is to acquire innovative assets that will allow them to respond quickly to scientific and regulatory changes, and to market demand. Disruptive technologies such as gene-editing, cell therapies, and immune therapeutics have attracted significant interest. According to data and analytics firm GlobalData, there has been a big increase in licensing agreements for drugs incorporating clustered regularly interspaced short palindromic repeats (CRISPR)-based technology. More generally, precision and personalized medicine-related M&A deals reportedly remain a priority for companies looking to respond to market demand.

At the same time, there has been increased momentum in artificial intelligence (AI)-led drug discovery M&A transactions, given the potential of AI to speed up processes, create greater efficiencies, and identify new capabilities, PwC reports.³

Determining and demonstrating value

Early-stage licensing deals provide buyers with an opportunity to acquire products at a lower price than later-stage assets or entire companies. This is important for private equity-backed organizations, which seek to build a portfolio with lower initial outlays and the potential for higher returns.

However, when acquiring early-stage assets or those in clinical development, scientific due diligence is of paramount importance. It requires a deep understanding of the regulatory and scientific assets, including the documentation and strategies supporting those assets.

A successful M&A outcome is contingent upon a deep understanding of the regulatory and scientific fundamentals that underpin a product, portfolio or set of business assets. And with the shift of focus to early assets, rigorous scientific due diligence is becoming an even greater priority.

Strategic preparation for acquisitions

When buying a target or portfolio, there is a need early in the strategy phase to screen a product’s potential or determine any red flags. Consideration needs to be given to any scientific, safety, or regulatory issues that could impede a product’s success. For example, there are sometimes different expectations and nuances in the major regions (the US, Europe, Canada, Australia, and Japan), which could present barriers. This is particularly notable when dealing with innovative therapies, since there can be some differences in their regulatory approaches.

Clinical and regulatory affairs should be involved in the due diligence process from the outset to provide strategic advice, handle due diligence and operational activities during the actual M&A transfer, and conduct any efficiency, CMC (chemistry, manufacturing and controls), and labeling remediation activities. Are there risks associated with the target product profile of individual products, or the whole portfolio?

For example, the European Medicines Agency has sought to move away from animal-based potency assays towards in vitro potency assays (which have been previously developed for various vaccines), for certain types of vaccines, for launch in the EU. However, there is resistance to use of in vitro potency assays in some regions, such as in Asia. It is, therefore, important that any due diligence process carefully monitors these types of activities and assesses the dossier to ensure it meets regional requirements.

Additionally, due diligence is needed to ensure nonclinical and clinical activities are carried out in accordance with good manufacturing practice status. CMC and process quality experts can help to identify any risks, such as issues with stability or potential impurities.

Pharmacovigilance experts should also be at the forefront of due diligence processes to assess the safety and viability of a product. For example, were there any adverse events reported during clinical trials and, if so, what was the severity of these events?

Today, big due diligence teams are less common and instead companies are bringing in specialized experts, such as key opinion leaders in their niche areas of development and regulatory consultants with early-phase development experience.

Generating value for divestments

For companies seeking to divest or out-license assets, these same activities are key to demonstrating the value of the product or portfolio. Whether seeking to rationalize the portfolio in order to streamline their research focus or to gain capital to fund further development and market growth, demonstrating the value and finding the right buyer is key.

A due diligence strategy should include market and target analysis and gap analysis to support the pricing of their assets and is a way to maximize the value of those assets before being acquired. For example, early-stage yet highly innovative advanced therapy medicinal products may be of particular interest to a company looking to expand its portfolio in a key therapeutic or novel approach, such as gene editing, cell therapies, CRISPR, and personalized cancer vaccines.

Understanding the market and regulatory environment can help those companies achieve the best value for their products.

Connecting the M&A dots

M&A is central to a company’s growth strategy and will be critical for top 25 biopharmaceutical companies that face significant patent expiries over the next five years. As data from EY shows, M&A represented 45% of overall revenue for leading biopharma companies in 2023. By 2028, it is projected that 68% of revenue will come from products acquired either through M&A or joint venture alliances, making it a primary strategic focus for the foreseeable future.

Unlike mega mergers that require complex post-merger integration, smaller deals allow for more seamless collaboration with biotechnology partners. In this environment, M&A due diligence must be more on scientific, strategic, and forward-looking. Carrying out thorough and well-defined scientific due diligence and building strong collaborations can help companies to excel in a competitive and fast-changing M&A landscape.

Kirsten Jacobs, PhD, is chief strategy officer; and Eva Keck is vice president; both with PharmaLex

Disclaimer: The information provided in this article does not constitute legal advice. PharmaLex and its parent, Cencora, Inc., strongly encourage the audience to review available information related to the topics discussed in this article and to rely on their own experience and expertise in making decisions related thereto.

References

1. EY Firepower Report: Life Sciences Dealmaking – Trends in 2025. EY. https://www.ey.com/en_gl/firepower-report

2. Global Trends in R&D 2025. IQVIA. March 26, 2025. https://www.iqvia.com/insights/the-iqvia-institute/reports-and-publications/reports/global-trends-in-r-and-d-2025

3. M&A trends in AI for Drug Discovery. PwC. July 12, 2023. https://www.pwc.ch/en/insights/health-industries/mergers-acquisitions-trends-in-ai-drug-discovery.html