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Strategics take larger share of life sciences deal pie

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Illustration: Shoshana Gordon/Axios

Strategic buyers struck more life sciences deals in each quarter of 2023, compared with financial investors, per a Q3 report from KPMG.

Why it matters: The findings underscore the impact of a difficult financing market and a gap in valuation expectations on private equity-led dealmaking.

By the numbers: Of the 194 life sciences deals completed in Q3, financial investors struck only 57 — their lowest volume in three years.

  • Life science deal volume in Q3 dipped about 5% below the average of the previous four quarters.
  • With 597 life sciences deals across all three quarters, 2023's volumes will align with that of 2019 and 2020, the report says.

The big picture: The report cites "macroeconomic uncertainty, antitrust scrutiny, and wide ask/ bid spreads" as primary reasons financial acquirers stayed on the sidelines."

  • Meanwhile, corporate acquirers were pursuing bolt-on acquisitions to grow in new markets or access new technologies, the report says.
  • Dealmakers in both categories told the authors of the report that they anticipate a return to normal economic conditions.
  • "Inflation in the US had retreated to 3.7 percent by September 2023, for example, from more than 9 percent in June 2022, giving more buyers confidence even as interest rate hikes continued," the report says.
  • "Recession fears are easing, and interest rates appear to be topping out. These and other trends suggest modest increases in life sciences dealmaking in 2024."

Zoom in: Medical device deal volumes reached their lowest volume since Q1 of 2020.

Yes, but: The report's authors predict a rebound in 2024, driven by an acceleration of elective surgeries, as well as advances in AI.

  • "While the cost of capital may continue to limit some deals in the medical device space, we anticipate that as start ups with AI begin to show the impact of their solutions in this space, it will fuel M&A competition and lead to an uptick in deals," per the report.

Meanwhile, pharma services — touted as a highly investible area of the life sciences continuum — saw just 54 deals announced or closed in Q3'23, tied for the lowest quarterly volume since Q3'20.

But, but, but: "Private equity seems increasingly ready to get back into pharma services—PE's most active life sciences sub-sector for years," the report says.

  • "We believe hub services will likely see more activity, and that technology solutions and services that support clinical trials will pick up again."
  • The report cites the September close of the Syneos deal, which was acquired by Elliot, Patient Square Capital and Veritas.
  • Also in September, Permira bid $886 million to acquire U.K.-based CRO Ergomed.
  • In October, Advent International and Warburg Pincus closed their acquisition of Baxter International's contract manufacturing unit for $4.25 billion.

The bottom line: While economic uncertainty continues to stymie pockets of life sciences M&A, organic growth in many of those areas is still more expensive than acquiring, the report says.

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