The life sciences sector, comprising of sub-sectors like pharmaceuticals, medical devices, diagnostics and services, aims to cure disease or otherwise alleviate symptoms and suffering where there is no cure.

It is estimated to be worth nearly US$3 trillion annually and has experienced significant growth in recent decades as a result of technological advances and increasing demand driven by ageing populations, rising rates of chronic disease in the West and increasing incomes in low and middle income countries. Most recently, the COVID-19 pandemic brought the sector to the forefront of public attention, with large amounts of capital being deployed by governments and the industry to develop and roll-out vaccines in record time. Since that bounce, the sector has faced a slow-down in deals but this is expected to increase again as markets improve. 

In this six-part series, we’ll examine the key legal issues that dealmakers need to consider when preparing for, negotiating and executing deals for or with companies in the life sciences space.  

The full list of articles is:

1. Trends in Life Sciences Dealmaking
2. Navigating the Complex Landscape of Merger Control and Foreign Direct Investment in Life Sciences in the EU and UK
3. Venture capital and venture debt in Life Sciences
4. Licensing and collaborations in Life Sciences
5. M&A in Life Sciences
6. IPOs in Life Sciences  

Trends in Life Sciences Dealmaking

The life sciences sector is well known for high levels of deal activity and in this first article we examine the key trends driving dealmaking, as well as the different types of transactions that are regularly undertaken in the sector.

What drives dealmaking in the life sciences sector?

Dealmaking is underpinned by several factors:  

1. Technological Innovation  

Over the decades, there have been several significant scientific developments that have resulted in major advances in treatments. Start-ups and growth companies are often at the cutting edge of developing such technologies and treatments. The most promising companies and technologies often end up being acquired by big pharma or larger biotech companies.  

Some major developments include:

• DNA sequencing, which has enabled scientists to map the entire human genome and understand the links between damaged genes and the diseases they cause; 

• gene editing techniques, such as CRISPR, which have enabled scientists to modify genetic material at specific locations in the human genome;

• immunotherapy and cell therapies, such as CAR-T, which have made it possible to use a patient’s own T-cells to attack cancer cells; 

• mRNA vaccines, which teach the body to produce a specific protein which triggers an immune response that produces antibodies and immune cells that ultimately destroy specific bacteria or viruses; and
  
   
• artificial intelligence (“AI”), which is streamlining the drug development process by replacing time-consuming trial-and-error experiments with AI tools that can quickly analyse large amounts of data and model likely outcomes. This helps scientists identify which chemical compounds are likely to result in successful drugs, accelerating drug discovery timelines. The development of quantum computing promises to further accelerate this process in the years ahead.

2. Demand 

Demand for healthcare is increasing year-on-year. Sedentary lifestyles in the West have led to an increase in chronic conditions, such as diabetes and osteoarthritis. Ageing populations caused by rising living standards have led to an increase in age-related conditions such as dementia, Parkinson’s and Alzheimer’s disease. At the same time, demand in emerging markets (such as China and India) is growing rapidly as increasing affluence leads populations to spend more of their growing incomes on healthcare. The rise in demand makes it increasingly attractive for entrepreneurs to develop treatments and new technologies.

3. Patents and Patent Cliffs

Patent protection is limited to 20 years (plus a variable period for supplementary protection certificates (SPCs)) in the US, Europe and the UK, and many of the world’s blockbuster drugs (i.e. drugs yielding annual sales of over US$1 billion a year) have lost or will lose patent protection in the coming years. 

As patents expire, generic versions enter the market at much lower prices which decimate sales of the patented (and more expensive) version.  The so-called patent cliff is less marked for “biosimilars” – generic versions of biotech products – as the cost of manufacture is so great and cannot be discounted.

Current estimates suggest that over 190 major drugs, including 69 blockbusters, will lose patent exclusivity by 2030. By way of illustration, Keytruda, which treats several types of cancer and was approved in 2014, generated annual sales in 2023 of over US$25 billion. However, it will lose patent protection in 2028 and sales are expected to decline significantly thereafter.

Patent expiry means that pharmaceutical companies need to continually replenish their portfolio of drugs. They do this by developing treatments themselves, but also by licensing or acquiring earlier or later stage assets developed by biotech companies, who are frequently developing innovative treatments in areas of high unmet need (i.e. high demand). These acquisitions allow them to build a pipeline of potential treatments that can become tomorrow’s blockbuster drugs, offsetting the loss of revenue from those drugs that go ‘off patent’, and creating a portfolio of profitable products. 

4. The Drug Development Process

It typically costs more than US$1-2 billion to take a drug from invention to patient and the development time typically takes between 10 to 12 years. The path to approval requires multiple clinical trials and approval by the Food and Drug Administration (“FDA”) in the US, the European Medicines Authority (“EMA”) in the EU or the Medicines and Healthcare products Regulatory Agency (“MHRA”) in the UK. Once approved, pricing and reimbursement approval must then be obtained from government authorities and insurance companies. Pricing and reimbursement can have a significant impact on the profitability of a product, as without reimbursement approval a drug may not generate meaningful profits. So, smaller companies are often unable to fund the entire drug development process alone. As a result, larger companies regularly acquire promising drugs (whether by way of an acquisition or by way of a licence) and fund their development. 

The risk profile and value of a drug in development changes dramatically over time.  A promising molecule that has been identified and is about to enter Phase 1 trials (i.e. first in-human trials in healthy volunteers designed to establish safety) will inevitably be valued significantly less than a drug which has successfully completed Phase II or Phase III trials where efficacy has been established (i.e. human trials that test efficacy and which compare the drug with existing treatments including the ‘standard of care’).  

Failure rates in clinical trials are very high. Drugs that make it through early trials may ultimately prove ineffective or have unintended side effects which render it less attractive as a treatment. Even successful development of a drug may not guarantee sales if the drug is not as effective as the existing ‘standard of care’ (i.e. the best treatment currently on the market and the default treatment for patients with a particular condition), or if it is significantly more expensive than existing therapies. Value is also affected by the speed of development, so the longer the drug is ‘on patent’ the more valuable it is. There are also regulatory routes to gaining exclusivity such as orphan drug designation or SPC extensions granted in exchange for the conduct of paediatric studies.

5. Mega-Mergers and Rationalisation

The high cost of drug development has increasingly led large pharmaceutical companies to specialise in a limited number of therapeutic areas while seeking to reduce costs. This has resulted in multiple rounds of mega-mergers over the years, including Bristol-Myers Squibb’s US$74 billion acquisition of Celgene in 2019 and Pfizer’s US$43 billion acquisition of Seagen in 2023. These deals enable costs to be cut and scarce R&D resources to be focused on areas of relative strength. 

Often these deals result in pharmaceutical companies divesting treatments, either because the area is considered ‘non-core’ or because competition authorities require certain assets to be divested to ensure the combined group does not have an overly dominant position in a particular therapeutic area. For example, the approval of GlaxoSmithKline's acquisition of Pfizer's consumer health business was conditional upon the global divestment of Pfizer's topical pain management business carried out under the ThermaCare brand. Competition authorities have also required divestment where a merger is likely to lead to a loss of innovation for a certain drug or treatment (e.g. where a merging party is developing a competing product which it would cease developing because of the merger – see for example AbbVie's acquisition of Allergan).

What are the breakthrough areas in life sciences?

Most research and deal-making occurs in areas of high unmet medical need and large patient populations, in which pharmaceutical companies can generate the largest profits. This includes areas such as oncology, immunology, diabetes and cardiovascular and respiratory diseases.

Other growth areas include:

• Rare Diseases
  
  Rare diseases (or “orphan diseases”) affect small patient populations (defined by the World Health Organisation as diseases that impact fewer than 65 patients per 10,000 people) and there are estimated to be over 7,000 rare diseases, with the vast majority having no treatments.  There is a special regulatory regime for orphan drugs, including research grants, tax credits, regulatory benefits such as extended market exclusivity rights and higher prices. Together, these make rare diseases particularly attractive for pharmaceutical companies with a number seeking to develop or acquire orphan drugs for their portfolios;
  
   
• Neurodegenerative conditions
  
  An ageing population has led to an increase in the number of people living with neurodegenerative diseases such as Parkinson’s and Alzheimer’s, leading to an increase in research and development in the space. As yet, there are no cures but treatments are being developed which are having a relatively small impact on disease progression. For example, Eli Lilley has developed donanemab, a potential Alzheimer’s drug that may slow cognitive and functional decline in early symptomatic Alzheimer’s patients;
  
   
• Obesity and Weight Loss  
  
  There is a rise in anti-obesity drugs, such as Novo Nordisk’s semaglutide, which help patients avoid the various conditions that stem from being overweight, such as diabetes and heart disease.  These drugs work by making patients feel less hungry. For example, by 2023 Wegovy had achieved annual sales of around US$4.8 billion and sales are only expected to further increase in future years; and
  
   
• Psychedelics
  
  Another area of research attracting considerable attention is the potential for psychedelic therapies to treat mental illnesses like depression and other conditions such as post-traumatic stress disorder (PTSD), and anorexia nervosa. For example, psilocybin (or magic mushrooms), a naturally occurring psychedelic compound produced by fungi and known for its hallucinogenic effects, may help treat people with treatment-resistant depression, which is estimated to affect up to 100 million people worldwide. 

What types of deals shape the sector?

The life sciences sector sees a range of different types of deals:

1. Venture Capital 

While pharmaceutical companies are still very much involved in the drug development process, the capital-intensive nature of drug development and declining R&D productivity has led to a model in which pharmaceutical companies effectively seek to outsource and share some of the risk and cost of drug development with other investors. As a result, biotech companies are regularly set-up by academics and entrepreneurs, and sometimes the relevant intellectual property is spun-out from universities, charities or pharmaceutical companies, to be further developed.  

These emerging biotech companies require significant amounts of capital. Several specialist life sciences funds and more generalist funds that allocate a portion of their capital to the high risk/high-reward pharmaceutical sector have stepped in to fund this early-stage development.  

Large pharmaceutical companies also often invest in these biotech companies. Corporate venture capital, which is now commonplace in most industries, started in the pharmaceutical sector.  Big pharma sometimes either invest on balance sheet (i.e. the investment is made by the pharmaceutical company itself) or sometimes through standalone CVC arms (i.e. a separate fund with its own investment mandate often focused on the therapeutic areas of the parent pharmaceutical company).  

Biotech companies use the funding to identify promising compounds and to navigate  the clinical trials required to bring a drug to market.  Treatments that do not show promise are quickly discontinued at relatively low cost, while those that show promise attract further funding, either through further venture capital funding or via an initial public offering. In other cases, the companies are acquired by big pharma.  

This model is attractive to pharmaceutical companies because it reduces the amount of capital they need to allocate to high-risk, early-stage drug discovery.  Big pharma can also acquire minority stakes in emerging biotech companies, allowing them to assess scientific progress while deploying less capital, perhaps with a view to an eventual acquisition. At the same time, big pharma is not required to consolidate the investment on the company’s balance sheet.

2. Licensing Transactions and Collaborations

Licensing is the most common way in which a pharmaceutical company will gain access to product innovation by a biotech company.

Licensing deals involve one party acquiring the right to manufacture, distribute and sell the licensed product, although cross licensing and collaborations are also commonly seen.  Licensing plays a critical role in the pharmaceutical industry and it enables companies to expand their product portfolios (or conversely outsource a non-core product), access new markets (whether geographic or fields of use), and generate additional revenue streams.

In recent years, late-stage licensing deals have been particularly sought-after and are commensurately expensive as the risk profile for such transactions is much better.  In order to mitigate costs, pharmaceutical companies have increasingly licensed in products at an earlier stage of development, when the risk of the product not successfully making it to market is higher, but the financial cost more manageable. The competition for “hot” assets has also meant that biotech companies have been able to negotiate better terms with pharmaceutical companies, so licensing deals reflect in effect longer term partnerships of equals. Biotech companies have also increasingly sought co-development and co-marketing roles in their licensing deals, giving them greater control over the product, rather than divesting it wholesale. 

3. Mergers and Acquisitions

Large pharmaceutical companies, looking to replenish their pipelines and acquire the blockbuster drugs of tomorrow, regularly acquire biotech companies that have developed promising new treatments. These biotech companies are often backed by venture capital investors, as well as big pharma, and a wider range of universities and charities. 

Biotech companies with later stage assets that have successfully completed multiple clinical trials are inherently less risky as more clinical data is available, so cost significantly more to acquire. Earlier stage assets, while less expensive, will carry greater development risk. In recent years, many of the later-stage, lower risk assets have been acquired, which in turn has forced big pharma to acquire earlier-stage, higher-risk companies.  

4. Initial Public Offerings (“IPOs”)

It costs billions of dollars to successfully take a drug through all the clinical trials necessary to obtain the requisite approvals and to start the commercialisation process. While biopharmaceutical companies first look to the private capital markets for funding, there are some that subsequently turn to the public markets for opportunities to raise capital. This is particularly true for growth companies that have generated positive clinical data and are looking to raise larger amounts of capital than venture capital investors alone would be willing to invest. Completing an IPO is a difficult process for any company and there are certain types of companies for which a public listing is more appropriate, which we examine in more detail later in the series. 

What are the key takeaways?

Dealmaking in the life sciences sector is underpinned and driven by strong long-term drivers, including rapid technological advances and increasing demand driven by ageing populations and rising rates of chronic disease.  Deals take a number of forms, from raising capital via venture capital fundraisings to IPOs on a stock exchange, to companies looking to replenish their pipelines (or divest unwanted assets) via licensing and collaboration transactions or M&A. 

While deal activity has reduced after the COVID “bubble” in which the life sciences sector saw unprecedented levels of cooperation between public and private entities and high levels of dealmaking, the long term drivers underpinning deal activity as set out above remain in place. As a result, deal activity in the life sciences sector is expected to remain robust in the years ahead.