In 1897, when a newspaper ran an obituary for the very-much-alive Mark Twain, the iconic American author and humorist wrote in response: “The report of my death was an exaggeration.”
Annual rumors of a resurgence in life sciences M&A, like Twain’s premature demise, have fallen short of reality despite signs pointing to an imminent rise in dealmaking. Something else — like a slow pandemic recovery, an uncertain financial environment or a fraught political election — always gets in the way.
Is 2025 the year drugmakers whet a heartier appetite for new deals? The tea leaves still read that way, and although challenges persist, the stars are beginning to align for a more favorable business development outlook, according to Jake Henry, senior partner and global co-leader of M&A at consulting giant McKinsey.
Not only do pharma companies need to bolster their pipelines in the face of steep, wide-ranging patent cliffs, but they have the cash and have formed their strategies to do so. Now, it’s all about implementation, especially after years of taking a lighter approach, Henry said.
“[Last year] continued a long-term set of investments that pharma companies have been making in biotech, but at a much lower level,” Henry said. “The larger moves were more selective in nature, and so 2024 wasn’t as exciting as it could have been, but was kind of a harbinger of things to come.”
Finding a fit
One way to look at the current prospects for pharma deals is to explore biotech valuations, Henry said, noting that the sweet spot for M&A in the life sciences is a valuation of between $2 billion and $10 billion.
Biotechs that haven’t yet commercialized a product often get “stuck” in the sub-$2 billion range, but once they’ve entered the market, the valuations “can start to tip into those higher levels” to where they can stay healthy and thrive without a deal, Henry said. And during the scant years of M&A, biotechs have opted to go it alone for longer than usual. Although some hit the $10 billion mark and became a harder target to transact, that wasn’t easy to pull off.
“We’ve now almost exhausted the $2 billion to $10 billion category, and so you’re starting to see more early-stage deals,” Henry said. “We’ve watched this adolescence period to understand and see whether biotechs can continue on their own or if they need a biopharma partner to get there. As funding started to dry up in the last three years, many of those companies got stuck in terms of their ability to fund their own growth.”
With many companies in the ideal range already harvested — “almost 75% of those assets have now been transacted, or at least tied up in some form,” Henry said — buyers are now looking outside of that window, particularly on the lower end.
So far in 2025, no biopharma deal has fallen within that sweet spot. Only J&J’s purchase of Intra-Cellular Therapies for $14.6 billion exceeded the top, while a scattering of smaller deals below the lower threshold have been announced.
With the slowdown in pure M&A, pharma companies have leaned more heavily into partnering or licensing deals with higher-risk, earlier-stage companies. If they ultimately bring positive results, the returns could be enough to pull stagnant pipelines into the future.
“What you’re seeing now is the industry having to move earlier and earlier upstream in terms of acquiring biotech assets with promise, and the focus is always on the data and understanding how they’re performing in the clinic,” Henry said. “But when you do that, of course, you have to be very confident in your ability to add value, both in terms of the targets you’re pursuing and then how rapidly you can introduce an asset to the market.”
Getting creative
The landscape puts both potential acquirers and acquirees in a position to “get creative” with their dealmaking as the dual hammers of patent cliffs for pharma and a tough financing climate for biotechs play out.
“There’s been a lot of scrutiny placed on the traditional approach, with activist investors highlighting there will be less forgiveness for, say, a deal with 10 assets that results in only two or three successful ones,” Henry said.
One way pharma leaders can position themselves for M&A gains is by using their own research and development talent to assess and understand the potential that new assets provide.
“What I see a lot of high-performing teams being able to do is use R&D folks to stratify risk in a more sophisticated fashion,” Henry said. “Yes, there’s a binary outcome at the end of the day, but using that expertise as a systematic identification tool to quantify risk will bring a lot less scrutiny.”
No matter what it looks like, the industry will always rely on M&A as a driver of innovation and financial gains, Henry said.
“Looking backward, you can see that 70% of innovations were sourced externally,” Henry said. “Looking forward at the challenges pharma and biotech companies are facing, I don’t think you’re going to see a secular shift that would end that.”
