Following a lacklustre 2022, the world’s leading healthcare and pharmaceutical companies are back to their deal-making ways. Unlike previous years, there is added motivation for big pharma’s aggressive moves in 2023.

Flush with cash from Covid-19 vaccine sales and rising medical costs all-round, 2022 was expected to be another huge year for pharma mergers and acquisitions. Unfortunately, rising inflation, fears of a global recession and the supply chain disruptions caused by Russia’s invasion of Ukraine put a stop to that.

As the year progressed, some of those fears eased and dealmaking picked up. Amgen’s $28.3 billion offer for Horizon Therapeutics in December proved to be the harbinger of great things to come for the healthcare and pharmaceutical industry.

So far, 2023 has been exactly what the doctor ordered.

Pharma Makes Strong Recovery in 2023

Given the dispapointment of 2022, the market was confident that 2023 would be a much better year for pharma M&A. some analusts estimated that at the beginning of last year, pharmaceuticals had a combined $1.7 trillion to splurge on new deals. At the end of the year, only $126 billion of that had been used. 

By the end of H1 2023, total dealmaking had almost caught up to last year’s aggregate. This came at the back of a strong start to the year, with Q1 M&A value coming in at $72.5 billion. Total value declined by 30% in Q2 to $51 billion. Despite the fall from the previous quarter, it was a 77% improvement on Q2 2022. This brough up the first half total to $123.5 billion. This figure increased by a further $12 billion in July, thus giving 2023 the edge over 2022 with five months to spare.

Just as in 2022, Oncology remained the most active sector, and the US market maintained its dmoninance of the industry.

Big Pharma Finally Shows Up

After a sluggish start to the year from the world’s leading pharmaceuticals, Pfizer got the ball rolling in March with its $43 billion acquisition of Seattle-based Seagen. The megamerger remains the largest deal of the year so far. So far, Pfizer has spent more on M&A in 2023 than the Top 50 pharmaceuticals combined.

Pfizer’s purchase of the biotech firm specializing in cancer-care is a huge boost to its oncology department. “Together, Pfizer and Seagen seek to accelerate the next generation of cancer breakthroughs and bring new solutions to patients by combining the power of Seagen’s antibody-drug conjugate (ADC) technology with the scale and strength of Pfizer’s capabilities and expertise. Oncology continues to be the largest growth driver in global medicine, and this acquisition will enhance Pfizer’s position in this important space and contribute meaningfully to the achievement of Pfizer’s near- and long-term financial goals,” said Dr Albert Bourla, Pfizer CEO and Chairman.

Seagen’s name had been in trade whispers since 2022, and many believed that it was Merck & Co. poised to takeover the company, also for an offer exceeding $40 billion. The deal would arguably have been better for Merck, whose overreliance on its cancer drug Keytruda has been a cause for investor discomfort.

Nevertheless, Merck soon responded with a blockbuster acquisition of its own, splashing $10.8 billion on Prometheus Biosciences for its inflammatory bowel disease (IBD) assets. IBD currently affects 2 million people in the US annually, and Prometheus’ PRA023 is one of the most promising treatments in development. Though the drug is still a few years from release, it will be a strong buffer when Keytruda loses exclusivity in 2028.

A few days after Merck’s announcement, GSK revealed that it was acquiring Bellus Health for $2 billion. The deal will help GSK go after Merck’s market share in the cough market. Bellus’ camlipixant is a highly-touted treatment for refractory chronic cough set to hit the market in 2026. Even though Merck’s gefapixant will reach the market first, many believe GSK’s new acquisition is the best in its class.

Given the intense competition and the fact that Merck did not get the prize they were really after, it is no surprise that the company is hungry for more deals.

“We continue to have a priority to do business development, so you should not necessarily expect a slowdown,” said CEO Rob Davis said. “If and when assets that bring important scientific opportunities present themselves—where we see an alignment with strategy and where we can see value creation—we have the capacity and we will be willing to act on those.”

Merck is keeping a close eye on 2028, but the real concern for all of Big Pharma is 2026.

Getting Ahead of the Inflation Reduction Act 2026

When President Joe Biden signed the Inflation Reduction Act (IRA) in August 2022, it put big pharma on the clock. The new law, which takes effect in 2026, has the potential to slash the costs of expensive drugs provided through the Medicare program. In particular, the government wants to target drugs with high dependence and low competition. It will also prevent the providers of those drugs from increasing prices beyond the inflation rate. When implemented, the IRA could end up costing Big Pharma $287 billion in lost revenue over 10 years.

The drug at the top of their target list is Merck’s Keytruda, which brought in $21 billion in revenue in 2022, and is on track to exceed that this year. As a result, Merck is particularly motivated to fight the legislation.

The company said it is willing to challenge the decision all the way up to the Supreme Court if necessary. “This will take a while to play out. What I do think is highly likely is that we will be able to see this result by the time we get into the 2026 timeframe,” said Davis.

Given Merck’s vast size and how expensive cancer care is for patients, many analysts believe their suit is unlikely to win. In the meantime, Merck and every other pharmaceutical company know that the only realistic response to the IRA Act is simple: keep getting bigger. Right now, the only way to realistically do that in time is with more mergers and acquisitions.