When the 41st annual JPMorgan Healthcare Conference gets underway Monday, attendees may notice something different: more space. 

The conference, which is known as much for its host city of San Francisco as for the throng which descends on the Westin St. Francis, will welcome some 8,000 attendees. That’s 2,000 fewer than the 10,000 or so healthcare executives, investors, venture funds and journalists who flocked here before the COVID-19 pandemic forced the venerable meeting online

As rumor has it, organizers kept numbers lighter this year — the first in-person JPM since January 2020 — to afford more space to network and press the flesh. It’s one of a number of factors that could rekindle deal-making. 

Last year, life sciences M&A investment (including biopharma and medtech) fell to $136 billion, down nearly 40% compared with the previous year, according to data collected by Ernst & Young for its annual M&A Firepower Report, released Monday. With only $105 billion in deals completed through November, the sector was on pace to record its lowest deal-making year by value since 2017, per the report.

The year ended on a high note, with both Amgen and Johnson & Johnson announcing multibillion-dollar tie-ups – the former’s $28 billion play for Horizon Therapeutics in December, which became the year’s largest, following J&J’s $16.6 billion all-cash pact to acquire heart-pump maker Abiomed in November. 

“Nevertheless, the story doesn’t change,” said Subin Baral, EY’s global life sciences deals leader. “2022 was a bit of a ‘watch on the sideline year’ for many of the life sciences companies, including biopharma.”

The M&A market abhors volatility and uncertainty, Baral explained, and 2022 had plenty of both. From a macroeconomic perspective, rising interest rates and inflation undermined acquirers’ leverage. Meanwhile, on the regulatory front, Congress passed the Inflation Reduction Act (IRA) in August, a law requiring Medicare price negotiation for top-selling prescription drugs. The pace of drug approvals by the Food and Drug Administration slowed.

Moreover, the stock market on the biotech side normalized (read: crashed), bringing valuations back to Earth. “It was a seller’s market for a long time. Now it’s a buyer’s market,” said Baral. “That shift also caused a little more tension between buyers and sellers on the valuation gaps between the two.”

But what drove deal-making last year, at least in biopharma, wasn’t necessarily the ability to get assets on the cheap as much as it was the quality of those assets. Consider Pfizer’s 2022 deals: buying Arena for $6.7 billion (immunology), Biohaven for $11.6 billion (migraine), Global Blood Therapeutics for $5.4 billion (sickle cell disease) and ReViral for less than $1 billion (RSV).

Merck got in on the act, too, agreeing to acquire blood-cancer biotech Imago BioSciences in November for $1.35 billion, as its cancer immunotherapy Keytruda nears patent expiration. 

Despite the headwinds, numerous other life-sci tie-ups got done — 117 of them by November, a 27% decrease versus 2021, per EY. The overwhelming majority were bolt-on in nature, or deals of a smaller scale, not unlike global deal-making trends across all industries. 

The right strategic deals are still getting done, and sector fundamentals look strong for dealmaking this year. For instance, companies are sitting on record levels of deal-making firepower: EY estimates biopharma had more than $1.4 trillion at its disposal as of early December. 

About 60% of respondents to a recent KPMG survey spanning life sciences and the rest of healthcare said they expect more deals in 2023 than in 2022, and just 8% predicted that deal volume will fall.  

Despite the uncertainties of 2022, “The positive upside to the sentiment is still there,” said Ash Shehata, KPMG national sector leader for healthcare and life sciences. “The expectation is that the industry is still very resilient.”

Another reason is the patent cliff. Out of pharma’s $900 billion in 2021 revenue, about $230 billion will lose patent protection between 2025 and 2030, according to a Goldman Sachs analysis cited by The Wall Street Journal. Companies will have to find a way to bridge that growth gap.

Merck may be one biopharma poised for a megadeal. The drugmaker had been in talks to acquire Seagen for $40 billion before negotiations broke down. But management has signaled openness to a deal of that size in order to replace the revenue soon to be lost from I-O megablockbuster Keytruda.

Access to capital is also getting harder, as the record access to liquidity, which companies had in 2021 through the IPO and SPAC markets, narrowed in 2022. That forces smaller biotechs to partner or do deals with their big pharma cousins. 

Rather than outright buyouts, the pressure could manifest in the form of partnerships and alliances, too. “Particularly when the market is uncertain,” noted Baral, “to de-risk the deal-making, a lot of these companies would want to do some of those collaboration-type minority stakes before they actually turn that into a full-blown M&A.” 

Will the trend toward in-person deal-making bolster these tailwinds? “I do think that you’re going see more deal-making in biopharma – not because of the in-person, but more because people are coming out of COVID,” said Priya Chandran, managing director/senior partner, global sector leader, biopharmaceuticals, at BCG. 

Consider that Pfizer’s two top products last year were pandemic-related – the COVID-19 vaccine Comirnaty and the antiviral pill Paxlovid, both of which were expected to generate $56 billion in sales in 2022. That was likely to account for about half of its sales. 

But this year, as COVID deaths and hospitalizations come down, sales of these products is set to decline, too. That dynamic adds to pressure already felt from other areas of its business, like the coming patent losses on blood thinner Eliquis and breast cancer med Ibrance. 

On the regulatory side, drugmakers don’t fully appreciate the impact of the IRA. By 2030, as many as 60 therapies may be affected. The new rules are already impacting revenue forecasting and valuation of assets in biopharma,

“Big pharma revenue gaps are real, growth ambitions haven’t necessarily modulated, and IRA impacts are definitely not fully understood,” said Chandran. “So with all of those downward pressures, you’re going to see more deal-making, because big pharma needs the needs deals to fuel growth.”

Some are more bullish on a coming resurgence than others. Either way, at a fundamental level, indicators appear to suggest an active 12 months on the deal-making front. 

“I would expect a recovery for 2023,” said Baral. “We expect this to be a comeback year.”