This week’s deal-making activity presages what could be a big year for biopharma mergers. Sitting on an earnings windfall thanks to sales of COVID vaccines and treatments and other inflows, major global drugmakers could have over $500 billion in cash by the end of 2022 to deploy on acquisitions and other growth strategies, analysts said. 

Throughout 2021, M&A activity in life sciences rebounded to a more normal – but still low – state after a pause due to COVID-19 uncertainty the year prior. Transactions included Merck’s $11.5 billion acquisition of Acceleron Pharma, which brought phase-III PAH candidate sotatercept, and Jazz Pharmaceuticals’ $7.2 billion purchase of GW Pharmaceuticals, which snared marketed drugs Epidiolex (approved for epilepsy in the US) and Sativex (approved ex-US for treating muscle spasticity).

These deals pale in size when compared to the previous mega-mergers of AstraZeneca/Alexion (2020), Bristol Myers Squibb/Celgene (2019) and AbbVie/Allergan (2019). But the merger comeback is poised to intensify in 2022. 

Monday’s $6.7 billion acquisition of Arena Pharmaceuticals by Pfizer, followed a day later by Aussie biopharma giant CSL’s $11.7 billion takeout of Vifor Pharma, were all-cash deals that enabled the acquirers to replenish pipelines with late-stage developmental assets. 

In Pfizer’s case, that included Arena’s immunology compound etrasimod, which is being tested in ulcerative colitis and Crohn’s disease. The deal came a month after Pfizer spent $2.2 billion to buy immuno-oncology firm Trillium Therapeutics. But the Arena deal is seen as particularly emblematic of a coming wave of even more ambitious M&A activity. 

Pfizer’s balance sheet will be in the black to the tune of tens of billions of dollars in added cash flow over the next 12 months, courtesy of its COVID-19 vaccine Comirnaty and potentially its oral antiviral Paxlovid, whose emergency authorization is imminent. The company has said it plans “to be very active in dealmaking.”

After Pfizer and BioNTech, Moderna is the next biggest beneficiary of COVID product sales, thanks to its Spikevax shot. They’re followed by Merck (from potential sales of antiviral molnupiravir), Regeneron (from its antibody cocktail), Gilead (Veklury) and Johnson & Johnson (its COVID jab).

All told, 18 U.S. and European drugmakers will have a combined $538 billion in cash by the end of 2022 and billions more in debt-financing power, according to investment bank SVB Leerink. Thirteen of them will have more than $20 billion apiece, according to the bank’s analysis. 

Also in that club is Novartis, which is benefiting from a one-time cash inflow from the $21 billion sale of its stake in Roche. GlaxoSmithKline has been boosted by the de-merger of its consumer joint venture, which will pad its war chest by an estimated $28 billion. 

The cash isn’t only earmarked for acquisitions, of course. The drugmakers might choose to spend it on licensing deals, collaborations, debt paydown or returns to shareholders via dividends and stock repurchases, SVB Leerink points out. On Thursday, Novartis announced a $15 billion share buyback, a move that came a few days after Bristol Myers Squibb said its board had approved funneling an additional $15 billion into its own buyback plan.

Still, many companies will look to snap up innovative small- and mid-cap biotech firms. Investments are likely to focus on oncology, cell and gene therapy, neurology and cardiology. Technologies like mRNA, which proved itself in the mRNA-based Pfizer/BioNTech and Moderna COVID-19 vaccines, will continue to draw suitors. 

In 2022, M&A investments are expected to reach as high as $400 billion, driven by pharma and biotech (and to an extent, med-tech), per a November report by PwC. Look for smaller biotech deals to continue through the first half of the year, growing more substantial ($50 or above) into the back half. PwC foresees the possibility of one megadeal ($100 billion or more) as part of a “transact-to-transform” strategy, given the continued need for scale.

Companies are also prepared to diversify their portfolios due to changes afoot in the current regulatory environment. Federal legislation that will allow Medicare to set some drug prices will keep the spotlight on affordability. That, along with depressed prices in the stock market and a looming growth crisis due to patent expiries in the 2025-2030 timeframe, will spur many companies to pull the M&A trigger. 

However, there are some challenges standing in the way of biopharmas deploying all of that capital. Tax reform regulation could impact available cash flows, PwC cautions. And the billions drugmakers are earning from successful pandemic vaccines and treatments could bring added scrutiny. 

The Federal Trade Commission, for one, may have something to say about outsized M&A deals. Even Pfizer’s Arena buyout may get the FTC’s attention. Due to potential antitrust concerns, the drugmaker might be asked to divest some of its current assets in order to close the transaction.