EY Predicts Smarter, Smaller M&A in Biotech and Pharma for 2025
According to Ernst & Young (EY) at the 43rd J.P. Morgan Healthcare Conference, the trend in biotech and pharma mergers and acquisitions (M&A) for 2025 will be “more, smaller, and smarter.” While the number of deals may rise, the value of individual transactions is expected to remain low as large pharmaceutical companies actively seek targets that complement their product lines and address patent expirations. The looming risk of patent cliffs and the rise of AI technology will be key drivers, influencing both IPO and venture capital markets.
More Deals, Lower Totals: Smaller, Smarter Transactions Take the Lead
In 2024, the total value of biopharma M&A deals fell by 51%, but the number of transactions increased by 17%, from 81 in 2023 to 95 in 2024. The largest deal in 2024 was Vertex Pharmaceuticals’ $4.9 billion acquisition of Alpine Immune Sciences, a far cry from Pfizer’s $43 billion acquisition of Seagen in 2023. Subin Baral, EY’s global life sciences transaction leader, says, “The need for innovation to achieve future growth targets will drive the biopharma M&A activities, mainly strategic partnerships and bolt-on acquisitions.” Here, the rise in deal volume reflects market activity, and EY expects to see more smaller but smarter deals in 2025. The key driver is the looming expiration of patents for many large drugmakers, creating an M&A demand.
EY predicts that patent expirations could lead to a $300 billion loss in revenue for the biopharma sector by 2028. Baral explained that the internal R&D pipeline within biopharma companies isn’t sufficient to replace or make up for all the lost revenue from expiring patents. As a result, M&A will become increasingly important for these companies to drive growth and create value.
In a recent interview, Baral highlights trends and factors shaping biopharma M&A activity, particularly heading into 2025. He predicts a focus on therapeutic area (TA)-specific acquisitions, where companies will target assets that align with strategic priorities. This trend may also drive divestitures and portfolio pruning of non-core assets to maximize value.
EY reports that the top 25 biopharma companies have $1.3 trillion in “firepower” reserved for M&A deals, slightly lower than previous years. Companies like Novo Nordisk and Eli Lilly lead this group due to their blockbuster GLP-1 therapies for diabetes and obesity, with both investing heavily in manufacturing expansions. Buyers are showing a preference for early-stage (pre-Phase III) drug candidates, reflecting a strategic shift to acquire assets at lower valuations.
Improving market conditions, such as expected lower interest rates and pro-business policies under the incoming U.S. administration, are likely to accelerate dealmaking. Proposed tax cuts and a rollback of Medicare drug pricing rules could further fuel M&A optimism. Unlike 2024, buyers aren’t delaying deals due to political uncertainty.
AI-Powered M&A Surge, Drug Development Becomes the Focus
Between 2019 and 2024, EY recorded 330 AI-focused partnerships in the biopharma sector, including M&A deals. Among the few notable AI acquisitions in 2024, the largest was Recursion’s purchase of Exscientia, valued at $688 million. As AI-driven drug discovery gains momentum, Baral expects this trend to accelerate, with an increase in M&A, licensing, and collaboration agreements in the coming years.
One recent example of such collaboration was announced by AI drug developer Insilico Medicine. The company granted Menarini Group’s subsidiary, Stemline Therapeutics, global rights to develop and commercialize a preclinical small molecule designed to treat various solid tumors with high unmet medical needs. This deal marks the second asset licensed by Menarini from Insilico, following the KAT6A/B inhibitor MEN2312, currently in a Phase Ia study. The new molecule was partially developed using Insilico’s AI platform, Chemistry42.
Baral noted that collaborations like these allow AI-focused companies to concentrate on technological innovation, while biopharma firms bring their expertise in clinical development and commercialization. By combining their strengths, these partnerships create a multiplier effect, accelerating progress in drug development.
Addressing concerns about AI replacing human roles in M&A, Baral stated that the dealmaking process will remain rooted in human relationships. “This is a high-touch, relationship-driven environment,” he said, adding that AI will enhance, not replace, the essential human element in crafting successful partnerships and acquisitions. To this end, the report highlights three key challenges for the industry in partnering with technology companies: developing an effective data strategy, adopting AI across all processes, and implementing education and integration strategies throughout the organization.
IPOs and Venture Capital Are Gaining Momentum
Initial public offerings (IPOs) and venture capital (VC) financing in the biopharma sector are set to grow in 2025, building on trends from 2024. In the U.S. and Europe, 30 IPOs raised $4 billion last year, a noticeable jump from 18 IPOs that brought in $2.87 billion in 2023. However, the figures remain well below the 2021 peak, when 158 IPOs raised $20.79 billion amid a surge in efforts to develop COVID-19 treatments.
Looking ahead to 2025, IPO activity is expected to increase further, albeit at a more moderate pace than the 20%-30% growth some had predicted. Analysts anticipate a continued rise in IPO interest compared to previous years, reflecting a cautiously optimistic market environment.
VC Financing Hits High Value with Fewer Deals
Venture capital funding in the U.S. and European biotech sectors experienced notable growth in 2024, with the industry raising $23.36 billion—a 27% increase from 2023 and the second-highest total in a decade, second only to 2021’s $26.64 billion. This significant increase occurred despite a reduction in the number of deals, which fell to 629, the lowest volume since 2016. The data indicates a trend toward fewer but larger deals, as investors channel more resources into select opportunities.
Securing funding is becoming increasingly challenging for early-stage biotechs. Only 63% of VC deals in 2024 targeted early-stage companies, a decline from the five-year average of 71%. This shift highlights the growing need for startups to present compelling business cases with clear paths to successful exits to attract VC interest. The ability to demonstrate strong business fundamentals is becoming as critical as scientific innovation.
What VCs Want
Venture capitalists are now prioritizing biotechs with solid clinical data, experienced leadership, and strong exit strategies. Companies focusing on incremental improvements to existing treatments may struggle to secure funding in this competitive landscape. Instead, VCs are placing their bets on organizations that combine novel science with a track record of progress and clear milestones for advancing to the next phase.
In summary, while the biopharma sector shows promising signs of recovery in IPOs and VC funding, the landscape has shifted. For early-stage biotechs, the emphasis on both innovation and robust execution has never been greater.
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