Within just the first quarter of 2023, the biotech sector already has its first mega-deal that at $43 billion is worth two-thirds of the Top 10 largest pharma M&A deals of 2022 combined. And in the world of pharmaceuticals, mergers and acquisitions (M&A) can be just as critical as scientific discoveries.

These types of deals have helped bring about some of the most important medicines today, from cancer treatments like Keytruda to anti-inflammatory drugs like Enbrel. As such, it's no surprise that big pharma companies are always on the lookout for young biotech firms with cutting-edge technologies.

Over the past few years, pharmaceutical M&A has reached record highs, as large drug makers have sought out acquiring the more innovative biotechs for new drug candidates. These deals have often focused on cancer research, which has seen major advances in clinical trials and generated huge profits for drugs that make it to market.

However, these acquisitions have come with a hefty price tag. Premiums on biopharma deals have frequently exceeded 100% in recent years, as biotechs have been able to attract large amounts of funding from both private investors and public markets. This has forced potential buyers to offer even more money to secure deals.

It’s projected that worldwide the immune-oncology drugs market is expected to reach $120.37 billion in 2026 at a CAGR of 14.3%, while the global clinical oncology next generation sequencing market is also projected to grow at a 14% rate through 2032.

While M&A activity was high in 2018 and 2019, it slowed down considerably in 2021 and 2022. Analysts and industry experts have been predicting a rebound for some time, but so far, it hasn't happened. Some speculate that new challenges and changing attitudes among buyers may be factors in this decline.

One major factor driving this trend is the ongoing demand for cancer treatments. Oncology drugs are among the most expensive and profitable medicines, and the market for cancer therapies is only getting bigger. As such, big pharma companies are keen to snap up biotechs with promising cancer drugs in development.

This is not a new strategy. In 2019, the parent company of blockbuster cancer drug Revlimid was acquired for $74 billion. Another notable deal that year included the $8 billion acquisition of the maker of several oncology drugs including LOXO-292, LOXO-305, and Vitrakvi (larotrectinib). These deals underscored the importance of cancer drugs in the pharma industry and set the stage for further M&A activity in the future. Overall, the biotech sector’s M&A activity exploded in 2019, to the tune of $357 billion.

Is 2023 M&A activity shaping up to reboot to 2019 levels?

While it is still early in the year, there are already signs that M&A activity is picking up steam.

It remains to be seen whether 2023 will be a year of mega-deals like 2019, but the signs are promising. With many big pharma companies looking to diversify their portfolios and gain access to promising cancer drugs, it is likely that M&A activity in the cancer drug space will continue to be a major driver of industry consolidation in the coming years.

The largest deal of 2022 came during the last month, for $27.8 billion at a 48% premium over the closing price prior to reports of the deal, and 20% over closing price prior to the official announcement. However, that deal wasn’t necessarily an oncology asset transaction, whereas two of the Top 5 and 4 of the Top 10 largest deals of the year did involve cancer drugs or assets.

So, what can we expect in 2023 and beyond? It's difficult to predict with certainty, but there are some signs that M&A activity in the oncology space may continue to be strong. For example, a number of promising cancer drugs are currently in late-stage clinical trials and may soon be approved for commercial use. This could make smaller companies with valuable cancer assets even more attractive acquisition targets for larger pharmaceutical companies.