Lazard survey: Uptick expected for bolt-on M&A, broader use of AI

Nearly 300 biopharma leaders also weigh in on valuations, therapeutic areas of interest as they look ahead to the next year

New results from Lazard’s annual survey of biopharma leaders and investors paint a cautiously optimistic picture, envisioning an uptick in bolt-on M&A activity and a broader impact from artificial intelligence and machine learning technologies.

The 2024 Lazard Global Biopharmaceutical Leaders Study also suggests that although uncertainties around macroeconomics and the U.S. election may lead to continued volatility, dealmakers are finding ways to overcome a disconnect in how potential buyers and sellers value biotechs.

Survey respondents chose autoimmune, inflammatory and fibrosis as the top therapeutic areas of interest, showing continued strength in those sectors. The group of 291 participants included 238 executives and 53 investors.

“Investors exited the summer of 2024 with a lot of uncertainty,” Lazard’s David Gluckman told BioCentury, pointing to the deceleration of inflation, concerns about economic momentum, and geopolitical worries as contributors to risk aversion that has led to volatility. He noted that the recent 50-basis-point interest rate cut resolved one issue for the time being; the decision followed the survey’s completion.

Gluckman is vice chairman of investment banking and global head of healthcare at Lazard.

Gluckman stressed that pharmas’ need to drive growth, replenish their pipelines and strengthen franchises, particularly with looming patent cliffs, is a primary driver of bolt-on M&A activity. In the survey, 81% of respondents believe bolt-on M&A will continue to increase in the coming year; 67% said activity would be “somewhat higher,” and another 14% said it would be “significantly higher.”

Although the summer was relatively sleepy for biotech M&A, buyers have shown a willingness through the multiyear downturn to enter 10-figure, and even 11-figure, deals to gain mid-to-late-stage or marketed assets.

And although many pharmas have strong balance sheets — in some cases, from sales of obesity drugs or COVID-19 vaccines or therapies — Gluckman said R&D budgets have acted as a limiting factor. “If you’re bringing on a clinical development pipeline, you incur the capital costs of the acquisition up front, but also the obligations and desire to run clinical trials, which can affect R&D budgets and P&L operating capacity. Those were cited as limitations in the study, as a constraint to M&A.”

With regard to valuations, executives at larger pharmas — more likely the buyers in M&A deals — believed smaller biotechs were appropriately valued, while those at private or small-to-midcap companies thought biotechs were undervalued, in some cases by up to 30%.

A small uptick in IPO activity over the past couple of weeks is “too early to call a trend,” Gluckman said, although he said the interest rate cut “is helpful to all companies with long-dated cash flows.” The survey’s respondents showed a belief that too many companies are publicly traded, but should not be.

Those surveyed said AI and machine learning are already affecting R&D, with 43% believing its greatest effect thus far is on chemistry discovery. The responses showed a shift across five years’ time, with AI and machine learning having a growing impact on clinical development.

Gluckman noted that one effect of AI is a “democratization” of innovation. Away from larger academic centers, he said, it’s possible to “scour tens of thousands of documents that otherwise couldn’t be read, and connect the dots” in new ways.

Beyond the top areas of autoimmune, inflammatory and fibrotic diseases, the group identified solid tumors, rare diseases, neurology and metabolic disease as areas of high interest. Also provoking interest were newer antibodies, antibody-drug conjugates and radiopharmaceuticals, as well as precision medicine and AI/machine learning. Areas of declining priority included immuno-oncology, gene editing and RNA approaches.

“We were struck by how widely distributed their views were across a wide range of technological modalities, which to us reflects the level of excitement, and the breadth and depth of innovation, within each of these modalities,” Gluckman said.

The respondents generally felt that there will be few or no effects from any changes to the Inflation Reduction Act. They saw continued challenges around the integrity of data emerging from China, leading to some onshoring of manufacturing and R&D, although many were impressed with the country’s science.