Pharma – Will 2025 be the year?

Regulatory

The pharmaceutical sector remains a top priority for merger control authorities around the world, with many seeking to expand their powers to intervene in so-called "killer-acquisitions" ie, acquisitions of smaller companies aimed at preventing a competing product from reaching the market or eliminating a nascent competitor (see our CRT killer acquisitions article here for more information). However, at the same time there is growing political pressure in many jurisdictions (including the US and the UK) to pursue a pro-growth, pro-innovation agenda and encourage investment in key sectors including pharma. It remains to be seen how these competing concerns will impact pharma M&A in the coming months. Alongside merger control, foreign direct investment (FDI) regulation continues to be an important consideration for cross-border pharma M&A with regimes expanding and many imposing mandatory notification obligations in the sector. Ultimately, this means that merger control and FDI regimes are now a critical consideration on virtually every pharma M&A deal but one that can usually be navigated with early engagement and the right preparation. For more on managing the regulatory burden on transactions see our piece "Regulatory risk, some give some take".

Outlook for 2025

As we look ahead to 2025, biopharma innovators are expected to continue to focus on 2024's popular therapeutic areas and deploy their cash to achieve their strategic aims of top line growth and pipeline replenishment. It will be interesting to see whether appetite might improve for earlier stage assets – particularly those offering differentiated potential which could reward the companies willing to gamble on a high risk, high reward approach. Meanwhile, the announcement of J&J's $14.6 billion acquisition of CNS-focused Intra Cellular Therapies in the opening days of 2025 begs the question as to whether mega deals are to make their return (particularly with speculation rife as to whether we will see a less interventionist Federal Trade Commission under the new Trump administration).  We also expect to see continued interest in accessing science developed in China, whether through licensing (which has been a growing trend in recent years) or through M&A activity.

For generic players in the sector, we expect to see increased activity concentrated on growth and moves to position themselves up the value chain with a focus on higher barrier to entry, higher margin, differentiated products (such as biologics, specialties and niche products) as well as expanding geographical coverage in attractive markets like the US, the UK, Europe, LATAM and the Middle East.  With M&A an obvious tool to achieve those aims, generic focused companies are anticipated to play their part in an M&A resurgence in the sector.

Meanwhile (and at the risk of sounding like an echo from 2024), there is heightened anticipation that private equity (PE) will properly return to the table in 2025, particularly with predicted interest rate reductions on the horizon. The drivers remain, including substantial levels of dry powder and ever-lengthening hold periods. But we can now add to that another year gone by. Investor pressure on firms to return invested capital through divestments and deploy new capital is expected to increase – which is likely to drive activity.

Whilst an uptick in VC funding is expected, the sector's share of global VC deal count is expected to stay the same with the need for meaningful exit activity to justify additional allocation to the sector. The expectation is that 2025 will continue to see fewer but larger deals, with a focus on later stage assets supported by clinical validation (such as phase 2 validation) with commercialisation potential. Metabolic health (in particular, GLP-1 therapies for obesity), brain-computer interfaces, AI, personalised medicine and digital health delivery will be key themes for VC investment.

Overall, there is once again a feeling that the signs all point to a more upbeat year for pharma M&A activity in 2025. Of course, headwinds remain. Yet we are seeing broader acceptance that they are here to stay and must be navigated, rather than allowing activity to draw to a halt. Strategics have already been rolling up their sleeves to get on with it. If PE follows suit, the scene is set for an exciting year ahead.