The biopharma dealmaking landscape and what to expect in 2026

(upbeat music) - You're listening to The Top Line, brought to you by Fierce Farma and Fierce Biotech. I'm your host, Aila Ellison. (upbeat music) On the show today, we are trying to make sense of something that has felt a little contradictory in Biopharma. How can we be in a moment of record fire power and huge scientific promise and yet spend years in a deal-making slump? During the COVID years, activities spiked across the board, M&A, venture financing, IPOs, licensing deals, then the break slammed on. Valuations wobbled, uncertainty mounted around tariffs to Fed, the IRA, and drug pricing in both buyers and sellers started to pull back. Now, as we look toward 2026, the picture is changing again. There are fewer deals, but they're larger, later stage, and heavily concentrated in areas like neurology, weight loss, and immunology. At the same time, AI is moving from buzzword to workflow problem. China is emerging as a serious innovation hub and cuts to NIH and other federal science funding could quietly shape the next decade of pipelines. To unpack all of this, Fierce Farmas, Kevin Dunlevy, chats with Arda Ural, EY America's Life Sciences Sector Leader, about the deal making landscape in the bio-farmate industry. Let's get into it. (upbeat music) - Hello, Arda, thanks for being with us. I think to really understand where we're at now, we have to look at the business development landscape in the industry over the last few years. Back during COVID years, we saw something that was really kind of unexpected. We saw surge in activity. And after that, we saw a major decline in the volume of deals. And this included M&A transactions, events for capital, financing, IPOs, licensing deals. What was really going on those years, Arda, and just in general, across the board declined in this activity. What was that about? - Thanks for having me, and I'm pleased to talk to your listeners about the outlook in M&A and where they stand. And as you cold out, we have been through the pandemic years, which certainly disrupted the typical deer flow and we came down back from the singular event in the history and now we're at what I would call the normalization phase of deal making, going back to historical normals. So specifically, when the valuations cannot be agreed upon by buyers and the sellers, and the outlook for the buyer to really determine how to maximize and monetize the asset that they are buying. Of course, there's gonna be some hesitation on the buy side, which paused the deal making last year. We got excited in 2023 to 2024, JP Morgan, that we are maybe coming out of that pause, but I think we got a head fake from the market and kind of that sizzle fizzled. So going wanting to 2025 and then JP Morgan 2026, I sensed this similar feeling of we are going into this sizzle and the numbers are to back that up. And when we look at the year-to-date activity through the end of October, we saw about in the bio-farmist space, about 29%, 129 billion in terms of the value, 129 billion, in terms of value, which is up 43% from last year, which was 90 billion. But as you called out, there are fewer deals. There are about 70 of them and down 29%. And that's, I think, causing the skewing of the average deal size up from 1 billion last year to 1.9 billion this year. So when the farm abies, they buy bigger than they used to last year. And they also buy later stage. So when you look at the marketed and phase three products, they made about 58% of the deal activity by value. And that's up from last year, which was about 50%. So clearly the preference is for de-risk assets, which we understand because in the grand scheme of things pharmaceutical companies have about $300 billion of a gap that they need to backfill with the top line erosion due to patent explorations. And that's why they tend to prefer later assets in their acquisition activity. So that's, I think, I hope you use you an overall sense of the business development dynamics are working out. - So what really has happened recently to get the valuations back up? How much of that has to do with the, just in general, the economy improving? And has there really become less uncertainty over the last 10 months since Trump took over? Has there been some effect as over that time that oh, good idea. - Investors were often clearly. - The answer is probably going to take 10 hours because there's so many things to talk about in that uncertainty. I think the uncertainty number one was the tariffs, how it would hit the pricing as well as the cost and where you're going to manufacture. So the global trade was number one, uncertainty number two, uncertain towards the FOMC and Feds direction, which we understood starting to calm down since September. So the tariffs impact had been muted to an extent with the deals that had been started to be cut with no immediate impact, which is fantastic for the industry. The Feds direction we talked about and also, I think the regulatory uncertainty, what's going to happen with FDA, what's going to happen with the NIH funding, DARPA, RPAH, all those have leaned in onto the valuations. And then, of course, the drug pricing and reimbursement, we had the IRA from last year, which the industry got used to, but then the most preferred nation got commindled with the tariff conversations that push people to direct to patient considerations. And in many things had to happen for these normalizations to come to bear. At this point, the news flows is somehow calm and I think the industry is going back to its roots of developing, the discovering and developing. Now, treatments to meet unmet medical needs and then for that reason, I think the industry is back on its day job, so to speak. So that's, I think, one of the one set of reasons why the deal activity was somewhat muted or paused. It seems to be calming. Now, in fact, I would add here, spends the carve-outs is a good indication that if you cannot know what the valuation will be, spends would be down and ahead and like all time low. Carv-outs, and that's another good indication why the companies were not sure about the valuation and they paused. Not just on the buy side, but on the sales side as well. - How about the FTC, are there, where are we at now? With the FTC and the Trump administration, are there indications that the FTC is taking a more, a more lenient approach to scrutinizing deals? - At least they are not in the headlines as they were last year, so to speak. I think Andrew Ferguson, who took over from Lina Khan has been voting with Lina Khan most of the time. It's not like a historical diversion or digression from the voting patterns, but I think we hear less of them in the news flow and then it deals. I think that doesn't mean in the backdrop there's no vocation in any deal that the FTC squashes need to be satisfied, but FTC is less of a factor or less of an unknown at this point than they used to. Last year, maybe that's an overall recognition. Again, it depends on the deals and then there's a lot of non-public conversations going on that we would not be privy to not. - We're seeing now that Trump is seeking big cuts in 2026 for NAH research grants. I'm not completely up to date on that, but that was the last I heard. How would this potentially affect business activity, do you think? - Look, I think NIH grants shape the ecosystem five to 10 years out. So any cut today is like I say the boiling the frog, so you won't realize it this minute, next minute, but in the end of the day, the frog will be boiled. So that is how the cuts in NIH feels because there are a couple arguments there. Number one, I think the administration was right to challenge that the indirect cost, which are not directly related to the research done, but was reversing the overhead and all the institutions. I think that could have been looked at, but that could have been looked at with a surgical scalpel as opposed to an ax. I think that was one point that could be looked at, but then otherwise cutting the largest venture capitalists in the world, which are about 40 to 48 billion dollars and dollars to expand, I think will, in the long term, hurt US competitiveness because that's the fuel that's the ecosystem going for being a dominant force or predominant force in biotechnology. And frankly, makes China to be more competitive in the long term if the NIH grant issue has not been fixed. And it's not just NIH, the DARPA and ARPAH are much smaller in number, but overall having that research funding that the private companies China to afford to do, this high-risk research funding would, again, some royalty payment down the road that comes with it, of course, but having that mechanism and having that vehicle to be cut off will certainly hurt the US competitiveness in the long term. Now, you've written that the, quote, therapeutic areas have been revitalized, unquote, with areas like immunology, CNS and weight loss therapies continuing to drive competition. Can you break this down a little bit, Arda? - Absolutely. So if you look at the deal flow, neurology and CNS, for the first time, I actually started matching oncology in 2025, which is absolute diversion from the past trends where oncology really dominated everything through and through. And we can add the cardiometabolic, both cardiology and metabolic diseases if you combine them with the GLP1, just a gold rush, so to speak. If you combine them, they are coming out as a formidable second and third, if you will, after neurology oncology. And we have seen a somewhat taming down of the rare diseases in I and I space recently in 2025. Those are the areas that attract most of the capital and deal activity when it comes to therapeutic areas. - Here are a few more treatment types that have gotten a lot of headlines lately, ADCs and radiopharmaceuticals. With all the M&A activity we've seen in these recently, are the investment opportunities getting exhausted, do you think? - The one area to look at is the PDU-1s, PDL-1s. At some point, there were like hundreds of them being developed and then the market shortly to south out. The same thing, I think we can say, for Selangene, there were so many cardiotherapies that the market could not bear it. Even if all of them were to be shown to be successful and clinic. So there's gonna be some natural shake off in the end of the ADCs and radiopharmaceuticals. I think radiopharmaceuticals earlier to that than ADCs. We should of course call out device specifics, multi specifics. They are getting smarter and smarter. We've got the new novel classes in molecular glued degraders. And I think the technology, the innovation is a very compelling and we are seeing some amazing results that we couldn't dream before in the clinic. So for that reason, there's certainly a fast mover advantage, or first mover advantage or fast mover advantage, meaning the fast follower that will certainly play and be sorted in the GLP-1. You saw the price competition surpassed anyone's imagination and evaluations, but that's the reason of what you call luck, formal fear of missing out. The FOMO feeling sometimes they get there because you get probably more uplift in your stock price, assuming you're a public company than from the deal. So multiple factors play in. And if you are also running a large pharmaceutical company as a CEO, CFO, you need to report something positive for the next quarter. And that also goes into play. There are many, there's a multifactorial space. So you need to be watching all those dynamics before you land on these days. Because if you look at the one thing I didn't call out before, if you look at the firepower of the industry, it is now all-time high at 1.87 trillion, $1 trillion, $870 billion, or it disposal all top 25 companies. So that certainly does not make the biopharma blink on the vi side. Of course, there's a walkaway point for any deal. But the balance sheet is strong enough to make up for the losses, to offset the top line revenue erosion, as a result of the-- I wouldn't call it patent cleft, because it implies there's an immediate drop-off. Not this time. That was the case in 2008/19. But these times, we are talking about obviously a lot of multiple antibodies. So for that reason, the willingness to pay somewhat extra is fine. And in fact, we have seen the deal premiums going up historically to 70% that they used to be 40%, 50% over the year. There's also the dynamic going on in the back. Another area drawing a lot of investment these days is AI. Can you talk about the AI landscape right now? Absolutely. We see a very quick update or adoption of AI in the pharmaceutical industry when you compare that to the digitalization 10, 15 years ago. And there are reasons for that. I think it is easier to find use cases. There are hundreds of use cases that have been ideated, tested and shelved. So now I expect you to be 26. We will have-- OK, now we have this AI gold rush. Now we have to think, how are we going to make our workflows a comedic AI-agentic capabilities? Which is the question that would be out like two years ago. Because how fast AI evolved from the generative AI to agentic AI has been stunning for industry. And for that reason, I think we are seeing their tremendous inflection point for how the industry will be able to use AI. The question is now, the adoption curve will probably be stalled somehow as the industry is figuring out, how do I do the change management with the individuals who will be using it in my company? What are the use cases that be the most sense? How do I adjust my workflow within the company these processes to accommodate an agentic AI? Because it's not like, I'm just equating this to, let's say, stage coach. And when the internal combustion engine came about, you just cannot put an internal combustion engine on top of a stage coach. So you need to redesign and imagine the stage coach to accommodate the internal combustion engine. So for that, I think what's going to happen in 2026. In fact, we are seeing some analyses coming out that the adoption curve is slowing down. However, the use cases are so compelling for lowering the SGNA of the farming industry. The SGNA is stuck at 27%, 28% for years, for a decade. And similarly, R&D is another big expense. And R&D actually kept increasing in terms of the percentage of the revenue over the last 20 years. So now we are talking about 18% of every dollar the farm has spent is going on to R&D. And just imagine the clinic of development capabilities and the discovery capabilities. And over the 18%, 90% is going to the development. Just imagine the platform that could bring you a predictive capability with some prescriptive action items that would improve your probability of success in your primary outcome. That would be golden. Just AI telling you, based on data and evidence, that you should change the following 12 things to make your 50% H-rate, 70% H-rate in the primary endpoint. Just that is the, I think, the really sweet spot. How AI can make a change in how we conduct our business. Yeah, that really amplifies the power of AI and why they're such a rush to it right now. Here's something else, Arda, that you mentioned earlier. China is really emerging as an innovation hub. What's going on there? And is it really just the system helping to spur the surge of licensing activity that we're seeing? I am just stunned how fast China can word is can. In the pandemic years, if you can think of 2021, US humbled China in terms of the speed and quality of the vaccines, which are ironic to under pressure right now, how the human species, the almost APNs, was just saved salvaged by the vaccines, the mRNA vaccines. And industry enabled that, again, with a big collaboration with the government at the time. So when you look at the China post pandemic last five years, they have prioritized the Chinese Communist Party in 2015 prioritized the biotechnology as one of their priority industries. And while we couldn't see that impact in 2021, that would make the pandemic a China win. Now we are seeing in 2025 a significant amount of China originated innovation. In fact, let me throw some numbers in the mix as of the end of the third quarter 2025. When you look at the number of dollars, the potential alliance deal value to be specific, is $61 billion, meaning the money coming out of the West into China was $61 billion, which is about a 35% of total investment, alliance investment in the world. So the third of the money is going to Chinese assets. Of course, these are assets deal during the sensitivity of doing business with China in China. These are all asset deals. But just imagine that number was $6 billion in 2020. Now $61 billion in 2020 was $41 billion. 2023 was $35 billion. Just how fast it just went up is just incredible. And so for that reason, China is no longer at me to fast follow or I think we are seeing innovation and there are systemic reasons. Number one, you can, the regulations are not as rigorous. So therefore you can move faster. But also, and also China, Chinese government made it a priority to lower the regulation. Maybe a playbook we should borrow from China. And then the second thing is the cost, of course. The cost is a fraction of what you do in the US. So the path here becomes like, get your first at human data in China. Get your phase one phase two in Australia because it's a very fantastic reimbursement. R&D tax credit at 43.5%. And then get your phase two phase three in the US in Europe to get to the BLA and the A studies. I think that is emerging as a trend in the world. Looking ahead, the 2026 ARDA, where do you see going on the M&A landscape, where a company is going to be focused with their business development efforts? I am more optimistic about 26 that I've ever been in the beginning of any year. Over the last couple years that we have been in conversations Kevin, because the underlying dynamics, number one, the externalities, the unknowns, somewhat are known. And the industry at least have developed certain measures to mitigate them internally. Yes, they are costly, but the output is somewhat within the realm of possibility. So that's number one. Number two, the underlying demand for technology is there with the $300 billion disappearing on the top line between 2021 and 28. So that is clearly pressing secular need for the industry to continue to buy technologies and it's going to be later stage technologies as we hold out. And I think you've got to keep an eye on China, how that will disrupt things. And you've got to keep an eye on AI, how it can in a long term, and I've three to five years, how it can be a differentiator for the US when you're competing with a low-cost Chinese labor. I think AI can help us skew the curve for the benefit of the US in that race. Here's another longer, probably a little bit longer term question, big picture question. Companies and you mentioned it earlier, companies are sitting on 1.8 trillion of firepower and patent cliffs looming for products will impact $200 billion in annual revenue by 2030. So doesn't this all mean that we're really hitting a crunch time for investment? I think we are hitting the sense of crunch time. And there is this secular trends that are telling us, we're encouraging us to think that way. Yes, in a short answer, yes. Here's another long-term question. Late in Trump's first term, we saw a huge surge in big deals, BMS cell gene, decayed ashire, Abbey Allergan, AstraZeneca, Lexion. In each of these cases, we saw a big pharma buying up another large company and not just for lucrative products, but what was also the potential in their pipelines? We've only seen a couple of these deals over the last four or five years. Do you think we're going to see any more of these mega deals at the end of Trump's tenure? Look, I think we never say never when it comes to mega deals, mega mergers. And yet they come with a lot of scrutiny and distraction from the outside, the scrutiny of the FTC, which is going to cause distraction, all the management to mitigate those or satisfy those concerns. And every quarter that you keep talking about merger integration, that's going to be a distraction from your organic growth. So for that reason, I think the target company should be large enough, but it should be done in a bolt-on fashion, so there is no overlap with existing business. So they will continue to operate as an almost standalone business of the acquirer. And in that case, you can just connect the back office, the HR finance, supply chain processes, and let you go to market and reimbursement and other commercial aspects to be managed somewhat independently or somewhat connected but independent to the mothership. So those models might still be happening. So if you have, let's say, a cardiovascular company, a metabolic company, you want to bolt that in into your mothership, I think that is still within the possible range of things that can happen. And yes, the dollars are mostly there, if not, I think the lowering fed rates will help to finance those deals. And private equity is actually very active in being the source. Either it's private credit or just direct deals. I think those are some positive enablers or that picture that you just described, but also you need to watch out the FTC and distraction. And also the synergy cost takeout is always a long-term game that farmer may or may not be the best to make those happen. So for that reason, I think we'd never say never for those large deals, but the underlying dynamic certainly asked for those given the top line erosion. Great stuff, Artif. A lot to consider here, and thanks a lot for being with us. Thank you for having me, Kevin. That's it for the top line. You can find out more about this topic in our show notes at beersfarma.com. Look for podcasts. And that's the bottom line from the top line.