With so much macroeconomic uncertainty, the recent mergers and acquisitions spree has lost momentum apart from one sector.

Big pharmaceutical firms are awash with cash, yet patent cliffs (expiration of patent protection) present challenges which can be partially fixed by buying smaller biotech firms with products almost ready to go to market.

International Biotechnology Trust’s (IBT) Ailsa Craig and Marek Poszepczynski told investors: ‘We believe that big pharmaceutical companies, especially those with sound balance sheets stemming from Covid-19 vaccines and treatments sales, will be looking to deploy their cash and build their drug pipelines.’

Investment manager Sven Borho at Worldwide Healthcare Trust (WWH) told Shares he expects M&A to accelerate in 2023 in this part of the market. To exploit the theme, Borho has constructed a basket of potential targets consisting of 25 to 30 names which has already seen some takeovers.

He sees Pfizer’s (PFE:NYSE) recent $43 billion deal to buy biotech firm Seagen (SGEN:NASDAQ) as a turning point for M&A in the sector. A year ago, Seagen rejected a $230 per share offer from Merck (MRK:NYSE) as well as a reduced $195 per share offer three months later. However, in March this year the board of Seagen agreed a $229 per share offer from Pfizer.

There are signs big pharma is becoming more aggressive and buying riskier earlier stage biotech. That is the view of Rod Wong, chief investment officer at RTW Venture Fund (RTW).

Speaking on the Shares / AJ Bell Money & Markets podcast, Wong said that Merck’s $10.8 billion takeover deal for Prometheus Biosciences (RXDX:NASDAQ) in April was interesting because the company is pre-revenue which shows big pharma companies are ‘really planning ahead’ and taking more risks to address patent expiration. The deal was struck at a 75% premium to the prior market day’s closing price.

Prometheus was RTW’s largest position representing 14.8% of net asset value as of 31 March 2023 and the transaction contributed to a 13% increase in April’s net asset value to $358.6 million.

It became the investment trust’s second portfolio position to be acquired in 2023 after Cincor’s takeover by AstraZeneca (AZN) which was priced at a 206% premium.

More evidence for big pharma moving up the risk spectrum is AstraZeneca’s $2 billion collaboration with UK cell therapy start-up Quell Therapeutics (9 June).

Life sciences investor Syncona (SYNC) previously co-led a $220 million investment into Quell and now owns a 33.7% stake. The latter’s technology allows scientists to manipulate a patient’s immune response to reduce an overreaction.

On 12 June, Swiss pharmaceutical company Novartis (NOVN:SWX) announced the $3.5 billion takeover of US-listed kidney biotech firm Chinook Therapeutics (KDNY:NASDAQ) for $40 per share, representing a 66% bid premium.

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