According to Ernst & Young (EY), 67% of merger & acquisition investment in 2023 came specifically from big pharma, compared to 38% in 2022. A number of deals between healthcare companies have already been announced for 2024, leading to the potential for growth in the category.

Arda Ural, EY Americas Industry Markets Leader for Health Sciences and Wellness, sits down with Yahoo Finance Anchor Julie Hyman and Healthcare Reporter Anjalee Khemlani to discuss state of mergers & acquisitions in the healthcare sector and what it may look like going forward.

Ural explains part of the reason for the uptick in M&A activity: "When the Fed gave the signal that they will pause the hikes, I think that was a good relief for the industry. And the other thing is the industry has been waiting for replenishing the top line with the right assets, with the late de-risked assets. The industry has a challenge in the amount of $350 billion over the next couple of years, between '23 and '28, to replace the loss of exclusivity that's... coming from losing the patents some lead biologics products."

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Editor's note: This article was written by Nicholas Jacobino

Video Transcript

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JULIE HYMAN: 2024 has already seen a number of deal announcements in the health care space. This coming after biopharma dealmaking saw an uptick last year. According to EY, 67% of mergers and acquisitions investment came from big pharma last year-- that's up from 38% in 2022. Joining me now EY America's industrial-- industry markets leader for Health Sciences and wellness Arda Ural, along with Yahoo Finance's Anjalee Khemlani.

Arda, thank you so much for being here, first of all. You were just telling us in the break that not only did we see an uptick last year, we really saw an uptick at the end of the year in this activity. What happened? What was the motivation for that?

ARDA URAL: Indeed. We typically look at a number that is $200 billion is a value of the total deals, and it was creeping up to the 200, but in the last couple of weeks of the year we saw a mad dash going over $215 billion. The reason for that is multiple, but one of the signals that the industry was waiting for was how is the, kind of, uncertainty is going to resolve over the next couple of months. And when the Fed gave the signal that they will pause the hikes, I think that was a good relief for the industry.

And the other thing is the industry has been waiting for replenishing the top line with the right assets-- with the late derisked assets. The industry has a challenge of-- in the amount of $350 billion over the next couple of years between '23 and '28 to replace the loss of exclusivity that's resonating from or coming from losing the patents of some lead biologics products. And as a result, that was the secular need is there, the trend is there, they were just waiting for a signal. I think we expect the deal momentum in 2024 will continue on that front.

ANJALEE KHEMLANI: That's definitely good news. I'm glad you brought up LOE's because we know that is one of the key focuses for a lot of large cap companies looking at $192 billion hole for the next four years, including this year. And that is with $1.37 trillion in firepower as you put it in the report, so talk to me about that because that is-- we're looking at almost double the loss of exclusivity since the last four years.

So, that is a lot of firepower on hand, plus the complications of the IRA and the political landscape coming up this year. What do you think are some areas that M&A is going to happen?

ARDA URAL: So the as you indicated, Anjalee, the need is there because they need to replenish, but also the balance sheet strength is there-- that's what we are measuring since 2014. Now the number for them to deploy as a capital is $1.4 trillion-- which is all time high-- matched to what we had last year. And now I think you are seeing the balance sheet converting to income statement. The challenge here is for the industry-- are there enough assets in the derisk late stage on that development front in that maturity for them to bolt on, to continue.

For that reason, what we see is like a tale of two cities in the biotech-- those who have the late assets, products come into market or in markets. So about 73% premium one day post deal announced versus 50 plus percent last year. So you saw assets, kind of, really picking up. This is the kind of a good side of the tale of two cities. On the other side, the innovation-- obviously coming from startups and early stage companies-- 27% of those companies in the biotech do not have cash to sustain their operations over a year. So, you've got, kind of, really in the biotech, you are seeing a tale of two cities.