By Ailsa Craig and Marek Poszepczynski, portfolio managers of International Biotechnology Trust (IBT), for Wealth DFM
After years of subdued deal-making, biotechnology M&A is firmly back — and its return carries major implications for investors. With big pharma facing looming patent cliffs and leaning ever more heavily on biotech innovation, revived acquisition activity is once again proving a critical engine of value creation. From pre-bid rallies to the growing use of contingent value rights, this new wave of deals is highlighted in Ailsa and Marek’s latest analysis as well as why the sector’s renewed momentum matters for long-term portfolios.
Following a prolonged hiatus, merger and acquisition (M&A) activity has returned to the biotechnology sector. In the recent months, there have been several high-profile acquisitions, including a bidding war for Metsera between Pfizer and Novo Nordisk, something rarely seen in the sector. This matters because M&A is a natural and recurring driver of value in biotechnology.
With a large patent cliff approaching, major pharmaceutical companies face a pressing need to replenish their pipelines. Yet, years of retrenchment from early-stage research mean few have the internal capability to generate new blockbuster drugs themselves. Meanwhile, biotech companies have stepped into the innovation vacuum left by pharma and now account for the vast majority of new FDA drug approvals.
The result is a symbiotic relationship in which pharma companies use their balance sheet strength and strong cash generation to acquire the most exciting and innovative biotech businesses to replace revenues lost when patents expire, putting their superior manufacturing and distribution muscle at the disposal of the biotech product
Despite the compelling strategic logic, M&A in the biotech sector slowed over the last couple of years, with political and regulatory uncertainty weighing on activity. Under the Biden administration, the Federal Trade Commission (FTC) adopted a tougher stance on large healthcare deals, making pharma management teams cautious about pursuing M&A. More recently, wider policy risks – from tariff disputes and drug-pricing reforms to concerns over funding for the US Food and Drug Administration (FDA) – have made acquirers more cautious about deploying capital, eagerly waiting for clarity.
This wariness now seems to be fading as the political backdrop stabilises and visibility improves, prompting a marked re-acceleration in M&A. For investors in the healthcare space, the return of deal-making is once again highlighting the role of M&A as a key mechanism for value creation.
The pre-bid rally
While there is often a sizeable bid premium when a deal is announced, that is only part of the story. In practice, value creation from M&A is a continuum, not a single moment in time.
Quarterly earnings reports, management commentary and analyst calls can provide valuable signals about where large pharma companies may be looking to strengthen their pipelines. As that information filters through, speculation from investors and the media can begin to influence share prices well before any formal bid emerges. This typically drives broad performance across the relevant sub-sector, with many stocks potentially benefiting.
As interest builds and media coverage becomes more focused, the gains often start to narrow to the most likely targets. Finally, when a bid does occur, there is frequently a further leap in the share price to the level at which the bid is struck. This is often where the bulk of the return is captured, but the scale of the premium varies, depending on how much a share price has already risen in response to speculation.
For example, SpringWorks Therapeutics was acquired by Merck KGaA in April at a modest uplift of around 5% to the previous day’s price, but the shares had already risen almost 30%, from $35 to $45, in the weeks leading up to the bid due to confirmation that discussions were going on.
Upside beyond the bid
While there is a continuum of upside before a bid is received, it doesn’t stop there. Even after an acquisition, investors can continue to benefit from successful exits from the portfolio.
Many deals these days come with ‘contingent value rights’ (CVRs) attached. CVRs are a mechanism that allows shareholders to retain exposure to future milestones, such as a positive trial outcome, regulatory approval or meeting defined sales targets. They act as a form of risk-sharing between buyer and seller, helping to bridge valuation gaps when a target company’s lead asset still carries uncertainty. Some CVRs are publicly tradable, though most are private and pay out only if conditions are met. These offer the potential for additional future upside after the deal is done allowing shareholders, in effect, to have their cake and eat it.
Overall, this represents a compelling opportunity. Biotech is an area of incredibly exciting technological progress and potential, yet has not seen the widespread popularity among investors that other themes, like Artificial Intelligence, have recently seen. For long-term investors, we believe biotech’s combination of innovation, attractive valuations and renewed M&A momentum positions the sector well for the years ahead.
