Dealmakers caution not to expect a quick rebound in U.S. healthcare mergers and acquisitions after the second-biggest slump since 2000.

“It’s likely to be a slow start to the year,” said Rick Landgarten, the global head of the healthcare and real estate advisory teams at Barclays Plc. Dealmaking prospects will depend at least in part on whether people believe inflation has peaked, which would help calm equity markets and allow debt costs to normalize.

“If that happens, we are likely to see M&A volumes pick back up in the second half of the year,” Landgarten said. “There will then likely be a surge of deals that were either in the works or waiting to come to market when things slowed down mid-last year.”

Landgarten, along with other bankers as well as M&A lawyers, shared his predictions ahead of this week’s JPMorgan Chase & Co. healthcare conference in San Francisco, the biggest in-person gathering of the industry in three years.

The conference follows a year in which deals by U.S. healthcare companies fell 43 percent from a record of almost $386 billion in 2021, according to data compiled by Bloomberg.

Biopharmaceutical companies last year announced the fewest deals since 2013. They finally started writing big checks, though, with Amgen Inc.’s $27.8 billion deal for Horizon Therapeutics Plc and Pfizer Inc.’s $11.6 billion deal for Biohaven Pharmaceutical Holding Co. pushing volume up by 36 percent to $82.8 billion, the data show.

Tough debt financing markets drove steep declines in healthcare services and medical technology transactions, where private equity firms have historically been among the most active.

Medtech deals slumped 66 percent to $50.2 billion with Johnson & Johnson’s $17.3 billion purchase of heart pump maker Abiomed Inc. the only deal to surpass $5 billion. Medical device companies also have gotten hit by surging costs due to supply chain issues.

“We expect to see a bit of a rebound in medical technology and life science tools and diagnostics as well after a relatively slow year in 2022,” said Mike Gaito, JPMorgan’s global head of healthcare investment banking.

Healthcare services companies, which include providers, insurers and those that serve them, announced $61.6 billion in deals, 67 percent less than the previous year, as the stock market rout removed IPOs as an exit option for many private equity backers and made sales tougher. The deals that did happen typically involved heavyweights such as Walgreens Boots Alliance Inc., UnitedHealth Group Inc., CVS Health Corp. and Inc.

“With the tough syndicated finance market and turmoil in the public markets, the balance of power has flipped back to the large cap corporates,” said David Blais, senior managing director in Guggenheim Securities’ healthcare investment banking group.

Drug Pipelines

Advisers say large drugmakers are likely to be the most active this year because they’re flush with cash and need to bolster drug pipelines.

Global pharmaceutical companies are set to lose some $200 billion in revenue from now to 2030 as top-selling drugs go generic, according to estimates from Subin Baral, EY’s global life sciences deals leader. They have $1.4 trillion of firepower available for transactions, a record, according to an EY report set to be published that was reviewed by Bloomberg News.

“We are pretty bullish about 2023,” Baral said. “Bigger pharma and medical device companies are facing lots of headwinds but the fundamentals are strong. We expect lots of bolt-on deals, smaller than $40 billion for biopharma and less than $10 billion for medtech.”

As the macroeconomic outlook darkened, pharmaceutical companies became more interested in buying more mature biotechs, like those with at least one approved, revenue-generating drug.

“That contrasts with the push we had seen towards taking more risk and acquiring earlier-stage assets during the few years leading up to 2022,” said Punit Mehta, also a senior managing director in Guggenheim Securities’ healthcare investment banking group.

Amgen’s Horizon deal will give it nearly a dozen approved drugs and Pfizer’s Biohaven deal gave it an approved treatment for migraine headaches.

But advisers say there aren’t enough of those so-called mature assets to go around.

Risks, Expectations

“A lot of the targets have risks associated with them or have really high value expectations that are still grounded in stock trading highs from 2021 or 2020,” said Barbara Borden, co-chair of the Cooley law firm’s M&A practice.

Borden said she expects more deals in the $3 billion to $5 billion range.

With one closely watched gauge of biotech stocks down 53 percent from February 2021 highs, many biotech CEOs aren’t yet ready to sell.

“We still have a disconnect between expectations and valuations between development-stage biotech and large pharma so that’s caused a lot of deals to be put on hold,” Sidley Austin M&A Partner Sharon Flanagan said. “Once that disconnect resolves itself, I think we’ll see more sales.”

Here are some other predictions from bankers and lawyers for what’s ahead:

Maren Winnick, Evercore senior managing director, who helps lead biotech investment banking:

“A lot of the early stage companies went public in 2020 and 2021 sometimes with no clinical data or when they were just entering the clinic. Now many of these companies will need to raise capital in 2023 — they are either betting on data to catalyze a financing or they need to do something strategic. But those aren’t really the companies that Big Pharma is excited to acquire. I worry that without a robust financing market, we will lose many of these companies as well as their science.”

Shahab Vagefi, THL Partners managing director:

“Rate hikes are generally expected to slow down or stabilize in 2023. At that point the credit markets should stabilize a bit and I think overall folks are hopeful that things will start opening up again in Q2 or Q3. You still have a lot of money on the sidelines. It feels like 2023 should be more active certainly than the second half of 2022 because you’ll be further away from those 2021 valuations.”

Kay Chandler, chair of Cooley’s global life sciences industry practice:

“The FDA has made remarks that lead people to believe they’re getting less flexible on regulatory approval paths and companies are thinking, ‘Wow I’m not certain about regulatory outcomes and I have limited resources, so maybe I really do have to accept this bid even if I don’t think it it accurately reflects the value of my company.’”