Pharmaceutical companies have $700 billion for acquisitions and investment

The global pharmaceutical sector has around $700 billion at its disposal to acquire other companies and invest in research and development, according to Goldman Sachs Research. That war chest will be important as patents expire for some of the industry’s blockbuster drugs.

“The pharmaceutical industry will need growth, and is sitting on a tremendous amount of cash,” says Asad Haider, head of the healthcare business unit in Goldman Sachs Research. “The baseline expectation is that there is going to be continued M&A.” In addition, he says there’s been tremendous progress in innovation and there are signs that surgical procedure volumes are on the rise. MedTech is expected to be the industry’s best performing subsector in the second half of the year, according to a midyear investor survey conducted in conjunction with Goldman Sachs’ 44th annual Global Healthcare Conference.

We spoke with Haider about the outlook for promising drugs and stock returns for the rest of the year, as well as his takeaways from our conference, which featured management teams from more than 200 healthcare companies.

What topics generated the most interest at the conference?

There’s tremendous interest in M&A driven by the fact that pharmaceutical companies are facing big cliffs toward the end of the decade with roughly $200 billion in revenue that will erode as a result of patent expirations that will allow for competition from generic drugs.

The pharmaceutical industry will need growth, and is sitting on a tremendous amount of cash. The firepower that we’ve calculated — i.e., cash plus modest leverage — amounts to $700 billion dollars globally.  The baseline expectation is that there is going to be continued M&A, though there has been increased focus recently on regulatory uncertainty, particularly as it relates to larger deals.

Which drugs were in focus during the event?

Obesity drugs, for one. There has been a tremendous amount of innovation in this area and investor enthusiasm is high on what could be one of the biggest product cycles that this sector has ever seen. Some forecasts size the total addressable market as well north of $100 billion.

That said, discussions from the conference suggest the field is still in its commercial and scientific infancy.  We still have a lot to learn, given the complexity of obesity and its connection to many other diseases. To that end, it is highly unlikely the two currently approved drugs will adequately address the market over time.  There’s a lot going on in R&D pipelines across several companies trying novel approaches that either build on what we’ve seen or test new approaches all together.

We also heard about promising developments in areas like Alzheimer’s and gene therapy, as well as very promising innovation and scientific progress across several other therapeutic modalities.

What about the role of AI in healthcare?

The use cases of AI and machine learning across healthcare remain of much interest as it relates to drug discovery/design, clinical trials, healthcare analytics, tools and diagnostics, and personalized care. Several companies at our conference discussed the impact that these tools are already having across their businesses in areas such as speeding up clinical trials, patient identification as well as guiding R&D and innovation. It would be a mistake to underestimate the impact and reach that these technologies could have across the healthcare ecosystem. Many companies are looking aggressively at ways to integrate and leverage AI technology into their businesses, and we expect investments here to continue.

What was the mood at the conference among investors and management teams regarding the healthcare sector?

The healthcare sector had a dismal start to 2023, one of the worst first half performances in at least three decades. Many factors have played into that, including regulatory and growth concerns as well as exogenous factors such as macro rotations and the well-documented investor preference for large cap technology stocks.  Sentiment remains cautious at best, and the majority of respondents in our investor survey expect the sector to either perform in-line with the market or underperform for the balance of this year.

That said, there were several pockets of optimism: Management teams across multiple healthcare verticals spoke to strong second-quarter procedure volumes; in our investor survey, medical devices were voted as the area most likely to outperform.  Consumer-facing healthcare segments were also upbeat with demand strong and patient traffic continuing to recover.  In the biopharma sector, the pace and direction of innovation trends remains very promising.

What other issues are investors focused on?

A key concern that came up across several presentations was around policy and regulatory uncertainties that are weighing on the mood. Specifically, there is a lot of uncertainty around the Inflation Reduction Act (IRA) as it relates to drug pricing. We hosted a policy panel that spoke to an uncomfortably wide range of outcomes on how this could all play out in the coming years. And that theme was echoed through management team presentations as well given it is a key input in guiding their strategic decisions as well as the R&D and M&A outlook.

Additionally, the long shadow of post-pandemic normalization trends is continuing to prove challenging for pandemic beneficiaries like life sciences, tools, and managed care companies. On the flip side, pandemic laggards like medical devices are emerging stronger as surgical and elective procedure volumes recover and normalize, and cost pressures abate.

This article is being provided for educational purposes only. The information contained in this article does not constitute a recommendation from any Goldman Sachs entity to the recipient, and Goldman Sachs is not providing any financial, economic, legal, investment, accounting, or tax advice through this article or to its recipient. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, express or implied, as to the accuracy or completeness of the statements or any information contained in this article and any liability therefore (including in respect of direct, indirect, or consequential loss or damage) is expressly disclaimed.