The nature of biopharma M&A changed dramatically in a year. After a period with no deals over $5 billion, there are now seven or eight such transactions, reflecting a pivot by large pharma to acquire de-risked assets with large market potential to offset looming patent expirations.

Contrary to seeking fully de-risked assets, pharmaceutical companies often prefer acquiring companies with some remaining clinical risk. This strategy allows them to leverage unique insights on early data to acquire assets at a better valuation, creating an opportunity for outsized returns before the value is obvious to others.

After years of focusing on de-risked late-stage products, the M&A market is showing a renewed appetite for risk. Recent large deals for early-stage and platform companies signal a return to an era where buyers gamble on foundational science.

Recent biotech deals are setting new valuation records for companies at specific early stages: preclinical (AbbVie/Capstan, ~$2B), Phase 1 (J&J/Halda, $3B), and pre-Phase 3 (Novartis/Abitivi, $12B). This signals intense demand for de-risked innovation well before late-stage data is available.

Pharma's renewed interest in neuroscience is not for early-stage discovery. They are underwriting late-stage, de-risked assets with human proof-of-concept, understood mechanisms, and biomarker data. This strategy allows them to buy optionality on validated programs while avoiding the high cost of early failures.

Novartis's DM1 failure joins other challenging neurology acquisitions like AbbVie's Cerevel. Diseases with subjective endpoints are proving exceptionally risky for M&A. Another negative result, such as with Bristol's Karuna deal, could make pharma reluctant to acquire development-stage neuro assets until they are fully de-risked.

The "takeout candidate" thesis often fails because corporate development teams at large firms won't risk their careers on optically cheap but unprofitable assets. They prefer to overpay for proven, de-risked companies later, making cheapness a poor indicator of an impending acquisition.

With patent cliffs looming and mature assets acquired, large pharmaceutical companies are increasingly paying billion-dollar prices for early-stage and even preclinical companies. This marks a significant strategic shift in M&A towards accepting higher risk for earlier innovation.

Following the costly trial failures of Novartis and Novo Nordisk, investors are expected to become highly risk-averse toward cardiovascular drug development. This will create a challenging funding environment for startups in the space as capital shifts to less risky therapeutic areas.