Life sciences companies to face new capital challenges in pursuing deal strategies in 2010, finds Ernst & Young
New York, Moscow, January 13, 2010 – An in-depth survey of senior executives in the life sciences sector found that more than half expect to see strengthening economic performance in the industry during the coming year, even while most believe the broader economy will continue to lag. Despite this growing optimism, the lingering effects of the financial and economic crisis will present life sciences companies with unique challenges in 2010 that will force even greater focus on managing and deploying capital effectively. These and other findings were released in Why capital matters, a global study of senior executives by Ernst & Young's Transaction Advisory Services.
The cross-industry study, conducted in September and October of 2009, included responses from 39 senior executives from life science companies with revenue of US$250 million or more.
With financing conditions in the life sciences sector beginning to improve, the majority of these respondents believe that transaction opportunities will be plentiful in the coming year, with a strong majority of respondents rating the outlook for merger and acquisition activity as “favorable” or “very favorable” over the next 12 months, and nearly half of respondents signaling that they are likely to execute an acquisition in the next 12 to 24 months.
Capital considerations to drive transactions in 2010
Even as deal activity accelerates, the impact of the recession and selectively constrained capital markets will keep some would-be acquirers on the sidelines, and force others to reevaluate how they structure and fund their transactions. Among the findings:
- 77% expect industry consolidation to accelerate, with the primary drivers being economies of scale, geographic reach and strengthening the core business.
- 64% of respondents would like to take advantage of deal opportunities that arise, but more than half of this group feels restricted in their ability to properly execute a robust transaction strategy, in part due to concerns over accessing or deploying capital.
- 46% see an increase in distressed asset sales in the next 12 months, but only 28% feel they are well positioned to execute a deal quickly if an opportunity presents itself, resulting from capital issues as well as challenges in buying troubled companies.
“In 2010 and beyond, the ability to respond quickly to transaction opportunities and threats that arise in all key geographies will be a key point of distinction between the winners and losers in the sector,” remarked Carolyn Buck-Luce, Ernst & Young, Global Pharmaceutical Leader. “To be truly ‘transaction ready’ in today’s economic climate, companies will need to give top priority to initiating an integrated program to manage capital most effectively, and to build greater flexibility throughout their organizations to act quickly and smartly.”
“Given continued uncertainty, enterprise-wide adaptability has become a valuable strategic asset,” adds Jeff Greene, Ernst & Young, Global Transactions Leader for Life Sciences.
Ernst & Young highlighted several steps life sciences companies should consider taking to improve their ability to execute transactions in 2010:
- Increase acquisition readiness by maintaining sufficient cash and financing capacity needed to react decisively to opportunities, as well as preparing a watch list of desired transaction targets, enhance skills needed for buying distressed assets, particularly out of bankruptcy processes.
- Develop compelling and aligned value propositions for both sellers and buyers, that go beyond just the financial aspects of the deal.
- Improve divestiture readiness by systematically reviewing the business and product portfolio, allocating corporate overhead and shared services costs rationally, and cultivating world-class sell-side capabilities.
- Build a broad repertoire of deal structuring capabilities to accommodate third-party financing shortfalls and buyer/seller valuation gaps.
- Evaluate the valuation and regulatory compliance implications of pending changes in volumes and reimbursement rates as a result of healthcare reform in major markets.
“While the worst of the funding crisis may have passed for emerging life sciences companies, their management, boards and investors increasingly see an M&A exit as the preferred route—as compared to taking on the risk associated with raising sufficient capital to go it alone,” said Glen Giovannetti, Ernst & Young, Global Biotechnology Leader. “Being prepared to opportunistically execute such a transaction at any stage of development is key to maximizing value for shareholders.”
“Russian companies are also focusing on mergers and acquisitions”, says Dmitry Khalilov, Ernst & Young, Partner, Head of the Pharmaceutical Group in the CIS. “The approach is characterized by a focus on generic companies, including Western companies. Also, the reform being carried out by the state is inducing state corporations to seriously consider acquisitions on the pharmaceutical market.”
About Ernst & Young’s Global Life Sciences Center
Ernst & Young’s Global Life Sciences Center brings together a worldwide team of professionals to help life sciences companies address their challenges at every stage of development. From the emerging biotech or medtech firm to the well-established, global pharmaceutical company, our industry teams bring deep experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify implications and develop points of view on relevant industry issues. Whether it’s forming innovative alliances, improving operations, new regulations or exploring new markets, we can give you a clear perspective on how to drive value in an increasingly complex, competitive and risk-driven environment. It’s how Ernst & Young makes a difference.
About Ernst & Young
Ernst & Young is a global leader in assurance, tax and legal, transaction and advisory services. Worldwide, our 144,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Ernst & Young expands its services and resources in accordance with clients’ needs throughout the CIS. 3,400 professionals work at 16 offices throughout the CIS in Moscow, St. Petersburg, Novosibirsk, Ekaterinburg, Togliatti, Yuzhno-Sakhalinsk, Almaty, Astana, Atyrau, Baku, Kyiv, Donetsk, Tashkent, Tbilisi, Yerevan and Minsk.
For more information, please refer to www.ey.com.