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Life sciences companies regain M&A appetite

Global Capital Confidence Barometer | Life sciences highlights | 15th edition

Deal intentions bounce back to near-record highs.

After a brief hiatus earlier this year, dealmaking intentions among life sciences companies have returned to near-record highs, according to the 15th edition of the Capital Confidence Barometer. At the same time, deal pipelines, a major leading indicator, are accelerating, with 43% of executives indicating that they are working on five or more transactions, up from only 6% a year ago. On average, companies have increased their new deal potential to four from three 12 months ago.

They have also raised their outlook for closing deals in the next year, with a mean of just over two, up more than 30% from our survey in April 2016 and up 10% from a year ago.

Filling growth gaps

Pressure from payers and politicians on pricing continues to take its toll on growth projections. Growing market share and acquiring innovation ranked highest as drivers of dealmaking as companies leverage M&A to help fill growth gaps.

The appetite for larger deals, however, appears to be on the wane. This may reflect a combination of factors, including reduced firepower for M&A as more debt and lower equity valuations diminish the capacity for larger deals. Instead, there seems to be a shift in strategic focus toward smaller bolt-on deals in targeted therapeutic areas that will boost pipelines for future growth.

Focusing on the US

Dealmakers have also turned more of their attention to the US, which has become the fastest-growing life sciences market. Life sciences sales for US companies have risen nearly 10% as emerging markets decline and the European Union remains sluggish. In fact, the US accounted for nearly 90% of M&A activity over the past year.

We should also note that deal discipline has improved. Executives are more willing to walk away from deals citing valuation gaps and competition, as well as better due diligence. And, while valuations had dropped at the time of survey, post-US election we are seeing them come back — making targets more attractive — while sellers expectations have not, or at least, not yet.

Moving beyond election jitters

Finally, it is important to point out that this survey was conducted in the months before the US election — a cautionary period marked by political and regulatory uncertainty that seemed to pause M&A intentions and activity. With the election now behind us, we could very well see caution turn to confidence as the sector begins to tap into those robust pipelines reported in our survey, unleashing a wave of pent-up M&A.

One indication of post-election confidence was the immediate surge in capital markets in the days after the election. Biotech and pharma stocks, the biggest losers of 2016, enjoyed particularly significant gains — and in turn, increased firepower for M&A. But even with pre-election uncertainty no longer an issue, how deal sentiment actually plays out in the months ahead remains to be seen.

EY - Jeff Greene

Jeff Greene

EY Global Transaction Advisory Services Leader

Life Sciences

+1 212 773 6500

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