Can policy uncertainty and record M&A coexist?

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EY - Jeff Greene

By Jeff Greene
Global Transactions Advisory Services Leader, Life Sciences

While organic growth remains an important driver for life sciences companies, there is an increasing shift toward inorganic growth drivers according to our latest Capital Confidence Barometer (CCB) survey of life sciences executives. Compared to 20% in October 2016, 25% of executives now expect growth to come from M&A activity with an additional 21% growth coming from joint ventures and alliances in the next 12 months.

EY - Expect growth

Life sciences companies are also on the hunt for alliances and acquisitions that can help them remain relevant in the digital age. The question is no longer whether companies should invest in digital technologies, but rather how they should be implemented — with what deal structures, partners and business models.

However, for nearly a quarter (24%) of respondents, implementing and enabling a digital innovation culture through change management has been the most difficult part of their digital transformation. An equal percentage cite maintaining their position as competitors adopt new technologies as a significant hurdle.

Despite the drive for deals that will position them to both survive and thrive, life sciences companies remain willing to walk away; 86% of executives say they have failed to complete a planned acquisition in the last 12 months. The reason? Almost half (49%) cited concerns about cybersecurity. Understanding cyber risks throughout the M&A and divestiture life cycle can preserve value and protect deal rationale.

Sixty-four percent of executives say that they have increased the frequency of their portfolio review process to capitalize on disruptive forces in their sector.

In doing so, life sciences companies are unearthing a broader group of assets, from legacy products to R&D candidates, where growth prospects have declined and are ripe for divestment. Conversely, portfolio reviews are also revealing core areas that life sciences companies want to bolster in an effort to drive scale and ease pricing pressures.

Portfolio optimization and a preference for bolt-on deals was also cited in our EY M&A Outlook and Firepower Report 2017, Will payer leverage and post-election optimism shift dealmaking into a higher gear?, as a key driver of acquisition activity in 2017. Our latest CCB survey reinforces this trend - 46% of life sciences executives expect their company to actively pursue mergers and acquisitions in the next 12 months, while 92% of life sciences companies with greater than US$5b in revenues are likely to pursue deals. Of those surveyed, 4 in 10 anticipate M&A activity will only improve over the next 12 months.

Medtech companies are even more optimistic, with 65% of executives expecting the market to improve. In addition, the executives surveyed reported an unusually full M&A pipeline — one third say they have five or more deals in the pipeline. Of the larger companies (revenues of US$5b+), 79% have more than three deals in their pipeline, and 55% of these expect their pipeline to grow in the next year.

EY - Pursue mergers and acquisitions

Acquisitions are likely to remain accretive versus transformative over the next 12 months. Only 6% of the deals in the life sciences pipeline are greater than US$1b in size compared with 16% from a year ago.

While some of this may be due to higher valuations, several US companies are waiting for potential tax reform to repatriate cash and execute larger deals. More than half of respondents (52%) say their largest deals are valued at less than US$250m. The vast majority of executives surveyed (79%) expect asset prices to increase or stay the same in the next 12 months.

We also expect that with geopolitical and policy uncertainty becoming the norm, fewer deals will be derailed than in previous cycles. Despite higher deal valuations, more than a quarter (27%) of executives expect deal completions to improve in the next year versus the last 12 months.

Changes to the US corporate tax code may unleash as much as US$200b in additional firepower, increasing competition for US-based assets.

Although Brexit in June 2016, the US election in November 2016 and elections in Europe have created uncertainty in the market, some see the policies coming out of these events to be advantageous for life sciences businesses. Interestingly, 32% of life sciences executives say that greater clarity around the EU’s Brexit negotiations has had no impact on their likelihood to invest in the UK.

However, changes to US policies are expected to spur M&A activity. The US administration’s recent announcement that it wants to reduce the corporate tax rate to 15% as part of a larger tax reform package may further motivate life sciences companies to transact. There is also the issue of cash repatriation by US companies. Changes to the US corporate tax code may unleash as much as S$200b in additional firepower, increasing competition for US-based assets.

EY - Pursue mergers and acquisitions

In terms of drivers for deal activity, strategic growth remains a top priority for boards as life sciences companies look to grow market share and expand into new geographies. Life sciences companies will also likely continue to pursue deals that drive scale to maximize reimbursement, ease pricing pressures and improve R&D capabilities in core therapeutic areas.

Life sciences companies also see M&A as the fastest route to future-proofing their businesses in an environment of technological innovation, digitization and increased competition from outside the sector. This helps explain why joint ventures and alliances are seen as a key component of any inorganic growth strategy. For 16% of life sciences executives, partnering offers faster access to innovation than making a full acquisition.


For more from the latest Global Capital Confidence Barometer – Life Sciences, download the full report pdf. The complete global cross-sector report as well as regional-, country- and other industry-specific reports can be found on