Global Corporate Divestment Study

Life sciences watch

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Investors in life sciences are attracted to companies that allocate capital to drive shareholder value. Companies need to reposition themselves for growth in a sector hit by global austerity, patent expirations, rising R&D costs and extensive regulatory change.

1. Focus on the core

Leading life sciences players are refocusing their businesses around their most profitable and fastest growing units. Some companies now have a number of non-core assets resulting from expansion into new therapy areas, adjacent businesses and new territories.

To remain competitive, these companies need to identify divestment candidates that are less profitable but demand a large amount of capital and/or management time. Those divesting non-core and less profitable business lines are being rewarded by shareholders for doing so.

What’s driving this trend toward divestment? The chart below shows what life sciences executives identified as the major factors encouraging divestment in a product or business.

EY chart on why life sciences companies make divestments

2. Monetize non-core R&D projects

Life sciences companies can extract value from under-exploited assets through a joint venture or licensing. Yet most companies are not proactive in identifying ways of monetizing their R&D projects. In fact, more than half of executives react only to expressions of outside interest, and a third said they rarely look to monetize R&D or bring in external financing for projects.

Meanwhile, just 16% indicate that they regularly evaluate R&D portfolios for monetization opportunities. This population will gain the greatest benefit from successful divestments as they are most likely to be serial dealmakers who are accustomed to monetizing under-utilized assets and, therefore, will not “leave money on the table.”

3. Consider and target most-likely investors

Success in divestments requires a clear and accurate picture of each unit’s contribution in order to identify where opportunities exist. To achieve this, firms need to allocate costs and profitability effectively and, when potential deals are identified, they should act promptly to prevent value erosion. Early preparation and decisive action are keys to generating maximum revenue from divestments.

Considering the needs and perspectives of potential buyers should be integral to a divestment strategy. Private equity firms, for example, will need to carry out in-depth due diligence and see attractive IRR forecasts before committing to an acquisition.

Case study

South Korea-based life sciences company

The head of finance at a life sciences firm based in South Korea says that reviews are conducted continuously to identify local and international trends.

Frequent reviews enable the company to keep track of policies, risks and opportunities in different business units. In the process, “EBITDA is one of the most important aspects, as it assesses our company’s profit margin,” the head of finance notes. “It also indicates that our company is able to keep our earnings at a reasonable level. In terms of strategic elements, identifying subsidiaries that are technological leaders is fundamental to our long-term success.”

The company’s most recent divestment saw a six-month gap between signing and closing due to new, necessary corporate structures, including new legal entities and necessary trading permits. Ultimately, the divestment had a better-than-expected effect on the company’s valuation multiples.

When it comes to improving his company’s portfolio review process, the head of finance says areas that could be enhanced include obtaining better industry benchmarks, establishing a dedicated team and ensuring findings have a bigger impact on strategic decisions.

Overall, he believes that divestments are becoming increasingly important for life sciences companies. “Life sciences is entering a period of consolidation, global expansion, and a period of off-shoring R&D and clinical trials,” the head of finance says. “It is more important than ever for companies to monetize their R&D portfolios and maximize shareholder value. In order to do that, companies must regularly review their existing portfolio.”