20 minute read 11 Jan 2021
Firepower doctors looking at X-rays

How the pandemic has changed the rules for life sciences deals

Peter Behner

EY Global Health Sciences and Wellness Strategy and Transactions Leader

Transformation leader in the development of new strategic direction for life sciences companies. Family focused. Loves fast cars, good wines and history books.

Pamela Spence

EY Global Health Sciences and Wellness Industry Leader and Life Sciences Industry Leader

Ambassador for outcomes-based performance and healthy aging. Advocate for women.

20 minute read 11 Jan 2021

COVID-19 became an unexpected M&A hurdle, as life sciences deal values failed to reach the annual new normal of US$200 billion.

In brief
  • Biopharmas showed a preference for late-stage assets in priority therapy areas as high target valuations increased dealmaking risks.
  • In 2020, medtechs inked fewer, bigger deals. With interest rates low, many increased their leverage, signaling an active 2021. 

Long before COVID-19 emerged, few life sciences executives expected a repeat of the 2019 mergers and acquisitions (M&A) show, when four megadeals drove the annual deal total to US$306 billion. With many biopharmas busy integrating the prior year’s acquisitions and with strong valuations and financings creating a seller’s market, odds were high that the M&A climate would cool. However, as COVID-19 accelerated in March, sending economies around the globe into hibernation, life sciences dealmaking experienced its own ice age.

With the reawakening of the US and European economies in the third and fourth quarters, life sciences dealmaking also warmed. However, any hope for a record setting year was long gone. In the end, total M&A value for 2020 was US$159 billion, on par with dealmaking totals of 2017 and 2018.  However,  a single megadeal – AstraZeneca’s December purchase of Alexion Pharmaceuticals – accounted for a quarter of the annual life sciences M&A spend.


US$159 billion

Potential deal value of life sciences acquisitions in 2020.

Setting aside the challenges of doing diligence and closing deals virtually, persistently high valuations for biopharma and medtech targets kept many would-be buyers on the sidelines. If there was any trend that signaled just how much capital was available to biotechs in 2020 it was the rise of special purpose acquisition companies (SPACs), which raised, or announced plans to raise, more than US$3 billion. To put that figure in perspective, it is roughly one third the amount that biotechs raised in initial public offerings in 2020 (US$9.6 billion).

Free flowing capital meant that valuations for both private and public biopharmas stayed buoyant throughout most of the year. This buoyancy ultimately proved an impediment for many acquirers. “For us and our acquiring colleagues, it is very difficult to evaluate assets and achieve a clearing price that also creates value for our shareholders,” says Elizabeth Mily, Executive Vice President of Strategy & Business Development at Bristol Myers Squibb.

  • Guest perspective: The importance of building a conviction case

    Elizabeth Mily
    Executive Vice President of Strategy & Business Development at Bristol Myers Squibb

    There’s never been a more challenging or inspiring time to be a biopharma dealmaker due to the emergence of COVID-19. I am personally inspired by the rapid development of potential treatments and vaccines for COVID-19, which have been enabled by the unprecedented collaboration to harness the innovation potential of the biopharma industry. At the same time, the need for a medical solution to the pandemic has brought a groundswell of support from more generalist investors into the biotech sector, causing valuations to climb to ever higher levels.

    These climbing valuations, combined with the very significant premium expectations in the biotech C-suite and board room, can make the path to an acceptable clearing price extremely challenging to impossible. For us and our acquiring colleagues, it is very difficult to evaluate assets and achieve a clearing price that also creates value for our shareholders. No one wants to be in the position of doing a large deal and then taking a write off because the assets are deemed to be impaired not long after the acquisition is finalized. The upshot: it is very tough for deal parties to arrive at any consensus on asset values, which is why there are so few bidders in the recent biotech M&A processes.

    The emergence in 2020 of special purpose acquisition companies (SPACs) has only compounded the situation. SPACs are companies with no commercial operations that are formed strictly to raise capital through an initial public offering (IPO) for the purpose of acquiring an existing company. As buyers, SPACs have a very different mindset – and different valuation constraints – than do strategic acquirers such as Bristol Myers Squibb. Not only do they create an alternative exit option for biotechs, but they are generally able to set a fixed purchase price that is greater than what a strategic buyer could, or would, propose. These investors are playing a very different game than biotech specialists.  

    Nonetheless, large biopharma continues to have an innovation imperative it cannot address solely through internal R&D. As a result of the importance of accessing externally sourced innovation, transactions will continue to occur in the current climate.  

    Sourcing the best external science that complements our strong internal capabilities and advances our pipeline and portfolio is an integral part of our company strategy.  Before doing a deal, we need to build a highly differentiated view, what I call a conviction case, about why an asset or collection of assets are worth more in our hands than the company currently developing them. Building that deep conviction requires a long-term assessment of the scientific and commercial opportunity.  It is difficult to build this level of conviction through reading an information memorandum, assessing data room materials or participating in a management presentation. In certain cases, there have been years’ long relationships before a potential transaction opportunity arises.

    Said differently, building these conviction cases does not happen overnight. It takes real time to invest in evaluation. Relationship building and arriving at a common scientific vision are both critical. If potential acquirers haven’t done their homework in advance, it’s difficult to create a counteroffer when they receive a call that another biopharma has put in a bid. The ability to move quickly to build a conviction case is nonexistent.

    Insights from the MyoKardia transaction

    Our deal with MyoKardia is a great example of how it’s easier to build that conviction case when there is an established relationship. MyoKardia was one of the earliest innovators in precision cardiovascular therapies with a deep pipeline addressing cardiomyopathies. The company has an exciting late-stage product, mavacamten, as well as an exciting mid-stage pipeline and set of foundational capabilities that are closely aligned with Bristol Myers Squibb’s heritage, expertise and capabilities in cardiovascular disease.

    Many factors came together to shift the conversation from a partnership to something more transformational. As data from mavacamten’s late stage trials were published, it became obvious there was a strong value proposition supporting our pursuit of an acquisition. It also helped that there had been a lot of sharing between MyoKardia’s scientific team and ours where we discussed our respective visions to address critical unmet medical needs for patients with cardiovascular disease.

    Turning to 2021, one of our biggest priorities will be to mine relationships we already have, while also establishing new relationships with innovators across our therapeutic areas. We will need to continue to create personal connections in this virtual environment. Yet we have shown through many of our other deals in 2020 that this can be done successfully. It requires strong communication skills and the investment of time, so that counterparties really get to know us and what we can bring to the table. At Bristol Myers Squibb, creative and flexible deal-making is part of our DNA.

    So, even though this year’s JP Morgan HealthCare meeting will be very different, our objectives are the same. We will continue to establish relationships with companies that have compelling science and offer real innovation to help patients prevail over serious disease.  Our partnering will be based on the strength of the scientific and strategic fit, which helps to define the value-creation potential.  Ultimately, we seek to be at the center of the innovative biopharma ecosystem as a partner of choice. We look forward to kicking off these discussions to focus on finding great science and building a better view of value as we begin to build our conviction cases for future deals.

No one wants to be in the position of doing a large deal and then taking a write off because the assets are deemed to be impaired.
Elizabeth Mily
EVP, Strategy & Business Development, Bristol Myers Squibb

That doesn’t mean leading life sciences companies eschewed deals altogether, however. In this less favorable environment, most biopharma acquirers refocused their energy on alliances and smaller, bolt-on deals in high-priority therapeutic areas. Medtechs, meanwhile, prioritized business areas that target the needs of our evolving health care system: diagnostics and personalized medicine capabilities.

In January 2021, many of 2020’s deal drivers remain in play. That suggests 2021 will be an active year for deals, at least in terms of overall volume. Focused growth remains a catchphrase for C-suites and boards alike. And despite 2020’s market volatility, life sciences companies ended the year with record levels of Firepower, which EY defines as the company’s capacity to do M&A based on the strength of its balance sheet. 

Life sciences Firepower rebounds graph

When the COVID-19 vaccine becomes more widely available globally, the environment for deals could warm further. However, whether that means a year of mega deal totals remains to be seen. With a return to pre-COVID-19 normalcy unlikely until the second or third quarter of 2021, buyers may struggle to develop confidence about assets at target companies if there is no preexisting relationship. How quickly acquirers can establish these trusted relationships virtually using the available tools is an open question.

As such, the most likely scenario is that 2021 will be a continuation of 2020’s deal dynamics. For biopharmas that means an ongoing emphasis on smaller, bolt-on acquisitions and partnerships that mitigate financial risk. Such deals are designed to add focus, but not operational complexity, in core therapy areas.

Meanwhile, medtechs experienced greater revenue slowdowns than biopharmas due to the cancellation or deferment of procedures in 2020. As their need for near-term revenue becomes more urgent, medtech may spend more aggressively on acquisitions. The medtech industry’s recent penchant for raising debt could be an early signal of what’s ahead in 2021.     

  • Important definitions

    Firepower: a measure of a company’s capacity to fund transactions based on the strength of its balance sheet, including cash and equivalents, debt and market capitalization.

    Deployed Firepower: the ratio of capital spent on M&A relative to available Firepower.

    Growth gap: the difference in US dollars of a company’s sales growth relative to overall market expansion. 

    Megadeals: Mergers with valuations of at least US$40 billion and US$10 billion for biopharma and medtech acquisitions, respectively.

    Bolt-on: small to medium-sized acquisitions that account for less than 25% of the buyer’s market capitalization.

Scientist writing down a chemical formula
(Chapter breaker)

Chapter 1

Biopharma deals: volume over value

Biopharmas showed a preference for late-stage assets in priority therapy areas as high-target valuations increased dealmaking risks.

Biopharmas proved resilient in 2020, navigating the COVID-19 turbulence by pivoting quickly to developing therapies and vaccines to remedy the pandemic. “The entire industry is experiencing that a new level of speed is possible if you really want to get something done. There is an enhanced awareness of threats to mankind and society, and of the need for biotech … to meet significant future challenges,” says Stefan Oschmann, CEO of Merck. 

  • Guest perspective: Resilient, innovative businesses in turbulent times

    Stefan Oschmann
    CEO, Merck

    Merck, based in Darmstadt, Germany, is a diversified science and technology company that discovers, develops, manufactures and commercializes pharmaceuticals, life science products and research equipment as well as performance materials such as specialty materials for the semiconductor industry. We also pursue innovation projects between and beyond our businesses, such as the data platform for cancer research that we are currently creating together with our partner, Palantir Technologies Inc.

    The R&D activities of our biopharmaceutical business are focused on three therapeutic areas:  immunology, oncology and immuno-oncology. This focus not only allows us to compete with much larger companies, it also enables us to perform very successfully both financially and in terms of R&D productivity. Over the past several years, we have entered into multiple strategic alliances with large partners, enhancing R&D outcomes and financial returns for our company while sharing the risks and costs.

    While we are very satisfied with the organic development of our pipeline, inorganic moves by means of corporate venturing, in-licensing and M&A are also a very important pillar of our strategy. In the health care field, valuation multiples are higher for small biotechs than they are for big pharma and biotech companies. Our company therefore faces the following challenge: a biotech company with a single Phase II compound can easily have a valuation of US$5 billion to US$10 billion. However, the risk is that six months later, this valuation could be anywhere from zero to several times what it was originally. That just isn’t the kind of bet a company of our size can justify to its owners and shareholders.  

    As a result, we are always looking at smaller, earlier stage opportunities. Here, I believe our therapeutic expertise in the fields of oncology, immunology and immuno-oncology underscores our positioning as a trusted partner. Ten years ago, the prevailing wisdom was that companies should stop internal R&D and instead market compounds that were in-licensed. But without top-notch internal capabilities in discovery and clinical development, how can we really be an attractive partner and truly assess the value of a partnership ourselves?

    Resilience in turbulent times

    Not least because drug development is such a high-risk, high-reward endeavor, one of the Merck family’s key principles has proven very beneficial to our resilience. As our majority owner for 352 years now, the Merck family expects the company to combine different types of business under the same roof. The rationale behind this is to operate in highly innovative, high-margin businesses while at the same time mitigating risk through diversification. That was true long before COVID-19 emerged, along with this new level of turbulence. But now, in times of crisis, the robustness of our business model can be clearly seen. While the pandemic has temporarily affected some of our pharmaceutical products more strongly than others in the first three quarters of 2020, the impact on our oncology pipeline and our clinical trials has been modest. And at the same time, we were able to mitigate any temporary slowdowns in the pharmaceutical business thanks to growth in our life science business, which sells more than 300,000 different products. Our life science business proved to be a generator of stable cash flows and earnings, even in turbulent times.   

    While our three businesses are all very different, they also benefit from synergies. Our materials and life science businesses give us a unique perspective on what is required for the industrialization of research, which is important for future value creation. More and more, the way we manage innovation is common across these different businesses: in fields like neuromorphic computing or quantum computing, the business model increasingly resembles that of biotech in terms of stage development or collaboration with start-ups, for example. Neuromorphic and DNA computing are even based on biological concepts. An added benefit of our business structure is our ability to move talent between these diversified businesses to offer attractive career opportunities and drive innovation. Our goal is to create synergy and cohesion between them to come up with cutting-edge solutions. This is something we drive systematically, also by means of a dedicated organization, with an in-house network of innovation hubs and incubators in places such as the Silicon Valley, Tel Aviv, Shanghai and Guangzhou.

    The importance of purpose

    During the pandemic, our immediate priorities have been to safeguard the health of our employees and their families and to ensure business continuity, especially in product manufacturing, logistics and in our R&D labs.

    At the same time, our focus was and is to be an active player in providing solutions to the COVID-19 pandemic across all our businesses, from supporting the development and manufacturing of diagnostics and vaccines to finding new therapeutics and enabling digital applications for both R&D and personal life.  

    While we do not develop or manufacture vaccines of our own, we are harnessing our comprehensive expertise in immunology and oncology to find new treatments. Here, we also benefit from the fact that there is a clear overlap between these two research disciplines. Among other things, we are currently running a Phase II trial of an immunological compound that could mitigate the harmful “cytokine storm,” an intense reaction of the immune system that is often the reason why COVID-19 patients die. In support of the search for new therapies, we are also working with important partners such as the Bill and Melinda Gates Foundation, World Health Organization, the Innovative Medicines Initiative, among others.

    Our high level of resilience is possible also because of the emphasis we place on purpose. The entire industry is currently experiencing that a new level of speed is possible if you really want to get something done. There is an enhanced awareness of threats to mankind and society, and of the need for biotech as well as scientific and technological innovation in general to meet significant future challenges. It greatly motivates people when they can make major contributions to society, such as in the fight against COVID-19.

    I see this every day in our own organization. Making sure our company is a great place to work, especially for our nearly 8,000 R&D colleagues across the globe, is very important to us and to me personally.

Our focus was and is to be an active player in providing solutions to the COVID-19 pandemic across all our businesses.
Stefan Oschmann
CEO, Merck

That ongoing resilience helped the biopharma industry deliver better-than-expected overall performance. In the early days of the pandemic, many Wall Street analysts warned that the wholesale shift to remote work would stymie research and endanger clinical development timelines. There were also concerns that drugs, especially newly launched therapies, would see major revenue slowdowns as patients postponed doctors’ visits unless necessary.

However, while there have been delays in certain clinical trials, and some physician-administered products are struggling, the industry has, at least on paper, weathered the pandemic much better than was originally predicted. Robust supply chains and quick pivots to COVID-19-linked products, especially vaccines, have helped big biopharmas such as Pfizer and AstraZeneca limit the near-term sales impact caused by the virus. As a result, growth gaps, defined as the difference between companies’ revenue growth and the overall industry’s sales expansion, shrank in 2020 from US$60 billion to less than US$35 billion.

That decline in the industry growth gap likely decreased the pressure on certain biopharma buyers to do M&A and shifted the emphasis from acquiring near-term growth to partnering for future capabilities. Although the year’s M&A volume remained consistent with 2019, biopharma deal value dropped 51% year on year. AstraZeneca’s purchase of Alexion, which gives the UK biopharma a significant foothold in the rare disease space, and Gilead Sciences’ purchase of Immunomedics were the year’s two largest transactions, driving 50% of the biopharma annual M&A deal value. 

Firepower biopharma M&A 2020

Sky high valuations and strong public markets also contributed to the decline in overall deal value. For most of the year, target companies had access to significant liquidity and were negotiating deal terms from a position of strength. Indeed, on average in 2020, publicly traded biopharmas were purchased for a 74% premium relative to the trading price of their shares one day prior to a deal’s announcement.

Such high premiums make acquirers nervous, as they make it more challenging to deliver a return to shareholders. Having spent so much to acquire an asset (or assets), there is little room for error clinically or commercially if the buyer organization wants to recoup its costs and deliver revenue growth. Moreover, this concern only applies in situations where buyers and sellers can mutually agree on what the assets are worth. In many cases, the valuation gap – the difference between how buyers and sellers value the same asset – is just too high to bridge. 

 “These climbing valuations, combined with the very significant premium expectations in the biotech C-suite and board room, can make the path to an acceptable clearing price extremely challenging to impossible,” says Bristol Myers Squibb’s Mily. The upshot? “It is very tough for deal parties to arrive at any consensus on asset values, which is why there are so few bidders in the recent biotech M&A processes. In such conditions, arriving at any consensus on value is very tough.”  

One-day deal premium


The average biopharma deal premium in 2020, which declined only 7% despite the market volatility.

With deal premiums still rich, it’s hardly surprising that acquirers focused on bolt-on deals in therapeutic areas of interest. Johnson & Johnson’s acquisition of Momenta Pharmaceuticals and Bristol Myers Squibb’s purchase of MyoKardia were examples of the trend. One reason such focused dealmaking continues to be the industry modus operandi is its link to operational performance. Data originally published in the 2019 EY M&A Firepower report highlighted the link between therapeutic focus and operational performance.

Current data continue to support that thesis: when we analyzed the financial results of 25 top biopharma companies across five operational and financial metrics, we found that the 10 companies with greater therapeutic focus outperformed the 15 more diversified companies. The only metric in which companies with greater diversification outperformed organizations with greater therapeutic focus was average total shareholder return.

Firepower therapy area focus graph

M&A is not the only lever biopharmas can use to achieve focused growth. Alliances are another mechanism for enabling affordable access to future innovations. In terms of both volume and value, biopharma alliance activity in 2020 was off the charts: through 30 November, buyers signed 261 partnerships worth close to US$140 billion in upfront and milestone payments.

Those numbers suggest that when it comes to the choice of alliances versus M&A, many biopharma dealmakers believed that alliances were better suited for the current climate. In an interview with EY, John Young, Pfizer’s Group President and Chief Business Officer, said, “We are generally seeking out early- to mid-stage clinical assets in our core therapeutic areas, where the potential for value creation is significant.” 

  • Guest perspective: Life sciences business development

    John Young
    Group President and Chief Business Officer, Pfizer

    When it comes to business development, Pfizer has historically been known as a company focused on large transactions. In recent years, while we continue to be active in business development, we are generally seeking out early- to mid-stage clinical assets in our core therapeutic areas, where the potential for value creation is potentially significant. 

    We are focused on investing in science, directly through our internal R&D and through bolt-on acquisitions such as Array BioPharma and Therachon Holding, as well as development collaborations like we have seen with our agreement with BioNTech for a COVID-19 vaccine development program. 

    Recent transactions

    I believe that real value is created when the acquirer doesn’t just bring funding, but also has capabilities and expertise that can help advance R&D. As part of our partnering discussions, we emphasize how such capabilities and expertise have the potential to result in new medicines that can make a difference for patients.

    We are investing in areas of strategic interest across each of our core therapeutic areas and leveraging our existing capabilities. Just this year, we were able to close several deals, including an agreement to co-develop and commercialize Valneva’s Lyme disease vaccine candidate, an acquisition of Arixa Pharmaceuticals, a company that focuses on oral anti-infectives, and an equity investment in Homology Medicines, a company developing gene therapy for patients with PKU, a rare disease causing a mutation in a gene that affects the way the body processes a critical amino acid called phenylalanine. Without treatment, phenylalanine can accumulate in a patient's body and cause neurological impairment.

    This year we also launched the Pfizer Breakthrough Growth Initiative to support non-controlling equity investments in clinical-stage public companies to focus on finding innovative solutions for patients across a range of therapeutic categories. 

    A focus on partnerships

    We need to proactively invest in relationships with companies working in areas of high interest to us. In doing so, we are prepared to move quickly to acquire or expand an existing relationship based on emerging clinical milestones at the smaller company.

    Our investment in, and expanded relationship with, BioNTech is a great example of how long-term collaboration can result in value to both parties. We originally signed a collaboration agreement with BioNTech in 2018 to develop mRNA-based seasonal flu vaccines. That collaboration gave us a chance to build a relationship and “chemistry” with BioNTech. When COVID-19 emerged, it was natural to expand the relationship to focus on this new global threat, which both organizations recognized was not business as usual.


    We are always looking to improve, which we believe can be achieved by supplementing our pipeline through tuck-in M&A and strategic partnerships, not large deals. If we see an attractive, larger acquisition opportunity that we deem to be value-creating, we believe we have a strong balance sheet that we may utilize for the right opportunity. We choose not to speak in absolute terms and “never say never” because operating factors can change over time. However, right now, we believe the opportunity that we have to advance our pipeline is unique and our clear focus is to complement the strength of our internal pipeline with attractive external clinical-stage substrate.

    We believe we have one of the strongest pipelines we have had in over a decade, and that we are well-positioned for future growth. We believe our outlook over the next five years is strong, with revenue and adjusted earnings per share (EPS) growth that is expected to be among the best in the industry. We expect a five-year revenue compound annual growth rate (CAGR) of at least 6% revenue on a risk-adjusted basis. In addition, we expect adjusted EPS growth of approximately 10% during the same five-year period. Of course, we are always looking to improve, so I expect us to remain active in business development.

    We continue to seek out and source the best science in the world, which enables us deliver on our purpose: breakthroughs that change patients’ lives.

Our investment in, and expanded relationship with, BioNTech is a great example of how long-term collaboration can result in value to both parties.
John Young
Group President and Chief Business Officer, Pfizer

Pfizer’s expansion of its 2018 alliance with mRNA vaccine developer BioNTech was an example of how biopharma majors preferred to collaborate rather than make outright purchases in 2020. So too were Merck & Co. Inc.’s and Biogen’s respective alliances with antibody conjugate drug developer Seagen and neurology-focused Sage Therapeutics. Including the milestone payments, those collaborations come with M&A-sized deal values. Even still, the upfront price tags were a fraction of what it would have cost to buy the partners outright. 

Firepower the volume and value of biopharma alliances set records in 2020

In 2021, biopharmas will continue to need to acquire decisively but with financial discipline. As a result, buyers are more likely to prefer deal structures that mitigate their monetary risk, with an emphasis on bolt-ons and alliances that combine milestone and equity payments. Megadeals will continue to be the less attractive option due to their larger integration and operational challenges unless there is no other way to provide needed near-term revenue.  

One major wildcard: if clinical trial delays increase or sales slow more than is currently predicted, actual growth gaps may be larger than our current estimates. Those accelerating growth gaps will create more urgency for acquisitions that add near-term revenue growth, which historically are deals that command higher premiums.

Doing such deals will require biopharmas to deploy significantly more of their Firepower than they used in 2020 – just 12%, compared to 20% in 2019. Companies will also have to distance themselves from their historical capital allocation patterns. Even factoring in 2019’s mammoth M&A spending, the top 25 biopharmas by revenue returned nearly US$200 billion more to their shareholders than they spent on M&A during the 2015-2019 time period. One area where biopharmas may want to consider additional investment: digital and data-centric skills necessary to deliver remote health care at scale.  

Doctor with test tube blood sample
(Chapter breaker)

Chapter 2

Medtech deals: value over volume

In 2020, medtechs deals were fewer in number but larger in size. Many increased their leverage, signaling an active 2021.

In 2019, medtechs took a conservative stance on M&A, preferring to return more cash to shareholders over doing deals. The dearth of M&A observed in 2019 continued in the first six months of 2020 as COVID-19 disrupted all aspects of dealmaking, from relationship building to the execution and closure of transactions. 

Firepower medtech capital allocation

But perhaps the industry will look back on the first half of 2020 and see it as the calm before the storm. Indeed, if the uptick in deals announced in the second half of 2020 continues to be a trend, 2021 could finally be the year that medtechs unleash their collective dealmaking power. Two of the year’s largest life sciences deals showcase the potential. In August, Siemens Healthineers inked a US$16.4 billion megadeal, acquiring Varian Medical Systems. In late September, Illumina announced it planned to spend US$8 billion to acquire 100% of GRAIL, a leader in liquid biopsy that it originally spun out in 2017.

Firepower medtechs do fewer higher value deals in 2020 as M&A

Certainly, medtech’s fundamentals suggest the time is right for M&A to take center stage. The industry’s Firepower for deals expanded 41% in 2020 and is at an all-time high. During the year, the industry’s commercial leaders took advantage of the strong public markets to raise significant amounts of capital, primarily in the form of debt and follow-on offerings. At the same time, medtechs as a group only deployed 7% of their Firepower through 30 November 2020. The result: major medtechs have significant capital reserves to direct toward acquisitions in 2021 – if they choose to use it.  

Firepower 2020 biopharma financing reaches new heights 2020

COVID-19 and the uncertainty it created for medtech acquirers likely triggered this race for capital. As the surge in the novel coronavirus resulted in deferred or cancelled procedures in the US and Europe, the industry’s growth suffered. Indeed, at the top 35 medtechs, growth gaps increased by US$9 billion to US$29 billion. With elective procedures resuming in the second half of 2020, companies seem to feel less pressure to preserve cash and more urgency to use their capital reserves for acquisitions. That attitude could shift as the COVID-19 cases surge in different geographies, however.

As with biopharma, M&A can help individual medtech companies close their growth gaps. Although valuations for target companies have remained strong, there are signs that smaller medtechs could soon be facing liquidity challenges. In the first half of 2020, a slowdown in venture capital investment and IPOs created new challenges for early-stage device companies. Venture and IPO investment levels rebounded in the second half of the year, but the pressures of an uncertain global economic climate may still push smaller players to entertain acquisitions, even on less favorable terms. If this rush for the exits materializes, medtech leaders may find themselves in the enviable position of having cash to spend in a buyer’s market.

Medtech growth gap

US$29 billion

The medtech industry’s growth gap increased 45% in 2020 as procedures were delayed or canceled.

Historically, one of the challenges for medtech buyers has been identifying innovations with significant market potential. This is certainly the case in therapeutic devices, where decades of investment have delivered cardiovascular and orthopaedic products that are hard to improve upon, creating reimbursement hurdles for newer solutions.

However, opportunities are emerging in other medtech fields. Look at diagnostics: in 2020, diagnostics companies have been at the forefront of combating the pandemic while also enabling care outside of traditional bricks-and-mortar channels. As remote diagnosis, triage and care becoming an increasingly vital part of health care, medtechs have a strong incentive to build out or add these offerings to their portfolios. This move toward remote care is just part of the broader shift in health care that the events of 2020 have accelerated, and which medtechs and biopharmas alike will need to respond to in 2021.

African scientist using microscopes in laboratory
(Chapter breaker)

Chapter 3

Looking ahead to 2021

In the next year, there will be a continued need to create focused business models.

Across multiple industries, the pandemic has slowed growth and created new financial and operational pressures that were ultimately reflected in the year’s overall drop in life sciences M&A activity. Yet, while COVID-19 caused many acquirers to tap the brakes, it has simultaneously accelerated the broader transformation of health care.

The potential to use digital technologies and data analytics to deliver more convenient, affordable and better health care has been trumpeted for years. But it took a global health crisis to demonstrate just how quickly health care delivery can move from its inconvenient, discontinuous, analog roots to a more convenient, seamless, digital experience. The rapid adoption of virtual care in the first half of 2020 is just one example of the health ecosystem’s evolution.

Teladoc’s acquisition of Livongo Health, a start-up developing personalized disease management tools, is another. It was one of the biggest deals of the year at more than US$18 billion, and as such, validation that the convergence of digital technologies and more traditional diagnostics and devices will permanently alter health care.

Firepower notable digital M&As by deal value

It was therefore notable that the buyer was squarely in the health services space, not a traditional biopharma or medtech. To really position themselves for future growth, life sciences companies must continue to invest in technologies that complement traditional product-centric definitions of innovation, including data analytics, user-centered design and product personalization.

 As life sciences companies revisit their business strategies in 2021, we expect many to look more carefully at their digital dealmaking in the wake of Teladoc/Livongo. Certainly, it won’t be hard for 2021 dealmaking in this arena to exceed the 2020 numbers, where biopharmas showed a decided preference for traditional forms of innovation.

Firepower digital deals make fraction biopharma total dealmaking activity

Just as “resilience” quickly became the watchword in 2020, expect “focus” to be a top contender in 2021. One of the most lasting effects of COVID-19 may be the need for business capabilities that can support the delivery at scale of remote care. But making the necessary investments in those capabilities requires biopharmas and medtechs alike to be choosier about where they place their strategic bets. To outperform, companies won’t be able to sell products in disparate therapy areas across a range of business models that span delivering truly breakthrough innovations to more affordable and personalized management of chronic disease. It will be difficult to find sufficient human and financial capital to invest in capabilities that yield the differentiation so important for outperformance.

This prioritization has important M&A implications in 2021. In addition to focusing on products or services that add therapeutic depth, companies may also want to ensure that these assets align with the company’s chosen commercial model. Before doing so, divesting or spinning out businesses that no longer align to the business strategy may take on greater urgency. Our analysis suggests that when biopharma companies divest proactively, they not only gain focus but boost operational performance.

Firepower biopharma average roce

Moving forward, there is no doubt that M&A will continue to be an important tool as biopharmas and medtechs reposition themselves for the future. As the specter of COVID-19 recedes, companies will need to disproportionately invest in data and capabilities that allow them to meet the demands of the ecosystem’s diverse and more demanding customers, especially payers and individual patients. Biopharmas and medtechs that delay investments in skills that enable more convenient and seamless care may find it difficult to compete with technology and consumer companies that see health care as prime segment for growth.

  • Dealmaking predictions

    We predict the following themes will be important in 2021:

    • Life sciences will continue to be an active market for dealmaking, as the need for focused growth, coupled with Firepower, enables more dealmaking.
    • Because of high valuations, biopharmas will prioritize high-value alliances and bolt-on deals over megadeals, making it unlikely that M&A totals will eclipse US$200 billion.
    • Medtech companies will be more active dealmakers, with an emphasis on high-value deals that can close growth gaps.
    • As life sciences companies manage the needs of today’s business while investing for future growth, they will continue to divest or spin out deprioritized businesses or assets.
    • Ample liquidity and active private equity buyers mean divestitures should be an ongoing piece of the M&A story in 2021. 


In the unfavorable environment created by the COVID-19 pandemic and related economic challenges, biopharma acquirers moved to alliances and smaller, bolt-on deals in therapeutic areas. Medtechs focused on areas targeting the health care system’s evolving needs in diagnostics and personalized medicine capabilities.

These trends suggest that 2021 will likely be an active year for deals, at least in terms of overall volume.

About this article

Peter Behner

EY Global Health Sciences and Wellness Strategy and Transactions Leader

Transformation leader in the development of new strategic direction for life sciences companies. Family focused. Loves fast cars, good wines and history books.

Pamela Spence

EY Global Health Sciences and Wellness Industry Leader and Life Sciences Industry Leader

Ambassador for outcomes-based performance and healthy aging. Advocate for women.