US tax reforms enacted in 2017 and the looming trade uncertainties around Brexit, which have a proportionately larger impact on life sciences than other sectors given the integrated regulatory regime between the EU and the UK, have already cast a shadow across the M&A landscape. About half of the surveyed executives are bracing for the harsh realities that Brexit will negatively impact investments and acquisitions outside the UK and EU, as well as their ability to recruit and retain key talent.
Life sciences companies focus on portfolio optimization to improve performance and free up capital
Given the spate of uncertainty around the world and within the sector, life sciences companies are increasingly relying on portfolio optimization to improve performance and free up capital for reinvestment. Portfolio optimization moves were particularly effective for several European and US big pharma players in Q2 2018.
Digital disruption should be an important agenda item given ongoing vertical integration of payers and providers and the rise of new technology and consumer entrants. Indeed, 30% of life sciences executives surveyed see it as a significant near-term threat. However, there is little evidence that this concern is translating into digital dealmaking at a rate needed to transform business models.
Record-high firepower could fuel more M&A in 2019
Looking ahead to 2019, life sciences companies’ aggregate firepower (defined as the financial resources to do M&A) is at an all-time high. This could fuel larger M&A than what we have seen recently, particularly as the widening innovation gap threatens to curtail future growth, and life sciences companies are compelled to consider how to engage in emerging platforms of care, or Life Sciences 4.0.
However, we expect dealmaking to continue more in the form of bolt-on acquisitions and divestitures rather than mega deals. High valuations and fragmentation in key therapeutic areas are part of the story there. The other part lies in private equity’s increasing appetite for life sciences assets. We expect medtech and services businesses that support biopharma and specialty clinical laboratories to be their primary focus in the year ahead.