3 minute read 12 Nov 2018
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Life sciences executives take a “less is more” attitude toward M&A

By

Peter Behner

EY Global Life Sciences 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.

3 minute read 12 Nov 2018

Despite available firepower, life sciences executives are focusing on divestitures and bolt-on acquisitions rather than megadeals, according to our latest M&A report.

This article is part of our M&A report Global Capital Confidence Barometer, 2nd half 2018.

The global life sciences industry is on track to achieve US$200 billion in deals in 2018. While the strategic drivers for M&A remain positive, dealmaking this year has been more muted than anticipated — a sentiment that is supported by the findings of the latest Capital Confidence Barometer.

With one exception, we have not seen the return of the life sciences mega deals, and we are seeing a “less is more” attitude, with bolt-on acquisitions being used to create scale and divestitures to secure value from non-core assets.

Yet while some executives, particularly in biopharma, may be pressing pause on M&A in favor of lower-risk ventures such as alliances, asset swaps and JVs, almost half (48%) indicate that they intend to pursue M&A within the next 12 months. Stable-to-improving sentiment around deal pipelines and completions seems to support a robust M&A outlook.

M&A outlook

48%

of life sciences executives intend to pursue M&A within the next 12 months.

Regulatory and policy uncertainty seen as the top near-term risk for dealmaking

If there is anything that could disrupt their plans, 43% of executives anticipate disruption will come from ongoing regulatory and policy uncertainty. Over the past 12 months, we have seen a rapid rise in failed and canceled acquisitions, with 98% of life sciences executives unable to close a deal, up 22% from six months earlier. Ongoing regulatory and policy uncertainty (22%) has been cited as the primary reason for not moving forward on these planned acquisitions.

Major M&A themes

43%

of life sciences executives anticipate disruption will come from ongoing regulatory and policy uncertainty.

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.

Summary

Life sciences companies have the firepower to fuel dealmaking, although this might continue with divestitures or smaller bolt-on acquisitions rather than megadeals. High valuations, fragmentation in key therapeutic areas, and private equity’s interest in life sciences assets should also drive M&A activities in the coming year. Download the full report (pdf).

About this article

By

Peter Behner

EY Global Life Sciences 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.