7 minute read 27 Feb 2019
Scientist in blue suit working with instrument emitting purple light.

Divestments will play a vital part in rebalancing life sciences’ portfolios


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.

Ambar Boodhoo

EY Americas Life Sciences Transactions Leader

Transformation leader in life sciences. Passionate about gender equity and access to education.

7 minute read 27 Feb 2019

Life sciences companies are making rapid strides toward succeeding in a patient-centric world and a strong divestment strategy is key.

Life sciences companies continue to move toward an interconnected business model focused on patients, and driven by convergence and new technology. Divestments, whether to raise funds for investment in growth areas or to swap assets, are at the heart of these efforts to reshape and reinvigorate the sector.

Journey to the core

Life sciences business models are changing as payers, physicians and patient consumers demand more cost-effective and efficient care that takes advantage of new digital platforms. In this changing environment, there is growing evidence that companies with more focused business models outperform their less focused counterparts. As such, C-suites are beginning to emphasize the importance of specialization in a fragmented therapeutic marketplace. In order to adapt, life sciences businesses need to optimize portfolios and focus on the core. The urgency to do so will only grow in the current commercial environment.

Divestments are at the heart of the life sciences journey amid a renewed focus on the core, from Johnson & Johnson’s sale of its Advanced Sterilization Products and LifeScan businesses to Sanofi’s divestment of its European generic drug unit. Capital allocation is a high priority and companies are increasingly diligent about exploring strategic options for non-core or low-growth businesses.

These divestitures are also part of extended M&A strategies designed to complement rebalanced portfolios. For example, Johnson & Johnson announced an offer to acquire all outstanding shares of Ci:z Holdings Co., a Japanese company focusing on dermocosmetic, cosmetic and skincare products. This appetite for divestitures in pursuit of portfolio optimization shows no signs of abating. According to the EY Global Corporate Divestment Study, 83% of life sciences executives are planning to divest a substantial part of their portfolio (>5% of sales) as companies look to build therapeutic depth without adding portfolio complexity.

Prepare to deal with divestment pressure

Life sciences businesses are tightening their portfolio review processes and divesting, driven by a need to invest in new assets or areas, especially capabilities that allow the delivery of personalized, high touch care. Indeed, this is the main driver for 21% of executives in the sector planning to divest, up from 18% last year.

The latest EY M&A Outlook and Firepower Report on the sector estimates that portfolio optimization could generate more than US$200b in future deals as companies exit deprioritized areas. In the analysis, EY researchers modeled potential deal values for assets belonging to companies with therapy market shares in the low single digits in four therapy areas: oncology, immunology, cardiovascular disease and infectious disease. Deal multiples were conservative and calculated using median value of publicly disclosed transactions. Beyond these four therapy areas, the divestment of deprioritized businesses such as animal health, women’s health or consumer health could liberate tens of billions of dollars of additional M&A.

Investor pressure to exit non-core businesses is increasingly a driver of divestments: 19% of companies now say that this pressure is their main reason for divestment planning, more than twice as high as last year. Strategic decision-making around divestments is becoming more of a battleground as external activist shareholders and internal stakeholders wrestle to define the core.

Management teams need to proactively think like a shareholder activist when reviewing their product portfolios and be able to answer the questions an activist would ask them. Most importantly, management teams need to communicate the company’s long-term strategy frequently, consistently and with transparency to key stakeholders.

Are you planning to divest a substantial part of your business portfolio? 83% said yes.

Invest in patients, not just processes or procedures

Life sciences companies are striving to establish deeper relationships with health care stakeholders, including patients, educators, physicians and payers. At the same time, consumer digital companies are entering the health care arena, prompting life sciences companies to disrupt their current business models before new entrants disrupt them.

In this environment, life sciences companies have an opportunity to create value in new ways beyond traditional product-centric definitions of innovation.

  • As reimbursement shifts from fee for service to fee for value, the key value-generating capability is the capacity to connect different data streams to deliver improved and highly personalized health outcomes.
  • Digital technologies, especially miniaturized sensors and wearables and powerful AI-based analytics are critical to this data fusion, as they make it possible to generate and use health data.

Going forward, businesses in the sector will need to improve their interconnectivity by creating digitally enabled platforms, either by buying, or partnering with, digital and other service providers. For many life sciences companies, this digital focus is uncharted territory. As companies focus on core therapy areas, they will need to align their digital strategies to their chosen focus areas. That’s because establishing closer connections with patients requires a solution mentality and the digital connectivity to link traditional medtech and biopharma products to diagnostics and services.

Doing this well in oncology is hard enough; doing it well in oncology, infectious disease and respiratory, three very separate areas, is even harder. Companies will need to hone in on the therapeutic areas where they think they’re best and invest in the right capabilities. Half of life sciences sellers say they are exiting businesses that will not help them build a competitive advantage in a patient-centric world. At the same time, 28% say they are quicker to sell off underperforming businesses to raise capital to invest in new digital capabilities, up 65% from 2018. Businesses are not simply bowing to investor pressure to offload non-core assets, they are divesting to invest in their future.

Quantify contingent compensation milestones

Contingent compensation – the mechanism linking price to future performance expectations – is a key component in life sciences divestment deals. In 2015, 78% of executives considered contingent compensation when structuring a deal. That has now risen to 99%.

Contingent compensation


of executives considered contingent compensation when structuring a deal.

Structuring a deal around contingent compensation helps to bridge the valuation gap between buyers and sellers as deal values continue to rise: the level of contingency is proportional to the seller’s belief in the value of the business.

Quantitative measures tied to sales targets and market entry are now key milestone criteria for contingent compensation, rather than qualitative ones (R&D and approvals). Increases in sales levels or expanded channel access are cited as criteria for contingent consideration by 75% of executives, a slight increase since 2018 (71%). Achievement of manufacturing volume or yield targets ranks second, cited by 72%, followed by R&D technical success (64%).

Lengthy gestation periods for products, an uncertain regulatory environment and high valuations mean there’s no such thing as a one-size-fits all approach when it comes to setting contingent compensation benchmarks.

Sellers will need to ask themselves two key questions:

  • At what stage is your asset?
    For example, the buyer of an early stage pharmaceutical will probably prefer R&D or regulatory approval milestones as the benchmark. But revenue milestones could be more important when purchasing a mid-stage medical device company or consumer health business because of hockey stick growth projections. As such, diligence in that area will be much more rigorous.
  • What is the growth rate, particularly from a top line perspective?
    This is where there may be a disconnect between what the buyer and seller perceive as the opportunity. As the valuation gap continues to rise, the options for contingent compensation will change.


When planning and structuring a divestment, which of the following criteria would you consider for contingent compensation? 75% said 'Increases in sales levels or expanded channel access'.

Move toward a stronger, simpler business

Structural changes in health care provision and payment continue to exert a big influence on divestment decisions. This shift is part of a much wider transition toward deeper specialization and therapeutic focus.

  • Examples of this shift:

    Sectors such as radiology have seen massive consolidation in response to the demand for competitively priced outsourced services.

    The biggest impact continues to be felt in imaging and diagnostics: 53% of companies say they are more likely to consider divesting these assets in light of this move toward consolidation, on par with last year (54%).

    Some health care businesses are selling off core assets for diagnostics while retaining their specialty drug units. Novartis, for example, sold its commercial laboratory subsidiary Genoptix to private investors while retaining the Genoptix specialist biopharma business.[1]

    In the case of diagnostics, companies with deep expertise in test development may be better positioned to derive the greatest value from diagnostic assets because of the different development, regulatory and commercial requirements. Biopharma or medtech companies looking to divest might sell assets to global diagnostics companies; however, if the business is sizable enough to be considered a stand-alone diagnostic company, private equity groups may also be interested.

    Diversified conglomerates with health care assets are also optimizing their portfolios. Siemens, which floated a 15% stake of its Healthineers[2] medical imaging and diagnostics division in 2018, is one example.[3] The spin-off of GE Healthcare is another[4]: it includes the organization’s valuable diagnostics assets, the largest part of GE Healthcare.


    1. “Novartis Completes Sale of Genoptix Lab Business.” 7 March 2017. https://www.genomeweb.com/cancer/novartis-completes-sale-genoptix-lab-business#.   XBjjX2j7QuU.

    2. “Siemens plans IPO of Siemens Healthineers AG in the first half of calendar year 2018.” Press release. 19 February 2018. https://static.healthcare.siemens.com/siemens_hwem-hwem_ssxa_websites-context-root/wcm/idc/groups/public/@global/documents/download/mda3/nze3/~edisp/pr2018020166coen-04858444.pdf.

    3. “Siemens Healthineers up 7 percent on 4.2 billion euro market debut.” Arno Schuetze and Ludwig Burger. Reuters. 16 March 2018. https://www.reuters.com/


    4. “GE Focuses Portfolio for Growth and Shareholder Value Creation.” Press release. 26 June 2018. https://www.genewsroom.com/press-releases/ge-focuses-portfolio-growth-and-shareholder-value-creation-284411.

Capitalize on R&D

Life sciences has one of the highest levels of R&D spend of any sector globally, and businesses in the sector face growing pressure to tap into their pipelines in search of value.


One option is out-licensing assets. Fifty-seven percent of companies are now actively seeking to do so, with 60% willing to respond thoroughly to expressions of outside interest. Only 42% say they rarely look to monetize R&D.

Beyond R&D, out-licensing in specific geographies remains an attractive strategy for pharma businesses looking to the mass market for established products. Germany-based Bayer, for example, out-licensed its heart drug Xarelto in the US market where it is sold by Johnson & Johnson (the latter also pays for its clinical development program in the US). Bayer retains the marketing rights for the drug outside the US.

Own pipeline

Larger companies often prefer to keep the most promising products in their pipeline and develop them, rather than out-licensing or selling them.

For example, pharma and biotech firms often cannot fund clinical development for all promising candidates. They usually retain the most promising candidates in-house up to the maximum they can fund and then sell the rest or find a partner for them. This is often the case for young biotech companies but also often a factor for big pharma.


Life sciences companies are making rapid strides toward succeeding in a patient-centric world, but there are still gaps that need to be addressed:

  • Tighter focus on the core. Businesses need to double down on specialization and focus on the core. Purpose-driven divestment – to rationalize the core and to provide capital for reallocation into digital offerings – is the cornerstone of business transformation.
  • Explore every avenue for growth. Evidence suggests that life sciences firms have yet to fully tap into the monetization opportunities available to them. More than 40% of executives say they rarely look to monetize their R&D. Meanwhile, 53% rarely bring in external financing for projects.
  • Think about buyer needs. Life sciences divestments are often poorly packaged. Management teams need to understand the needs of potential buyers. They must take the time to do the following: prepare multiple sales scenarios to evaluate the risks of complex partial divestments and tailor financials to strategic versus PE buyers. By taking the time to make these assessments, executives create a smoother deal that generates value for both parties.
  • View portfolio reviews as a strategic priority. A well-articulated strategy, underpinned by frequent portfolio reviews, is the best path to sustained growth.


The EY Global Corporate Divestment Study focuses on how companies should approach portfolio strategy, improve divestment execution and future-proof their remaining business.

About this article


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.

Ambar Boodhoo

EY Americas Life Sciences Transactions Leader

Transformation leader in life sciences. Passionate about gender equity and access to education.