Key considerations for making life sciences bolt-on deals successful

Bolt-on deals less than US$1b in adjacent therapeutic areas are likely to have a higher success rate, according to life sciences M&A research.

In brief

• Bolt-on acquisitions in adjacent therapeutic areas are likely to increase life sciences deal success
• Smaller deals, less than US$1b, and focused deals tend to have higher success rates
• In nonadjacent therapeutic areas, de-risked and in-market deals tend to be more successful

As biopharma companies see their top lines pressured by another upcoming wave of loss of exclusivity, they may increasingly need to supplement growth through M&A. Our recent research shows that CEOs and CFOs can focus on adjacent therapeutic areas (TAs) to help boost the success rate of bolt-on acquisitions.

Bolt-on acquisitions have demonstrated the ability to increase total shareholder return, as reported in the EY 2019 publication “Why bolt-on acquisitions are better poised for value capture.” In this new research, the EY-Parthenon team uses a more specific revenue lens to examine what types of bolt-ons can help lead to long-term deal success.

Global M&A plummeted in 2020 as a result of the COVID-19 pandemic, though total liquidity in the market remained robust. A year later, 43% of life sciences executives plan to actively pursue acquisitions in the next 12 months, according to the EY Global Capital Confidence Barometer. And 41% of those say bolt-ons will be the deal of choice.

Our analysis shows that acquisitions in adjacent TAs and smaller bolt-on deals (with a value of US$1b or less) are more likely to deliver on their original deal hypotheses.

At the same time, when considering assets from TAs in which the acquirer does not currently participate, acquisitions of de-risked assets, which already have regulatory approval and are in the market, tend to perform better. These assets allow the acquirer to use its promotional scale without assuming a technology or regulatory risk.

Bolt-on deals in adjacent TAs, regardless of size, are better positioned to capture value and are nine percentage points more successful in achieving their projected revenue targets over a five-year period compared with deals in nonadjacent TAs. Based on our experience and research, this has mostly been attributed to existing TA expertise within the acquirer’s organization and assets that can be brought to market more efficiently.

Success in bolt-on acquisitions often requires an understanding how the target fits in the acquirer’s portfolio as avalue driver

Value drivers and benefits

Our research and experience tell us the following actions are important to enhancing acquisition value in adjacent TA bolt-on deals:

• Seek smaller deals (value less than US$1b): creates value without exposing to undue financial risk.
• Transact in the TAs where you have operational understanding:  may be more effective and require fewer resources to implement a successful integration of a smaller target.
•  Align operations to re‑platform assets efficiently:  secure predictable and efficient operations to re-platform the asset. Key resources, practices and key cultural elements are easily retained.
• Consider speed to market:  integration of enabling functions can be done relatively fast, however, the in-house knowledge of the target’s technology should be fully utilized.
  
• Leverage therapeutic brand value:  think of your own brand value to the providers and patients in the TAs since you can maximize the commercial opportunity for the bolt-on asset.
• Watch for key talent:  key employee retention is essential to maintain medical and technical know‑how as well as customer relationships.

Choose wisely, considering ease of integration

The analysis of the 142 bolt-on deals suggest that TA aligned deals are more successful due to higher synergies, an existing client base and presence of a potentially successful commercial plan. Hence, vigorous pre-deal diligence to choose the right target and an efficient synergy enhancement plan is important to deal success.

Key steps deal teams can take:

• Create a comprehensive diligence plan: conduct detailed diligence in all major business functions, including financial, tax, commercial, operational, IT and cyber to understand the target’s business in detail before deal finalization. 
• Consider key characteristics: examine deal size, TA alignment and lead asset maturity before target finalization.
• Set valuation expectations: identify important transaction value drivers, improve deal structures, mitigate risks and challenge assumptions about future performance to set realistic deal value expectations.
• Focus on M&A integration strategy: define the integration strategy early for acquired assets to prevent value erosion, help accelerate synergy realization and minimize transaction risk.

Definitions

Bolt-on deal:

A small- to medium-size acquisition up to US$1b in value, and less than 25% of the buyer’s market capitalization in a new high-growth area, or an area adjacent to the core existing product portfolio. It offers a means of diversifying while leveraging part of the same value chain platform, commercial infrastructure or skill set.

Therapeutic area:

Area of medical practice that encompasses groupings of specific diseases and/or disorders generally treated by a specific medical specialty such as oncology, cardiology, etc.

• TA aligned deals/adjacent TA deals: bolt-on deals where both the acquirer and target have business in the same TAs.
• TA not aligned deals: bolt-on deals where the acquirer and target conduct business in different TAs.

Deal size:

The deal value that the acquirer paid to the bolt-on target.

• Small deal: less than US$1b.
• Large deal: greater than US$1b.

Lead asset maturity:

Level of maturity of the target’s lead asset.

• In-development deals: lead asset is under development, usually in clinical trial Phase I–III.
• In-market deals: lead asset is already being sold in the market and has established customers, supply chain, etc. These deals are also considered de-risked since the drug has received regulatory approval and shows proof of revenue generation.

De-risked asset:

Assets that already have regulatory approval and are available in the market.

Methodology

The analysis started with a universe of 673 bolt-on transactions from 2010 to 2019 in the life sciences space of more than US$99m in value and with an acquired stake of more than 50%. The data was sourced from Bloomberg and Evaluate Pharma. Deals with no identified lead asset for the target firm were excluded. These criteria lowered the number of deals to 165.

Then the remaining deals were categorized based on the “therapeutic area,” “deal value” and “lead asset maturity” related to the assets owned by the acquirer and the target.

After capturing actual sales vs. current projections of the lead asset and sales projections at the time of announcement for a period of five years post-close the analysis classified these deals as success or failure by comparing historical projections vs. actual sales.

Successful deal: Deals where the actual revenue was equal to or greater thanthe predicted revenue were classified as successful deals

Unsuccessful/failed deals: Deals where the actual revenue was less than the predicted revenue were classified as unsuccessful or failed deals.

Dr. Parul Aggarwal, Sweta Gupta and Shivam Jaitly contributed to this article.