34-35 - Trends, predictions and challenges for M&A activity

The COVID-19 pandemic has triggered one of the most volatile periods on record for every sector including life sciences. In fact, according to an EY report, 89% of life sciences companies say profits declined in 2020 and two-thirds said they cancelled or failed to fulfil a planned acquisition during the same period.

The pandemic created multiple barriers to deals from challenges including due diligence and closing deals virtually, as well as high valuations creating a sellers’ market.

Still, despite these unfavourable market conditions, the industry has adapted at pace and the deal pipeline is growing. The life sciences sector has rebounded to record its highest growth in terms of the number of M&A deals in Q1 2021, marked by a surge of initial public offerings (IPOs) and strong deal flow. Mega deals are also re-emerging. In May, two British healthcare companies agreed takeover deals worth a combined £2bn as the mid-cap M&A rush accelerates.

So far this year, new life sciences projects on Datasite’s platform have increased 56% in the first half of this year compared to the same period last year. As we head into the second half of 2021, this increased market activity is expected to continue as life sciences companies evaluate their long-term business plans and strategic priorities and invest in assets and capabilities that will fuel growth. The quickest way to do that is through M&A or via strategic alliances across core therapeutic areas where the potential for value creation is significant.

The environment for deals could warm further when the COVID-19 vaccine becomes more widely available around the world.

Following are some of the key trends that are set to drive deals through 2021.

COVID-19 has accelerated the broader transformation of healthcare and triggered a reorientation towards telemedicine, with the development of digital technologies being integrated within patient-care delivery models, clinical trials and the wider health and pharma ecosystem.

Expect to see strategic players continue to offload non-core business assets and focus on pursuing specialty platforms. For example, whilst market volatility has previously limited M&A within the biotech subsector, acquisition activity within the $2-10bn range is now ramping up as companies seek to innovate and enhance their presence within novel subsectors.

Companies exploring medical devices, vaccines, therapies and diagnostics connected to the COVID-19 pandemic and future epidemic scenarios will also continue to retain their attractiveness to investors and become M&A targets.

In 2020, bolt-on deals accounted for 82% of biopharma M&A activity. While a rise in transformative ‘mega deals’ is expected, a simultaneous ‘bolt-on frenzy’ will continue to support deal activity to mitigate financial risk and enable companies to focus in core therapy areas and expand their capabilities.

New players are also expected to enter the market through bolt-on deals, particularly focused in consumer-directed healthcare. Private equity and venture capital investors will see potential in these new market opportunities and will become more active across the sector – diversifying at pace and buying in talent and expertise.

Alliances are another method for facilitating affordable access to future innovations. For example, major pharmaceutical companies chose to collaborate rather than make outright purchases in 2020.

There has been an uptick in tech companies breaking into the healthcare market, and health and life sciences companies strategically acquiring tech companies to enhance their digital capabilities and boost their technical offerings.

As deal activity accelerates across the life sciences sector, companies are also becoming more introspective and taking a critical view on where they have gaps in their operations. This will continue to trigger more cross-sector transactions. Separately, the evolving regulatory climate and changing trade picture is set to accelerate cross-border transactions as companies look to secure and diversify supply chains. Still, there are some challenges to consider.

Capacity constraints of regulators across the EMEA region triggered by the COVID-19 pandemic will continue to impact market activity.

Over the past 12 months, competition authorities across Europe have delayed assessment of M&A transactions. The French Competition Authority asked companies to delay non-urgent merger plans, and several intellectual property offices postponed merger reviews. Whilst constraints are easing, these delays will continue to influence the willingness of some buyers to proceed with M&A transactions.

Alongside this, legislative proposals will also impact smaller life sciences companies. For example, the commencement of the EU Medical Device Regulation will trigger greater costs for R&D within the sub-sector and new hurdles relating to market access and supply chain disruptions. With market growth focused on medical devices and diagnostics connected to the pandemic, there will likely be further market consolidation as SMEs struggle to source the additional capital required to compete.

Despite the life sciences sector ending 2020 as one of the more active markets – it was the second most active sector for new projects on Datasite’s platform – and recording a relative boom in the first half of 2021, executives are still erring on the side of caution. This hesitant approach may disseminate through the year; however, current high market valuations are still making it difficult for some smaller players to absorb the cost and associated risk of M&A.

Additionally, special purpose acquisition companies (SPACs) are no longer as prevalent, with activity tapering off, as regulatory bodies examine and reconsider their structures and operating rules. Whilst smaller market participants have previously looked to SPACs to gain access to capital, this narrative will continue to make some industry players uneasy and many life sciences companies will continue to focus on more traditional market approaches due to the typical long development cycle.

Yet, life sciences companies have proven resilient to challenging times and health industry M&A activity in Europe, the Middle East and Africa has staged a notable recovery since mid-2020.

As the industry refocuses following the pandemic and begins planning for the next decade, life sciences companies will continue to use M&A to focus on products and services that can drive growth and operational performance. As a result, commercial models may change to ensure assets align with their chosen divestment or investment strategy.

Life sciences’ role in developing and delivering vaccinations has helped overhaul the industry’s image of putting profit before people. This sentiment shift has led to an improvement in trust levels but also enhanced the sector’s position as a strategic industry for governments and a source of scientific innovation.

The industry and associated M&A activity are likely to benefit from the increased focus on public health concerns by politicians, economic decision makers and investors. This will extend their appeal to private equity firms and drive up investment. As a result, a competitive bidding landscape for assets and a significant ramp up of activity across the life sciences sector is expected in the months ahead.

Trends, predictions andchallenges for M&A activity

Trends, predictions and
challenges for M&A activity