Global M&A Industry Trends in Health Industries
Health industries M&A activity is accelerating and attracting new investors
Investors have maintained a high level of interest in the pharmaceuticals and life sciences (PLS) and healthcare services (HCS) sectors, particularly since the start of the pandemic. The sector’s historic position as a defensive refuge for investors during difficult economic times has helped it attract new investor interest (for example, from infrastructure funds) and a lot of capital chasing a safe harbour. M&A deal activity and valuations are running high, and we expect this trend to continue for the next 12 to 18 months.
That said, there are nuances in how this will play out across the M&A landscape in 2021. The ongoing adoption of digital technologies is affecting everything from patient-care delivery to practice management to the development of advanced precision therapeutics. In PLS this is causing large pharma to refocus on innovation-led value creation and away from consumer-oriented businesses. For HCS, the whole operating model is shifting to focus more on delivering consumer-driven health and wellbeing services.
The prolonged and ongoing impact of the pandemic will have winners and losers, with variations among regions and health systems. On the one hand, private hospitals and clinics surviving solely on government support packages are likely to consolidate and restructure as their financial support winds down. Amid restrictions on elective procedures, medical device companies face much the same fate. On the other hand, successful vaccine developers will likely earn a windfall of excess cash and market positioning that they can use to reshape the competitive landscape of the pharmaceutical industry.
M&A trends in the second half of 2020
Global Health Industries Deal Volumes and Values
Source: Refinitiv, Dealogic and PwC analysis
The volume of M&A deals increased significantly in the second half of 2020, an increase of 25% relative to the first half of the year and 14% up on the second half of 2019. This was mostly the result of mergers and acquisitions in the Asia-Pacific region, where deal volume for medical devices, biotech and pharma increased by 35%, 75% and 36%, respectively compared to the first half of the year. In both EMEA and the Americas, pharma volumes declined by 2% and 22%, respectively compared to the first half of the year, but at substantially higher deal values. Healthcare services M&A deal volumes dipped in the second quarter of 2020, but rebounded during the second half of the year.
Total M&A deal value was also trending much higher in the second half of the year, largely due to five megadeals totalling around $97 billion: AstraZeneca announced plans to acquire Alexion Pharmaceuticals (approximately $39 billion), Gilead Sciences acquired Immunomedics (approximately $21 billion), Siemens Healthineers is in the course of acquiring Varian Medical Systems ($16.4 billion), Bristol Myers Squibb acquired MyoKardia ($13.1 billion), and Johnson & Johnson acquired Momenta Pharmaceuticals ($6.5 billion). Excluding the megadeals, the total value of deals appears to be slightly down but broadly consistent with pre-pandemic levels across the deals landscape.
Valuations in the pharmaceuticals and life sciences sector
Valuations for medtech and pharma services have both risen, likely the result of COVID-19-related demand. Medtech includes companies producing diagnostic testing supplies, personal protective equipment and acute care devices such as ventilators. The pharma services subsector includes companies that are working to develop vaccines and treatments for COVID-19.
“Health industries has continued to be a go-to sector for investors throughout the pandemic. COVID-19 has had a significant impact on the relative fortunes of the different subsectors, benefiting the financial position of vaccine developers in particular.”
M&A hotspots
We expect the following areas to be M&A activity hotspots in 2021:
Pharmaceuticals and life sciences
- Midsize biotech companies, such as cell and gene therapy, oncology and next-generation biologics, will continue to attract interest from big pharma. The most attractive targets will have strong research and development (R&D) capabilities and technical expertise.
- Contract development and manufacturing organisations (CDMOs) that focus on innovative drug development and technologies, including the messenger RNA (mRNA) technology now successfully used in COVID-19 vaccines, will be attractive to large pharma companies looking to add to their pipeline and development capabilities (across all therapeutic areas) via mergers and acquisitions.
- Given the prolonged nature of the pandemic crisis, firms focusing on medical devices, vaccines, therapies and diagnostics connected to pandemic response and future preparedness are expected to continue to have attractive value creation stories and to become targets for acquisitions and tie-ups.
- Device manufacturers (and certain drug companies) across a variety of therapeutic areas not related to COVID-19 (including dental, general surgery and orthopaedic) have experienced prolonged suppression of demand resulting from restrictions on elective procedures. We expect the trend towards consolidation that started in the first half of 2020 to continue.
- The relative resilience of the PLS sector and its strong returns could attract large chemical and technology industry players to enter, or re-enter, the pharma manufacturing space.
- Continued focus and pressure on drug prices and supply chains will lead to some consolidation in generics and production of active pharmaceutical ingredients (APIs), particularly in India and the Asia-Pacific region.
Healthcare services
- Private clinics and hospitals providing primary and elective care are similarly facing consolidation and roll-ups as government financial support winds down and struggling practices run out of cash.
- Digital healthcare services providers and health IT companies that digitise practice management should continue to see elevated interest from healthcare services companies looking to modernise their business models via M&A activity.
- Elderly care facilities have been negatively impacted by the ongoing pandemic. We expect to see further consolidation across Europe, partly through the integration of single players and small groups into larger provider groups.
Key themes driving M&A activity
Industry-specific drivers
The PLS industry has two main drivers of value: innovation in treatments, and enhancing the customer experience and ecosystem. Recent scientific and technological developments in cell and gene therapies, mRNA, and digital analytics capabilities are leading industry players to refocus primarily on treatment innovation.
In other words, the large strategic players will continue shedding non-core business units, focusing instead on building specialty platforms and moving away from being pharma conglomerates. As a result, we expect to see accelerating deals activity from the divestment of consumer-focused businesses (such as over-the-counter products) and the acquisition of specialty pharma developers, contract development and manufacturing, and contract research organisations.
Business model disruption
The ongoing digitisation and digitalisation of PLS and HCS business models through the intersection of digital analytics technology, smart health devices, healthcare practice-management software and consumer-centric delivery models (including developing direct-to-customer digital therapeutics offerings) is changing how existing players are looking at their business models and driving cross-sector deals.
Players from across the PLS and HCS spectrum are leveraging digital solutions to modernise their business models, streamlining and enhancing how they interact with payers, providers and consumers. As a result, PLS and HCS firms are increasingly acquiring or partnering with tech companies.
Capital availability
The combination of high investor demand, scarce assets and abundant financial capacity is a recipe for high valuations and high-speed dealmaking. We expect it to continue for the next 12-18 months.
The private equity community—along with the investment community more broadly—has high levels of financial ‘dry powder’. In private equity houses, fund managers know that active buyers emerged as winners from the global financial crisis ten years ago. So, despite the uncertainty of the current economic environment, private equity fund managers with ample financial capacity are under pressure to find good investments.
This pressure has been further compounded in the PLS and HCS sectors by the increased entry of capital providers—such as generalist private equity houses, infrastructure investment funds and family offices—which are attracted by the relative resilience, performance and value of these sectors.
Environmental, social and governance
Concerns about environmental, social and governance (ESG) issues have come into sharper focus during the pandemic. A related theme is whether the world’s institutions have the capability to address other communal issues like sustainability and climate change, the social determinants of health, and the inequities inherent in healthcare systems—who gets access to what treatments, when and at what cost. For example, access to COVID-19 testing resources, emergency treatment facilities and vaccines has varied widely from one country to another and even within countries.
As a consequence, we expect that dealmakers in the pharmaceutical and life sciences and healthcare services sectors will place greater emphasis on ESG criteria when selecting and considering future deals. This may not lead to specific M&A activity hotspots, but it may mean that buyers reject deals with negative ESG characteristics or value them lower.
Geopolitical developments
While much of the world has been preoccupied with the pandemic and internal political uncertainties (such as the US presidential election and Brexit), China has enacted a new regional free trade agreement, the Regional Comprehensive Economic Partnership (RCEP). China has also published an economic plan for 2021–2025 and pushed further investment in its regional PLS industry champions (BioNTech’s first vaccine partnership, for example, was with the Shanghai-based multinational conglomerate Fosun). We expect to see additional Chinese-backed acquisitions, particularly in biotech, over the next six to 12 months.
“Looking forward, we anticipate significant deal activity as a result of a pivot towards innovation-led value creation by large pharma companies.”
Health Industries M&A outlook
- Economic uncertainty
- Cross-sector technology deals
- Regulatory uncertainty and geopolitical tension
- Healthcare services consolidation and digitalisation
- Pharmaceutical innovation track
- Post-crisis, post-vaccine: Winners and losers
Economic uncertainty
A pandemic-induced economic downturn continues to put downward pressure on middle-class income, reducing discretionary spending and lowering demand for over-the-counter (OTC) products. We expect this to accelerate the pace of consolidation in the OTC market as companies seek efficiency in economies of scale and the market-pricing power of category leadership. Many of these deals cross sectors, with consumer product companies buying OTC assets from traditional pharma players. This is especially prevalent in emerging markets, where currencies have also been devaluing.
Cross-sector technology deals
We expect continued growth in cross-sector deals with digital and technology companies. On one side, large tech companies are entering the healthcare and pharma space to leverage their advanced data analytics and novel consumer-platform technologies, including the development of digital therapeutics. And on the other side, traditional pharma companies are acquiring digital and technology companies to modernise their development processes, explore the potential of advanced analytics such as artificial intelligence and machine learning on developing higher precision therapeutics, adjust their customer delivery models, and achieve cost efficiencies.
Regulatory uncertainty and geopolitical tension
Uncertainty surrounding potential political regime changes in certain regions is likely to continue, either from ordinary elections or in response to the pandemic. We expect business owners who have been considering exits to expedite those plans in anticipation of governments making unfavourable tax, regulatory or fiscal changes.
We also expect continued tensions in the geopolitical and trade relationship between China and the United States to impact company investment and deal activity with regard to supply chain and market partnerships. European companies may look to secure ‘near shore’ production capabilities by acquiring CMOs/CDMOs, and some international players may look to build ‘China plus one’ options by securing production capacity in India.
Healthcare services consolidation and digitalisation
Across the healthcare deals landscape, we see continued consolidation of private clinics and hospitals where government financial support has been insufficient to sustain institutions through the prolonged pandemic. Also, as with the broader PLS sector, M&A activity is likely to reflect accelerated adoption of digitalised practice management and patient services through telehealth and other channels.
Pharmaceutical innovation track
The development of treatments in pharmaceuticals has followed a relatively steady pattern of expensive breakthrough innovations followed by the development of cheaper alternatives. Small-molecule formulations come off patent and face competition from generics, and biologics face competition from biosimilars.
Following the same model, in future we expect that the current frontier technologies of CGT and mRNA will face pressure from the technological equivalents of generics and biosimilars. This will likely propel deal activity as the large generic and biosimilar players look to acquire their next product lines from smaller development companies.
Post-crisis, post-vaccine: Winners and losers
The selected players that have secured (or will secure) successful vaccine approvals and distribution agreements are likely to enjoy a large influx of cash from vaccine sales. Even at modest prices, the sheer volume of doses that national governments have already committed to purchasing will lead to a substantial build-up of cash for those companies. Furthermore, companies that use the new mRNA technology to produce their vaccines will have an important early advantage in the innovation process of applying mRNA to other therapeutic areas.
As a result, the deployment of mass mRNA vaccinations will lead to a complete reallocation of the balance of market power in the innovative drug space. The successful mRNA vaccine developers will have more cash than the previous innovation leaders and a technological edge.
We expect that M&A activity will respond with new leaders acquiring weakened firms, and weaker firms combining to challenge the new leading firms.
About the data
We have based our commentary on M&A trends on data provided by industry-recognised sources. Specifically, values and volumes referenced in this publication are based on officially announced transactions, excluding rumoured and withdrawn transactions, as provided by Refinitiv as of 31 December 2020 and as accessed on 3 January 2021. This has been supplemented by additional information from Dealogic and our independent research. This document includes data derived from data provided under license by Dealogic. Dealogic retains and reserves all rights in such licensed data. Certain adjustments have been made to the source information to align with PwC’s industry mapping. We define megadeals as transactions with a deal value greater than US$5 billion.
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