Global M&A Industry Trends in Pharmaceuticals & Life Sciences

Strong fundamentals and COVID-19 catalysts will drive the M&A market into 2021

In times of crisis and rapid change, investors have historically viewed Pharmaceuticals & Life Sciences (PLS) as attractive, reflecting the industry’s traditional resilience in the face of economic challenges and the opportunity to diversify risks across its varied sub-sectors, including pharmaceuticals, biotechnology (biotech) and medical devices.

COVID-19 has been no exception: interest in biotech companies and divestitures of non-core assets, which were driving mergers and acquisitions (M&A) before the global outbreak, remains largely unchanged. While much dealmaking paused during the shutdowns, many CEOs and investors view this as a temporary trend, due to the short-term lack of liquidity in the syndicated loan market.

We believe the industry’s strong fundamentals will continue to drive M&A activity for the remainder of 2020 and into 2021. Some key areas that we expect to be particularly active are highlighted below. These include companies directly involved in tackling the spread of COVID-19, such as those carrying out diagnostics and vaccine development, as well as consolidation among manufacturers of medical devices, which have been hard hit by recent restrictions on elective procedures.

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“Pharma remains an attractive industry for investors. It has proven its resilience to macroeconomic challenges and the disruption caused by COVID-19.”

Tobias KlimpeGlobal Health Industries Deals Leader, PwC Germany

M&A hotspots

We expect the following areas to be M&A hotspots in the PLS sector:

  • Mid-size biotech companies, such as cell and gene therapy, oncology and next-generation biologics, will continue to attract interest from big pharma. Research and development (R&D) and technical expertise will be key drivers.
  • Medical devices, vaccines, therapies and diagnostics connected to pandemic response and future preparedness are expected to have attractive value creation stories and 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 faced significant challenges due to restrictions on elective procedures and we expect this to result in consolidation.
  • Acquisitions that PLS companies can integrate to pivot their business models towards more digital delivery should see strong interest.
  • Specialist drug discovery companies should continue to receive interest from strategic buyers reshaping their R&D and innovative drug development portfolios.
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Key themes driving M&A activity

Pre-existing trends driving M&A

As we saw in 2019, large pharma companies focused on value creation will continue to reshape their portfolios as the long-term trend of transformation towards more specialisation accelerates. Their focus will remain on core strengths, whether those relate to key therapy areas or business segments, leading to divestitures of non-core assets or business units, and they will use strategic acquisitions or strategic alliances to fill portfolio gaps in exciting and innovative areas.

The proliferation of “HealthTech” companies and technology-enabled service providers has also introduced many new investment opportunities focused on integrated digital connectivity across the wider health and pharma ecosystem. This trend has led to a blurring of industry lines, with large tech companies breaking into the healthcare market, and health and pharma companies buying tech companies to digitalise their offerings.

Consumer health groups within large pharma companies are accelerating towards a highly concentrated industry endgame. Which companies remain as leaders in the sector will depend on which are able to execute deals, with limited remaining available options.

Explore the other key themes driving M&A activity.

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Rethink and reconfigure M&A strategies

COVID-19 has benefitted some PLS companies and hit others hard. Unsurprisingly, firms with specific coronavirus-related products and services have generally outperformed and as a result are going through a step-change in investment and interest. These include vaccine developers, testing units of diagnostics companies and makers of treatments/therapies, critical-care devices (such as ventilators) and personal protective equipment (PPE).

Areas relating to immediate and near-term COVID-19 response (such as PPE and critical-care devices) are expected to benefit from a short- to mid-term increase in demand, which may lead to more M&A activity in the form of consolidation and exits while current earnings are boosted. Vaccine development and diagnostics are expected to go through a longer-lasting increase in activity and investment as “pandemic preparedness” becomes an ongoing focus for governments.

Others such as healthcare services providers and certain medical device suppliers have suffered as a result of COVID-19 because elective surgery has been deferred. Short-term actions by management have focused on the repair of supply chains and dealing with operational and liquidity issues caused by the sharp decrease in revenue. While many expect the disruption to be temporary, followed by a period of catch-up, there are likely to be companies in a weakened financial position that may require a financial rescue. We expect some distress and consolidation among selected segments of medical device makers, especially orthopaedic and dental treatment suppliers.

Health companies have had to rethink and reconfigure their business delivery models to adapt to new social-distancing environments while also dealing with changes in demand; virtual trials, virtual consultations, digital salesforces, online and digital service delivery have all become necessary. This has led to operational realignment and established players looking for either tech-focused acquisitions or partnerships that can kick-start, transform or extend their remote delivery capabilities.

Territories with universal healthcare systems will likely need increased government funding and possibly see reductions in coverage of care eligible for reimbursement. In the US, the drastic increase in unemployment as a result of the economic impact of COVID-19 has shifted more of the responsibility of paying for healthcare from the private sector to public agencies. We expect these changes in healthcare funding, reimbursement and spending to have a knock-on impact on the salesforce and customer delivery model for PLS firms and established players will potentially seek to acquire capabilities to adapt to these new market dynamics.

Explore the other key themes driving M&A activity.

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Macroeconomic impacts

The high economic cost of the crisis will put pressure on the future fiscal environment for governments, which have had to increase spending in the near to mid term. We believe it is unlikely that governments will try to curb future healthcare budgets by reducing core services and that, instead, they will put heavy pressure on companies to reduce prices for both generic and innovative speciality drugs.

This means that suppliers will face further scrutiny of the health versus economic arguments for reimbursement for drugs supplied and we expect this will lead them to sell off under-performing drugs as companies focus on where margins are safest. There may also be distressed sales of already low-margin generic drug suppliers.

However, as in previous economic crises, investors appear to view PLS as a safe harbour in times of turmoil. In comparison with other sectors, PLS valuation multiples remain relatively high and companies are still doing deals.

Explore the other key themes driving M&A activity.

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Trust and regulatory sentiment

Public and government sentiment towards PLS companies has markedly improved as a result of COVID-19, both in terms of trust and as sources of scientific innovation. Government and regulatory sentiment towards third-party capital as a part of the healthcare ecosystem has also improved. This combination is expected to make future investment by private equity (PE) firms into healthcare and PLS more attractive and easier to execute, driving up the competitive bidding landscape for assets.

The regulatory environment has become more open and “friendly”, resulting in early regulatory dialogue and scientific advice, as well as expedited regulatory decisions such as emergency-use approvals for drugs, diagnostics and devices. There are questions as to whether the new communication flow and approval environment will or can be sustained by the US Food and Drug Administration (FDA) and the European Medicines Agency. However, while it persists, we may see increased deal activity around drug and therapy developers operating in an environment of shorter development and approval cycles.

Early on during COVID-19, some highly publicised examples of mismatches between needs and available resources in the drug supply and medical equipment chains and workforce started an ongoing debate relating to the possibility of PLS firms “re-shoring” their supply chains. There is some pressure from the public and governments to treat the medical supply chain as a component of national security that needs to be able to operate independently.

However, the PLS sector supply chain has functioned relatively well throughout the crisis. Further, the economic benefits of supply chains that leverage lower international costs of production and distribution tend to reinforce the status quo. We believe that the most likely impacts will be in-house operational changes and do not expect this to be a major driver of deal activity.

Explore the other key themes driving M&A activity.

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Pharmaceuticals & Life Sciences M&A Outlook

We expect the number of deals in the PLS sector to rebound when markets and financial institutions stabilise. To address pricing pressure, the cost of developing new products and changing business models, we expect large pharma companies to continue refocusing their portfolios, divesting non-core assets and investing more in innovative breakthrough treatments. These actions will foster M&A activity in the mid to long term.

In the near term, we expect M&A activity to slow across much of the medical devices sub-sector due to capital constraints, economic uncertainty and valuation impacts. However, there will likely be some opportunistic dealmaking to take advantage of market dislocations.

In the longer term, the fundamental drivers for dealmaking remain intact and we expect M&A activity to return as one of the key elements of a comprehensive value creation plan.

Read the cross-industry Global M&A Industry Trends

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 30 June 2020, and 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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Contact us

Tobias Klimpe

Tobias Klimpe

Global Health Industries Deals Leader, PwC Germany

Brian  Levy

Brian Levy

Global Deals Industries Leader, PwC United States

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