Key industry players are focusing resources internally right now and not on inorganic growth. As many companies redirect resources towards developing vaccines and treatments for COVID-19, they have also begun planning for how to respond to disruptions in supply chains and maximizing the potential of their limited capital resources
“Buyers with strong balance sheets will begin to see opportunities to move their strategic agendas forward. We see potential for consolidation in the Medical Device/MedTech sub-sector as companies look to adapt to a new world.”
Pharma deal values were just $3.3B in Q2 2020 despite seeing a bump in volumes from 19 transactions in Q1 2020 to 22 transactions in Q2 2020. Q2 2020 Deal values in the sub-sector were the lowest since Q1 2018, likely due to companies digesting the large volume of deals completed in recent years as they plan their next strategic moves.
Biotech deal values were flat in Q1 and Q2 of 2020 ($6.3B), the lowest level since Q2 2017, partially driven by relative strength in Biotech capital markets. There were no Biotech megadeals in Q2 2020 and only one in Q1 2020 (Gilead/Forty Seven, Inc). Additionally, there were three Biotech deals above $1B in Q2 2020.
Medical Devices volumes increased to 16 deals in Q2 2020 after a slower first quarter in which there were only 12 transactions. However, deal values were below levels seen in recent periods due to the prevalence of smaller transactions with only one deal eclipsing $150M in the most recent quarter. This likely reflects timing delays due to logistical challenges in completing deals while managing through the pandemic.
Other/Services were down significantly in Q2 2020 with only 2 transactions taking place for a combined $300M after a more favorable Q1 2020 that had 10 transactions with a combined $12.5B in value, primarily as a result of the Thermo Fisher/QIAGEN megadeal.
While most of the sector is not facing the same issues retail and travel sectors experienced, the PLS sector has faced its own set of challenges during the first half of 2020. Rapidly evolving supply chains, concerns around the availability of capital, and regulatory/political uncertainty have all contributed to potential buyers exhibiting caution before deploying resources towards M&A. Due to the rapidly changing medical needs in response to COVID-19, companies throughout the sector have responded in a variety of ways from either shifting or accelerating production of ventilators or shifting R&D resources towards the development of vaccines or treatments as rapidly as possible.
As companies continue to evaluate their competitive position in the face of these new challenges, we expect many industry participants will look to M&A in the second half of the year to best maximize their limited resources.
Divestitures: We expect there to be further divestitures within the sector as companies are forced to prioritize and manage a limited set of R&D resources. Many companies could look to divest assets outside of their core competencies in order to obtain the capital necessary to complete development of their high priority projects.
Private Equity: Private Equity has remained largely quiet during the first half of 2020, but still has significant dry-powder to deploy. While we may not see many examples of Private Equity completing megadeals, we expect opportunistic buyers to leap back into M&A during the second half of the year, especially as buyers and sellers pricing expectations around valuations begin to align. Buyers have been developing their investment theses and will soon begin to execute on small and medium sized deals to capitalize on the opportunities arising from all of the uncertainty facing the sector and capital markets. Aside from traditional M&A, Private Equity continues to look towards other methods of obtaining ownership interests and influence in the operations of targets in the sector, such as through Private Investment in Public Equity (PIPE) deals.
Partnerships (Alliances/JVs/Other): As many industry participants work to preserve capital, they have continued to look for other ways to gain access to high potential assets. As has been exemplified by the dozens of alliances, joint ventures, licensing agreements, and partnerships formed in response to COVID-19, companies have utilized tools other than traditional M&A to rapidly gain access to the assets necessary to further their strategic agendas.
While we expect all sub-sectors to cautiously re-engage with the M&A market, we see some sub-sectors with greater potential for activity in the second half of 2020:
The strains placed on the Medical Devices sub-sector due to temporary limits on elective surgeries in response to COVID-19 could create the need for significant consolidation as companies work to remain competitive. Combined with continued pricing pressures and uncertainty related to the potential for a changing political environment after US elections in November, industry participants will need to balance the need for swift action with the ability to remain agile in response to potential regulatory and political developments.
We define M&A activity as mergers and acquisitions in which targets are US-based companies acquired by US or foreign buyers, or foreign targets acquired by US or foreign pharmaceutical and life sciences companies. We define divestitures as the sale of a portion of a company (not a whole entity) by a US-based or foreign seller. We have based our findings on data provided by industry-recognized sources. Specifically, values and volumes used throughout this report are based on announcement date for transactions with a disclosed deal value greater than $15.0 million, as provided by Capital IQ, as of June 30, 2020, and supplemented by additional independent research.
Information related to previous periods is updated periodically based on new data collected by Capital IQ for deals closed during previous periods but not reflected in previous data sets. Deal information was sourced from Capital IQ and includes deals for which buyers or targets fall into one of the PLS industry sub-sectors: biotechnology, medical devices, pharmaceuticals, or other (such as contract manufacturing organizations). Certain adjustments have been made to the information to exclude transactions that are not specific to the PLS industry. Capital market and equity return information is sourced from Capital IQ.
US Pharmaceutical & Life Sciences Deals Leader, PwC US
Principal, Deals, PwC US