Global Pharma & Life Sciences deals insights Year-end 2019
Despite rising uncertainty around the global economy, the PLS sector saw a banner year in terms of total deal value in 2019, coming in at over $350B.
Two large deals, BMS/Celgene and AbbVie/Allergan, led the way. However, robust activity was seen in all sub-sectors, particularly biotech, and across all types of activities (divestitures, partnerships and IPOs). As expected, pent-up demand for deal making led to aggressive action on strategic agendas in 2019. With many CEO changes leading up to 2019, we now see many businesses with clear agendas to create PLS companies of tomorrow.
“We expect 2020 to be an active year in terms of M&A, albeit likely not at the same level of deal value. Strategic agendas are now set, and we will see another year of executing on these agendas.”
High level trends and highlights
The PLS sector has experienced continued volatility as a combination of economic and regulatory factors drive change across each of the PLS sub-sectors.
The sector saw 12 megadeals in 2019, surpassing the number of megadeals that were announced in each of the prior two years.
In Q4 2019, deal volume declined after two quarters of increases. Deal value continues to fluctuate depending on the presence of megadeals.
Pharma experienced the largest decline in deal volume across any sub-sector and dropped below 100 deals for the first time in several years.
While three of the four sub-sectors saw increases in deal value during the year, Biotech experienced the largest increase compared to 2018, with six megadeals. We see this trend continuing.
Medical Devices experienced declines in both deal volume and value during 2019. With the lowest deal value of any sub-sector, companies appear to be focusing internally to determine how best to manage changing relationships with payors and providers before returning their focus to inorganic growth.
After a quiet year, the Other/Services sub-sector experienced a significant increase in deal value. While most of the increase was due to Danaher’s acquisition of GE’s biopharma business, the sub-sector did experience consistent quarterly deal volumes throughout 2019.
US to US deals provided the majority of 2019 deal value as six of the 12 megadeals were domestic.
Non-US to non-US deals accounted for the majority of deal volume with more than 39% of the total deals in 2019.
In line with 2018, outbound and inbound deals in 2019 made up 8% and 20% of deal volume respectively. Outbound deals accounted for roughly 27% of deal value, largely due to the Allergan acquisition.
US transactions dominated 2019 PLS deal value, driven largely by megadeals, including the $99.5 billion Celgene megadeal.
PLS transaction value in Western Europe was in line with 2018. However, deal value was far more concentrated in a single deal in 2019 (AbbVie’s acquisition of Allergan).
Over each of the last two years, deal value in Europe has significantly outpaced deal volume, with deals in Western Europe accounting for only 15% and 13% of the number of deals in 2018 and 2019, respectively.
Asia Pacific and Rest of World deal value was notably low in 2019, combined only accounting for 5% of deal value.
Highlights of deal activity
PLS sub–sector analysis
Pharma deal value was largely stable in 2019, driven primarily by the Allergan/AbbVie deal in Q2 2019. However, Pharma volumes were down 16% from 2018. We expect significant activity in 2020 driven mainly by acquisitions of Biotech companies and divestitures.
Biotech experienced a significant increase in both volume and value, which was primarily driven by the Celgene/BMS megadeal. However, activity involving targets in the $2B - $10B range has never been stronger. We expect Biotech to be extremely active in 2020.
Medical Devices was down slightly relative to 2018 in both value and volume, as the larger deals in previous years did not reoccur. In 2020, we expect both value and volume to go up with targets in the $2B - $5B range being most active, with the possibility for one large deal.
Other/Services was up significantly in 2019 in both value and volume relative to 2018. While a significant portion of the value was driven by Danaher’s acquisition of GE’s Biopharma business, we anticipate the increase in deal volume during 2019 signals an active market for the sub-sector in 2020.
PLS deals outlook
We expect 2020 to be an active year in terms of M&A, although activity may not reach the same level of deal value as 2019. Mid-sized Biotech companies will continue to drive the activity as the next wave of progress in developing life-saving drugs is advancing at accelerated rates. We still see divestitures (either sale, spin or IPO) as a way to unlock capital to invest in innovative areas such as oncology and cell and gene therapy in the long term. We expect the following key contributing factors to drive an active M&A market in 2020: access to capital (currently on balance sheets as well as available financing); innovation at Biotech companies showing tremendous promise; and a need for companies to act on their growth strategies.
Our expectations by type of activity:
Divestitures: We expect this trend to continue as companies look to transform into innovative biopharma businesses, unlock value and free up capital to further invest. There is the potential for several spin transactions as larger companies that made significant acquisitions in previous years divest non-core assets as a method to pay down debt.
Private Equity: Private equity (PE) has over $1.7 trillion of dry-powder, and they have positioned themselves to transact on many of the divestitures and other businesses in the PLS sector. Unlike historical periods, private equity is no longer reactive (e.g. waiting until auction processes); they are proactively looking for take-private opportunities, corporate divestitures, partnerships with mid-market companies, and other alternative structures to bridge the gap between buyers’ and sellers’ value expectations.
Partnerships (Alliances/JVs/Other): From supporting front-end operations for new entrants to R&D and co-promotion arrangements, we see this area continuing to grow. Now, more than ever, the need to invest early or partner with innovative businesses (for delivery, data, etc.) is a critical success factor. With a continued focus on reducing overall healthcare costs, channel consolidation, and the continued integration of the payor/provider landscape, it will become even more critical for companies to compete either through innovation or scale.
Capital Markets: PLS and Biotech IPO activity, in particular, slowed in 2019 after a record breaking 2018. Biotech IPO activity in 2019 has been characterized by immunotherapy, oncology, cardiovascular diseases and early-stage companies. Despite PLS IPO's moderating in 2019 from 2018 levels, demand for Biotechs remains strong, with some consideration around step-up valuation levels from the last private round prior to the IPO. For 2020, we generally see the first half being a robust period for Biotech IPOs and other fund-raising activity, with some concern for a potential slow down in the back half of the year with the general election looming.
Sub-sector outlook
While we expect all sub-sectors to continue with M&A activity in 2020, each sub-sector’s deals will be driven by unique factors:
Pharmaceuticals:
- Large Pharma: We expect large Pharma companies to continue pursuing category leadership in order to create the scale necessary to compete long term, but these transactions are likely to come in the form of ‘bolt-on’ type deals of smaller/mid-sized companies. We anticipate that $5B - $10B-sized Biotechs will be the sweet spot for this activity, possibly extending to include a few $20B - $30B-sized larger deals. Also, we see significant divestiture activities (sales, spins and partnerships) within the sub-sector to generate additional capital to use in acquisitions of Biotech companies driven by a normalization in capital markets after a year of robust valuations. Cell and gene therapy (oncology and rare disease) will likely continue to be the key therapeutic areas of focus.
- Specialty Pharma/Generics: While we see this sub-sector likely being less active in 2020 compared to 2019, we are cautiously optimistic about the need for consolidation of mid-market players as they need to add scale to compete relative to larger Generic deals. Additionally, divestitures may also become a key trend as some companies look to de-leverage their balance sheets.
Biotech: The sub-sector will likely see significant interest from Large Pharma, among others, as additional innovation and data becomes available, and buyers become more comfortable in executing deals for attractive Biotech targets with price points ranging from $2B - $10B. Given the fragmented nature of the oncology and gene and cell therapy markets, we will likely see more volume of the smaller sized deals.
Medical Devices: Medical Devices could see significant activity driven by new entrants, such as industrial products companies looking to diversify and new independent medical device companies from recent / potential spin-offs (e.g. Siemens Healthineers, GE Healthcare, etc.). We see many mid-sized ($2B to $5B) transactions as well as a variety of different divestitures as Medical Devices companies look to reshape their portfolios after years of consolidation.
Other/Services:
- Animal Health: Despite a high level of activity during 2018 and 2019 across the Animal Health sub-sector, we see 2020 slowing a bit. Look for continued deals around technology and transactions that push all players beyond traditional drug offerings.
- OTC: It is clear more now than ever that scale and innovation is important in this space. As such, we see potential additional partnerships of Pharma companies with OTC businesses and/or additional spins/IPOs in this area.
- CRO/CMO: Bolt-on activity will likely continue during 2020 with the potential for some larger independent CRO businesses to be acquired by services companies looking to move into adjacent spaces within the sector.
About the data
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 December 31, 2019, 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.
