Pharma and life sciences deals insights: Midyear 2020
After an exceptionally strong H1 2019 deal activity in the PLS sector saw significant declines in the first half of 2020, as predicted in our year-end outlook. However, the potential for consolidation in certain sub-sectors remains high.
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.”
High level trends and highlights
The PLS sector has experienced significant headwinds during 2020 due to a combination of economic, regulatory, political, and macro-economic factors.
The sector has only seen two megadeals in 2020, both happening in the first quarter of the year. This number reflects a drop-off from the second half of 2019, in which there were four megadeals in the last six months of the year.
Although deal volumes also weakened, deal values were mostly impacted by the decline in both the size and number of megadeals, which was expected after a year that included $80B+ acquisitions by Bristol Myers Squibb and AbbVie.
Two of the four sub-sectors (Biotech and Medical Devices) saw declines in deal volumes and values from H2 2019 to H1 2020. Biotech experienced the biggest percentage drop in volumes whereas Medical Devices took the biggest hit to deal values.
The Other/Services sub-sectors saw increases in both deal volumes and values in H1 2020 over H2 2019. The big increase in deal values is the result of the Thermo Fisher/QIAGEN transaction, the largest of the year across any sub-sector.
Pharma deal values were down significantly, despite having an identical number of deals (41), between H2 2019 and H1 2020.
Deal values dropped roughly 56% in Pharma, 74% in Biotech, and 88% in Medical Devices from H2 2019 to H1 2020.19.
US to US deal volumes have fallen steadily between H2 2019 and H1 2020, and made up only 27 of the 99 deals in the first half of 2020. US deal values dropped from $33.6B to $11.6B from H2 2019 to H1 2020.
Foreign deals have accounted for only 16.5% of the H1 2020 deal value while making up 42 of the 99 deals during the period.
US to non-US deal volumes have remained low, accounting for just 8 out of the 99 deals but represented $12.5B in deal value (36%) through half the year.
US transactions have led 2020 deal volumes and values through half the year, despite having only one megadeal which accounted for $5B in deal value.
PLS transaction value in Western Europe peaked in Q1 of 2020 with $12.6B in deal value. However, deal value was heavily concentrated in a single acquisition (Thermo Fisher/QIAGEN).
Asia Pacific has been notably low through the first half of the year, only accounting for 4.5% of deal value.
Highlights of deal activity
PLS sub–sector analysis
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.
PLS deals outlook
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.
Sub-sector outlook
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:
Pharmaceuticals:
- Large Pharma: After significant sub-sector consolidation, including deals valued at over $20B in the last few years, Large Pharma will likely look to smaller deals and divestitures as they actively manage their portfolios in response to a rapidly changing environment. As COVID-19 related issues impact the timelines for completion of new and existing clinical trials, companies may need to make difficult choices in prioritizing assets for further development. Rather than postponing the development of non-core assets, Large Pharma may look for opportunities to divest and redirect resources towards their core competencies. Oncology and cell/gene therapy will likely be key areas of focus within the sub-sector.
- Specialty Pharma/Generics: While the macroeconomic environment continues to evolve, the underlying need for Specialty and Generic companies to grow their product pipelines through M&A remains. While large deals may be difficult due to the desire to preserve capital in times of uncertainty, we expect a steady flow of smaller deals as this sub-sector continues to evaluate their product portfolios and work to scale their operations in an increasingly
competitive space.
Biotech:
- While we anticipate a rebound in the volume of Biotech deals in the second half of the year, relatively high valuations and strength in the capital markets could limit the number of megadeals in the sub-sector. The underlying rationale and need for M&A in the sub-sector remains strong, and trends in capital markets will likely determine the speed of the recovery in deal volumes to the levels experienced over the last
few years.
Medical Devices:
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.
Other/Services:
- Animal Health: After several years of deal making, the Animal Health sub-sector will likely place a larger focus on collaborations and partnerships rather than traditional M&A. New demands from both pet and food animal channels could drive M&A activity beyond traditional drug offerings.
- OTC: While M&A activity remained limited in the first half of 2020, the need for scale and innovation remains critical for success in this sub-sector. This sub-sector in particular could see an increase in partnerships along with other deal structures aside from traditional M&A.
- CRO/CMO: As companies adapt their supply chains in response to COVID-19, we expect continued interest in the space by Private Equity and other buyers. Thermo Fisher’s acquisition of QIAGEN exemplifies the diversification strategies that may also drive deal activity in the second half of 2020 as larger players look to leverage and expand upon their specialty areas into adjacent spaces.
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 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.
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