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Global pharma and life sciences deals insights: Year-end 2018

07 January, 2019

Glenn Hunzinger
US Pharmaceutical and Life Sciences Leader, PwC US

2018 Highlights

Despite a strong desire for companies to be active in M&A and continued acquisition and divestiture evaluation in the pharmaceutical and life sciences sector, many buyers were kept from executing on their inorganic growth agendas due to inflated valuations, leadership changes, and political and regulatory uncertainty. While the total deal value was higher in 2018, primarily driven by the Takeda/Shire $81.7B megadeal, lower volumes reflect the challenges faced in completing deals.

  • Pharma was up in 2018, driven primarily by the Takeda / Shire deal. Excluding this deal, pharmaceuticals value and volumes were still higher year-over-year. We expect significant activity in 2019 driven mainly by acquisitions, partnerships/JVs and divestitures.
  • Biotechnology has experienced some normalization of capital market valuations, and the recent Tesaro acquisition by GSK is an example of what we expect to see in 2019.
  • Medical Devices was down relative to 2017 due to a lack of megadeals (none in 2018).

2019 Outlook

We expect 2019 to be an active year for deals in the PLS sector. The recently announced $74 billion combination of BMS and Celgene sets us off in the right direction for this year. Overall, we see other deals to follow given that the underlying fundamentals remain strong. Companies are now executing on their forward looking strategies, driven by a need for scale and category leadership. We anticipate the following key contributing factors to drive an active M&A market in 2019: access to capital (currently on balance sheets as well as available financing); capital markets normalizing for biotech companies after a year of robust valuations; and a need for companies to act on their growth strategies.

  • Divestitures: We believe divestitures will highlight the M&A landscape in 2019 as larger companies look to divest non-core/non-strategic assets. Recent trends in the sector have shown that obtaining market leadership and scale are critical to success, and using sales proceeds from divestitures of non-core assets allows companies to reinvest where they have a strategic advantage. Unlocking value through spin-offs, divestitures and partnerships/JV’s will likely continue during 2019. Following a wave of leadership changes throughout the sector in 2018, new leaders will look to implement their strategic plans to advance their growth agendas in 2019 (both organic and inorganic) and replace divested businesses with products and services more in line with their core competencies.
  • Private Equity: 2018 was a busy year for private equity, and we see this trend likely accelerating in 2019. Private equity has over $1.5T of dry-powder, and 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): With the continued importance of achieving scale and operational efficiencies, we believe there will be many partnerships (in various forms) as all sub-sectors look to compete against the headwinds facing the broader healthcare sector. 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. We also believe there will be more partnerships between larger Rx companies and payor/providers.
  • Capital Markets: After a strong showing in 2018, we see the beginning of 2019 being a robust period for Biotech IPOs and other fund-raising activity with some concern for a potential slow down later in the year. The 67 PLS IPOs during 2018 represented an ~80% increase from 2017 levels and more than 30% of the overall IPO market. Of the 67 PLS IPOs, approximately 50 were Biotech companies that had strong showings in raising over $5.0B, with almost all (~90%) priced within or above the expected range. Through the remainder of 2018, these Biotech IPOs generated an average return of more than 16%. Overall, some normalization from 2018 highs will occur; however, we anticipate there will still be an appetite for investment in new technologies and growth businesses.

While we expect all sub-sectors to show increases in M&A activity in 2019, each sub-sector’s deals will be driven by unique factors:

  • Pharmaceuticals:
    • Large Pharma: We expect to see one or two larger transactions (in addition to the BMS / Celgene combination) as companies seek to gain category leadership and create the necessary scale to compete for the long term. Also, we see significant divestiture activities (sales, spin-offs, 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 & gene therapy (oncology & rare disease) being key therapeutic areas of focus.
    • Spec Pharma / Generics: Increases in M&A activity will likely be driven by consolidation of mid-market players as they need to add scale to compete (vs. larger generic deals). Additionally, divestitures may also become a key trend as some companies look to de-lever. We see private equity and other domestic middle market players as most active, but expect Chinese and Indian headquartered companies to seize on these opportunities as well.
  • Biotech: The sub-sector will likely see significant interest from Large Pharma, among others, as capital markets normalize and buyers become more comfortable in executing deals for attractive Biotech targets at lower price points ($5.0B – $10.0B deals that were priced at $15.0B – $20.0B in 2018 due to high valuations).
  • 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.). Activity will also be driven by the need for many companies to achieve their growth agendas despite limited organic growth opportunities due to broader healthcare affordability headwinds. We see many mid-sized ($2.0B to $5.0B) 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: We expect 2019 will be an active year within the sub-sector, but may not hit the same highs experienced in 2018. Continued acquisitions by companies that look to diversify their offerings (such as Merck’s recent Antelliq acquisition) will be key. The race to ‘own the channel’ is here and companies will likely continue to bolt-on products to have a broader offering. Overall, with scale and product diversification becoming increasingly important, we see inorganic activity as a key lever companies will use to gain an advantage in the sub-sector. Similar to Elanco’s spin from Eli Lilly in 2018, we anticipate the potential for other dual track processes (spin/IPO or sale) as companies such as Bayer’s animal health business evaluate IPO opportunities against sales to strategic or financial buyers, which may depend on capital market interest in 2019. Lastly, with more independent Animal Health companies, we would expect there to be more capital available for inorganic growth (vs. the historic competition for capital allocation inside a larger conglomerate), which could fuel further M&A activity.
    • OTC: Coming off of the recent GSK and Pfizer OTC JV announcement, we believe there is a possibility for at least one additional larger deal to take place in this space, as well as a variety of continued bolt-on deals and divestitures, as many larger OTC businesses look to refine their portfolio. Bayer’s ongoing sale of their French OTC business and recent announcement to consider options for Coppertone and Dr Scholls, along with Nestlé’s announced potential sale of their skin business, spotlight examples of what is to be expected in 2019, as we anticipate other divestitures from large multi-nationals to follow suit in 2019.
    • CRO / CMO: Bolt-on activity will likely continue during 2019 with the potential for some larger independent CRO businesses to be acquired by services companies looking to move into adjacent spaces within the sector.