Global M&A Industry Trends in Pharmaceuticals & Life Sciences

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.

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.

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.