The increase in the value of mergers and acquisitions (M&A) in the life sciences and health care (LSHC) sector during 2014 is continuing in 2015 (see Figure 1). In 2014, life sciences companies announced some $441 billion worth of acquisitions, the highest figure for well over a decade. By the middle of July 2015, $379 billion worth of transactions have already been announced, which means that 2015 could be a record-breaking year for M&A in the sector.
The increase in deal-making has covered all segments of the industry, from the household names of big pharma to up-and-coming biotech companies to the lower-profile manufacturers of generic and over-the-counter drugs. This wave of activity is principally driven by expiring patents on blockbuster products (and the need to drive growth from augmenting product portfolios and replenishing pipelines), a challenging reimbursement environment, and relatively underwhelming research and development (R&D) productivity. Consequently, these drivers, assisted by a benign financing environment, have caused companies to use M&A to refocus on their core capabilities and therapy areas.
Source: Deloitte analysis based on data from Thomson One Banker
Note: LSHC includes pharmaceuticals, health care providers and services, health care equipment and supplies, hospitals and biotechnology.
Pharmaceutical companies, especially the relatively cash rich “big pharma” companies, are again turning to “mega deals” to address the changing market dynamics. Current M&A opportunities are being used to deliver improved returns in a relatively short timeframe as well as providing a platform for focused, longer-term growth in an environment that is evolving rapidly.
While patent expiries continue to depress the top-line growth of several major pharmaceutical giants, share valuations continue to increase. There are several factors that have led to this:
- An “M&A premium” attaching to a number of industry-players, particularly those domiciled in tax jurisdictions outside of the US
- An M&A funding benefit enjoyed by corporations with low effective tax rates, increasing their ability to “pay up” for acquisitions
- A very favorable financing environment, conducive to debt-financed acquisitions
- The post-crisis quantitative easing program in the US, which gave a boost to the valuations of US listed entities
- A “re-rating” of the pipeline potential of a number of market participants
- A growth in cash reserves; constituents of the S&P Global 1200 Health Care Index reached $380 billion of cash reserves in 2014 (an annual growth rate of 5.6 per cent since 2009). These companies are well positioned to continue acquisitions in their field, further strengthening their product portfolios.
An ongoing feature of the pharma M&A landscape outside of the “mega-deal” is a focus on portfolio reshaping as players concentrate their attention on areas of comparative therapeutic strength, with this strategy viewed as being most conducive to generating more productive R&D and enhanced operational efficiencies. This has resulted in targeted acquisitions, general divestment programs, and in some cases some innovative business combinations.
More recently, some market commentators are beginning to flag concerns over high valuations and overly optimistic expectations for development projects and recent launches. For now, even though drug discovery is beginning to appear more successful, the challenges facing the industry remain and consequently the favorable back-drop to deal-making is set to continue.
This post originally appeared on the Deloitte UK Centre for Health Solutions blog, Thoughts from the Centre.