Looking Ahead to Factors Shaping Market Activity

The COVID-19 pandemic has triggered significant market upheaval for the life sciences sector, hindering what would be transformative M&A activities and re-orientating deals to focus on securing supply chains. According to EY’s 23rd edition of its Global Capital Confidence Barometer, 89% of life sciences executives saw a drop in profits in 2020, with two-thirds saying they cancelled or failed to complete a planned acquisition (1).

Still, despite this unprecedented disruption, life sciences companies have proven resilient to challenging times with the industry rebounding at pace. M&A deal activity is accelerating, valuations for pharma and life science services are running high, and the sector continues to attract significant interest from strategic and financial investors.

Indeed, a surge of pharma sector initial public offerings reached a record, in terms of the number of M&A transactions in Q1 2021 (2), and new life science deals on Datasite’s platform are up 58% year-on-year for the first half of 2021, compared to the same period last year. The market appetite for mega deals has also re-gained lost ground. In May 2021, two British healthcare companies, Spire and Vectura, agreed to takeover deals worth a combined £2 billion (€2.3 billion) (3), while AstraZeneca completed its US $39 billion (€33 billion) acquisition of Alexion in July 2021 (4).

This market activity is expected to grow throughout Q3 and Q4 of 2021 because life sciences companies will continue to evaluate their business plans and diversify their portfolios in response to the ongoing market shifts triggered by the pandemic. Following are some key considerations that will influence how deal activity progresses through 2021.

Increased activity

Digitization has been a key consideration for life sciences companies over the past 10 years. Now, the pandemic has directed market attention towards telemedicine, with the development of digital technologies being central to practice management, advanced therapeutics, and the wider clinical trial ecosystem. This shift has caused large pharma to refocus on digital health deals and has demonstrated the validity of digital investments. Now we can expect to see leading market participants release non-core business assets and instead focus on pursuing novel subsectors.

In particular, the biotech market will see substantial interest from investors and become a crucial M&A target, as companies continue to invest in innovation. For example, in June 2021, the German company MorphoSys announced a US $1.7 billion (€1.4 billion) deal to acquire the clinical-stage biotech company, Constellation Pharmaceuticals (5). According to PwC, biotech acquisition activity in the US $2–$10 billion (€1.7–€8.5 billion) range is accelerating, and funding will continue to trend as well, with companies looking for strategic deal making and partnership opportunities (6).

Rise of new market players

The ongoing digital transition is overhauling how industry players are assessing their business models and driving cross sector deals. Life sciences companies are increasingly acquiring or partnering with tech companies to enhance their market offerings. As rising valuations drive deal activity across the sector, companies are also becoming more introspective and taking a critical view on where they are coming up short. This is likely to prompt more cross sector transactions, particularly through bolt-on activity.

In 2020, bolt-on deals accounted for 82% of biopharma M&A activity, with companies spending US $17.8 billion (€15.1 billion) on these types of deals to mitigate financial risk (7). While we expect to see a rise in ‘mega deals’, bolt-on acquisitions of healthcare and pharma companies will accelerate this year as businesses look to hedge risk and diversify at pace.

New players will also enter the market through bolt-on deals. Despite the turbulent market conditions, many participants have strengthened their financial position over the past 12 months and are now looking for suitable investment opportunities. The life sciences traditional position as a refuge for investors is now attracting the attention of companies that didn’t previously have a foothold in the industry. Private equity and venture capital investors are already taking stock of these new market opportunities to deploy capital and will become more active across the sector.

Still, there will be ongoing regulatory and legislative challenges for key market players to navigate.

Implications of EC’s new merger controls

In March 2021, the European Commission (EC) published a significant change to merger controls on cross-border M&A activity (8). Previously, a member state could petition the EC to review a cross-border M&A transaction under the provision that completion of the deal could have a detrimental impact on the ability for other industry players to compete fairly within European markets. However, the EC advised members against requesting reviews of deals that did not breach jurisdictional thresholds.

Now, under the updated controls, the EC is encouraging referrals to review M&A deals that do not meet the national filing threshold. In particular, they have announced interest in reviewing M&A deals within the pharmaceutical and biotech sectors, and, in April 2021, the EC accepted a petition to review a merger within the pharmaceutical sector for the first time (9).

These new merger controls will now raise concerns for deals that previously would not have been reviewed within the EU and may impact the willingness of some companies to proceed with M&A transactions within the life science sector.

The National Security and Investment Act 2021

Expected to come into force later this year, the National Security and Investment Act 2021 will increase the powers of the UK government to scrutinize transactions on grounds of national security (10). The act is being introduced to prevent transactions that could hamper internal market competition and will trigger a significant change in the United Kingdom regarding the regulation of M&A activity.

With vaccine production and distribution becoming a crucial concern over the past year, transactions across the life science sector have fallen under the spotlight and many businesses in those areas will be classified within the mandatory notification sectors. Under the UK’s new act, even if actual government intervention turns out to be infrequent, life science companies will now face additional compliance challenges that could involve additional costs and extensive time delays.

According to the government’s impact assessment, up to 1800 transactions could be notified each year (11). This potential imposition will now need to be high on the agenda for life sciences companies when pursuing M&A deals. Moreover, any transactions since 12 November 2020 could be eligible to be called for review retrospectively, so there is the possibility that a deal that has already been completed may be subject to intervention (11).

Despite the acceleration of M&A deals within the life science sector, the introduction of this act is expected to impact market activity. From a regulatory perspective, there is also still a degree of uncertainty, and so one can expect to see executives act with reservations whilst the sector waits to see how the act will be enforced on the ground.

Looking ahead

Despite the market uncertainty triggered by the COVID-19 pandemic, M&A activity across the health industry in Europe, the Middle East, and Africa has recorded a significant recovery since mid-2020. Now, as markets adjust to this new COVID era and the sector re-focuses its priorities, large pharma companies will continue to re-evaluate their long-term strategy and look to invest in the assets that will drive operational growth.

Whilst there are a number of regulatory and legislative hurdles to consider, M&A deals offer a much quicker route to market. With investor demand and financial capacity on the rise again, we can expect to see a significant ramp up of activity across the life science sector, with new market players pushing valuations higher.

References

1. EY, Global Capital Confidence Barometer, 23rd edition, February 2021.
2. B. Cotton, “Global M&A Activity Increased by 48% in Q1 2021,” Business Leader, Press Release, 28 May 2021.
3. A. Ralph, “Spire and Vectura Join Takeover Deals Rush in Mid-Cap Scramble,” The Times, News Release, 27 May 2021.
4. AstraZeneca, “Acquisition of Alexion Completed,” Press Release, 21 July 2021.
5. MorphoSys, “MorphoSys to Acquire Constellation Pharmaceuticals,” Press Release, 2 June 2021.
6. PwC, “Pharmaceutical and Life Sciences Deals Insights: 2021 Midyear Outlook,” Research and Insights, 21 June 2021.
7. P. Spence, “How the Pandemic has Changed the Rules for Life Sciences Deals,” ey.com, 11 Jan. 2021.
8. EC, “Mergers: Commission Announces Evaluation Results and Follow-up Measures on Jurisdictional and Procedural Aspects of EU Merger Control,” Press Release, 26 March 2021.
9. EC, “Daily News 20/04/2021—Mergers: Commission to Assess Proposed Acquisition of GRAIL by Illumina,” ec.europa.eu, 20 April 2021.
10. UK Gov., “New and Improved National Security and Investment Act Set to be Up and Running,” gov.uk, Press Release, 20 July 2021.
11. Penningtons Manches Cooper, “National Security and Investment Act: Implications for Life Sciences Businesses,” Press Release, 13 May 2021.

About the Author

Merlin Piscitelli is the chief revenue officer for EMEA at Datasite. Datasite is a leading SaaS provider for the M&A industry, giving dealmakers the tools and insights they need to succeed across the entire deal lifecycle.

Article Details

Pharmaceutical Technology Europe
Vol. 33, No. 9
September 2021
Pages: 44–46

Citation

When referring to this article, please cite it as M. Piscitelli, “Looking Ahead to Factors Shaping Market Activity,” Pharmaceutical Technology Europe 33 (9) 2021.