More Mergers and Acquisitions Ahead for 2010

Many life-sciences companies are likely to execute an acquisition in the next 12–24 months as economic conditions improve, according to Why capital matters, a global survey of senior executives in the life sciences sector conducted by Ernst & Young in 2009. Respondents believed 2010 would offer many transaction opportunities and a strong majority of respondents rated the outlook for merger and acquisitions (M&A) as "favorable" or "very favorable" during the next 12 months.

Despite growing optimism, however, Ernst & Young warned in a press statement that the "lingering effects of the financial and economic crisis will present life-sciences companies with unique challenges in 2010," which will necessitate an even stronger emphasis on effectively managing and deploying capital. Although M&A activity is expected to accelerate, some would-be acquirers will be unable to participate because of the impact of the downturn. Others will have to re-evaluate how they structure and fund their transactions.

More than 60% of respondents said they would like to take advantage of deal opportunities that arise, but more than half of this group added that they would be "restricted" in their ability to properly execute a robust transaction - partly because of concerns in accessing and deploying capital. Additionally, although 46% of respondents foresee an increase in distressed asset sales in the next year, only 28% feel they are well-positioned to execute a deal quickly.

"In 2010 and beyond, the ability to respond quickly to transaction opportunities and threats that arise in all key geographies will be a point of distinction between the winners and losers in the sector," Carolyn Buck-Luce, global pharmaceutical leader at Ernst & Young, explained in the press statement. "To be truly 'transaction ready' in today's economic climate, companies will need to give top priority to initiating an integrated program to manage capital most effectively, and to build greater flexibility throughout their organizations to act quickly and smartly."

Ernst & Young highlighted several steps that can help life-sciences companies improve their ability to execute transactions this year. For example, companies are recommended to increase their preparation for an acquisition by maintaining sufficient cash and financing capacity, as well as preparing a list of desired transaction targets and improving the skills required for buying distressed assets. Ernst & Young also suggested that companies evaluate the valuation and regulatory compliance implications of pending changes in volumes and reimbursement rates caused by healthcare reforms in major markets.

"While the worst of the funding crisis may have passed for emerging life-sciences companies, their management, boards and investors increasingly see an M&A exit as the preferred route compared with taking on the risk associated with raising sufficient capital to go it alone," Glen Giovannetti, global biotechnology leader at Ernst & Young, said in the press statement. "Being prepared to execute such a transaction opportunistically at any stage of development is key to maximizing value for shareholders."