Not surprisingly, since the dawn of the coronavirus there’s been particular interest in the pharmaceuticals and life sciences (PLS) and healthcare services (HCS) sectors, traditionally seen as a safe haven in times of uncertainty. The health industries are in good shape overall. But the prolonged pandemic is taking its toll on some players while boosting the fortunes of others – as well as accelerating the response to underlying, more fundamental developments, many of them shaped by technology, regulation or ESG concerns. All this spells lively M&A activity as the industry seeks to realign with the new normal. PwC’s most recent global M&A insights are also reflected in what we’re observing in Switzerland.
Five main themes driving M&A in the health industries:
- Industry-specific drivers
There are two main drivers of value in pharma and life sciences: developing innovative treatments and enhancing the customer experience and ecosystem. Recent developments in cell and gene therapies, mRNA and digital analytics are encouraging industry leaders to refocus on treatment innovation. So rather than trying to do everything as a conglomerate, large players will continue to dispose of non-core businesses in favour of building speciality platforms, resulting in more sell-offs of consumer-centred businesses and acquisitions of speciality pharma developers, contract development, manufacturing and research.
- Business model disruption
Digitalisation continues to sweep both the pharma and life sciences (PLS) and healthcare services (HCS) segments. The convergence of digital analytics technology, smart health devices, healthcare practice-management software and consumer-centric delivery models is transforming and modernising business models in its wake. With players from across the industry realising the need to streamline and enhance how they interact with payers, providers and consumers, there’s a growing trend to acquisitions and partnerships with technology companies providing such capabilities.
- Capital availability
An abundance of financial resources looks set to drive deal activity and valuations for the next 12 to 18 months. The winners that emerged from the financial crisis ten years ago were the active buyers. Private equity managers in particular have learned this lesson, and despite the economic uncertainty, they’re under pressure to find good investment destinations for the huge amounts of financial ‘dry powder’ they have available. There’s even more pressure in the PLS and HCS sectors, as capital providers are attracted by their relative resilience, performance and value.
- Environmental, social and governance
The pandemic has focused stakeholder attention on environmental, social and governance (ESG) issues – concerns about the way the world is dealing with issues like sustainability and climate change, but also, more specifically, about inequality in terms of healthcare. As a result, we’re going to see players in the health industry placing greater emphasis on ESG criteria when selecting and considering deals. A number of major ESG initiatives worldwide, including the counterproposal to Switzerland’s Responsible Business Initiative, will soon be forcing investors to weight ESG factors more heavily in their decisions – and punishing a lack of ESG compliance with lower valuations.
- Geopolitical developments
Here all eyes should be on China. While other countries have been preoccupied with the pandemic and domestic political concerns such as presidential elections and Brexit, China has been busy enacting a new regional free trade agreement and elaborating ambitious economic and investment plans for the next four years. So, look out for more Chinese-backed acquisitions, particularly in biotech.
As the graph shows, health industry M&A activity in Europe, the Middle East and Africa has staged a powerful recovery since mid-2020 – an even sharper increase than on a global basis. Activity is already back at pre-crisis levels. Given the trends we described above, we see continuing movement in the industry in the medium term, but with marked differences between regions and healthcare systems.
What about M&A in the Swiss health industry?
Taking a closer look at Switzerland, we see that, like the trend in the EMEA region, pharma and life science M&A activity picked up significantly in the second half in 2020. Specifically, Swiss pharma companies doubled the number of acquisitions to a total of 21 in 2020.
Source: Refinitiv, Dealogic and PwC analysis
Buy-side M&A was driven by the large corporate players strengthening their development pipeline and innovation and R&D-led dealmaking. We have seen scientifically-driven acquisitions from most large Swiss pharma players (such as Novartis, Roche, Vifor and Nestlé Health Science) underpinning the trend of targeted M&A to enhance product and treatment development and focus on their core business and therapeutic areas.
Source: Refinitiv, Dealogic and PwC analysis
Swiss pharma and life science companies remained attractive targets. As discussed in our last M&A update, the sector showed resilience in the first half year, and investments into the sector in Switzerland continued to grow. The main accelerator was investments into biotech, where several companies had successful funding rounds or were able to place equity stakes with investors, profiting from the availability of private capital to fund their capital need for R&D.
Source: Refinitiv, Dealogic and PwC analysis
The second trend reflects pharma companies’ efforts to focus on their core business and divest product portfolios or restructure their manufacturing footprint. For example in September, Vifor Pharma divested its OM pharma business with the aim of strengthening its focus on becoming the global leader in iron deficiency, nephrology and cardio-renal therapies.
Overall, M&A activity in the Swiss pharma and life science sector remained strong in terms of deals volume. Deal values, by contrast, remained relatively low, reflecting the trend of targeted acquisitions to support organic growth and the absence of large transformational M&A activities. Specifically, in medtech some companies were challenged when elective treatments and surgeries were suppressed and demand declined; this, however, also provided opportunity for consolidation.
We think this will continue in 2021 with an uptick in activity and value, as we also expect private equity led transactions to increase – specifically in the pharma and medtech space. In 2020 around 25% of Swiss pharma and life science M&A activity involved private equity, with a strong focus on private investors funding biotech activities (some 50% of biotech mergers and acquisitions were private equity-led). As uncertainties subside and industry players continue to align their portfolios, attractive investment opportunities will emerge for private equity to deploy capital, and PE led pharma and medtech transactions will likely catch back-up to the level of previous years.
Source: Refinitiv, Dealogic and PwC analysis
“In addition to creating shorter-term winners and losers, COVID-19 has accentuated and accelerated more fundamental developments in the health industries. We expect innovation-led M&A to continue for large pharma companies, with private equity stepping in to create value from carve-outs and divestitures and drive consolidation in specific subsectors.”
To summarise: in sound health and ready for the next challenge
The pandemic has created new dynamics in the industry as well as accentuating developments that were already under way. Regardless of how COVID-19 develops, the momentum will continue to drive dealmaking in the medium to long term. Businesses connected with pandemic response and future preparedness will continue to be attractive acquisition candidates, as will medium-sized biotech companies that offer large pharma the chance to acquire specialist capabilities. On the other hand, device manufacturers and some drug companies not profiting directly from COVID-19 have seen a suppression of demand as elective procedures were restricted. This has created the potential for consolidation, which we expect to continue through this year.
