In 2018 alone, mergers and acquisitions (M&A) activity among the life sciences industry totaled US$198B according to the 2019 EY M&A Firepower Report. The report continues on to state that “Life sciences M&A in 2018 was strong but failed to meet market expectations as companies focused on portfolio optimization.”
In 2018 alone, mergers and acquisitions (M&A) activity among the life sciences industry totaled US$198B according to the 2019 EY M&A Firepower Report. The report continues on to state that “Life sciences M&A in 2018 was strong but failed to meet market expectations as companies focused on portfolio optimization. New digitally savvy entrants are disrupting the larger health ecosystem – and life sciences companies’ business models. When data and technology expedite growth, how can dealmaking power the value equation?”
Over the past several decades, the health industry has rapidly fused with technology to create novel advancements, such as CRISPR technology’s advanced genome editing. These shifts are ushering forth necessary self-reflection from the life sciences industry, revamping their former methods of therapeutic scale building and portfolio optimization to push technology to the forefront.
“The restrained M&A environment that we’ve seen in 2018 is surprising given expectations that new regulatory and tax environments would result in increased deal activity. Despite this, the need for life sciences companies to use M&A to acquire new capabilities is essential if they are to keep pace with the changing landscape. As digital technologies become the status quo, companies that have already made their therapeutic bets and invested in disruptive technologies will be better positioned to accelerate growth,” informs Pamela Spence, EY Global Health Sciences and Wellness Industry Leader.
EY refers to the measurement of a company’s M&A capacity as firepower. “Together, a company’s market capitalization, cash equivalents and debt capacity provide the “firepower” for deals. For instance, when a company’s market capitalization or cash and equivalents rise, so does its firepower. Deployed firepower is the ratio of capital spent on M&A relative to available firepower.” In 2018, despite healthy firepower, the life sciences industry just missed EY’s projection of an annual M&A total of over US$200b.
“Each year since 2015, EY professionals have predicted life sciences M&A would reach or exceed an annual total of US$200 billion. In 2018, the total aggregate deal value approached this figure. However, the aggregate deal value through 4 December 2018 is nearly US$90 billion less than the average M&A total value from 2014 to 2016. One reason for the more restrained climate may be because dealmakers focused on smaller, less transformative deals. In 2018, bolt-on acquisitions comprised 81% of the deal volume and 43% of the total deal value for the year,” continues the report.
To position themselves for the growth that is well within reach, EY suggests that life sciences companies must take in the following three “dealmaking opportunities”:
1. Continue to seek scale in their strategic therapeutic areas through focused M&A and alliances
2. Partner with other health care stakeholders to access and use data to improve outcomes
3. Partner with, or acquire, digitally focused, data-centric companies to improve the efficiency and effectiveness of R&D to better differentiate marketed products with evidence
In the third item lies perhaps the most lucrative opportunity for said companies: the acquisition of technology that could potentially revolutionize their pipelines. For example, John Carlson, President of Flex Health Solutions, explains that “In today’s health environment, new opportunities to improve health for individuals are being created as consumer and medical technologies intersect. These opportunities are data-driven. By combining traditional medical data with data that aren’t health related, it’s possible to paint a more complete picture of a person’s health. It’s also possible to personalize the care experience for that individual, using the data that are most meaningful to drive actual behavior change. Diabetes and congestive heart failure are two conditions where rich data streams are beginning to have an impact. As the number of medical-grade connected devices grows, there will be even more opportunities to use data to improve outcomes.”
Though technological automation may not prove immediately lucrative, it is likely that life sciences companies who have already partnered with or acquired technological advancement companies will typically outperform those who have not in the long run.
“Whether they want to bring new technologies in-house or remain in partnering relationships, we believe companies must emphasize digital deals that align with their therapeutic focus. They will need to learn to connect, combine and share data quickly and at scale to create secure solutions that deliver clinical and economic benefits across the ecosystem,” the EY report continues. “Above all, as companies develop their M&A and partnering strategies to build future value and counter the threat of new entrants, they must remain agile and move fast.”
Despite much hesitation from companies who wish to stick to a traditional product-centric business model, the future of the life sciences industry, as well as others, will include technology. Over time, the life sciences and technology industries will only become more dependently intertwined.
