Blockbuster life sciences mergers and acquisitions (M&A) are due for a comeback this year, after COVID-19 and other factors pushed biopharmas away from pursuing big deals during 2020, EY predicted in a report released today. Publication was timed to coincide with the first day of this year’s virtual J.P. Morgan 39th Healthcare Conference.
The pandemic further slowed down dealmaking during what was expected to be a tougher year for blockbusters than 2019. EY reported a 48% plunge in the total value for life sciences M&A deals year-over-year, to $159 billion as of December 12—one of the lowest levels since 2013, according to the firm’s 2021 M&A Firepower Report.
“There was clearly a time in the middle of the year I thought we would not even hit $100 billion,” Peter Behner, EY Global Health Sciences and Wellness Strategy and Transactions Leader, admitted during a virtual briefing with reporters.
Of the life-sci M&A deals, Behner said, about 80% of their total value or $127 billion were biopharma transactions. Their number even rose slightly to 66 from 62 in 2019, a year in which biopharma deals accounted for 85% or nearly $261 billion.
Answering a GEN question during the briefing, Behner said a significant volume of new M&A deals during 2021 are expected to involve cell and gene therapy developers as in recent years—but with an emerging twist resulting from some recent clinical disappointments for autologous treatments.
“Cell and gene therapy will continue to be a major focus in 2021,” Behner said. “Within cell and gene therapy, I sense that there is a little bit of a cool down on autologous, and a little bit more of a wind, so to speak, blowing towards allogeneic.”
Cell and gene therapy accounted last year for a total $5 billion in seven “bolt-on” M&A deals, defined by EY as small- to medium-sized acquisitions that account for less than 25% of the buyer’s market capitalization.
Bolt-on deals accounted for the vast majority of biopharma deals, 82%. Of the rest, 10% were deals whose buyers were private equity firms and other investors outside of life sciences; 6% acquisitions specifically designed to access capabilities in a new geography; and 2%, a single “megadeal”—AstraZeneca’s planned $39-billion acquisition of Alexion Pharmaceuticals, set to close later this year.
The other life sciences deals were within medical technology or “medtech”—a category that includes diagnostics developers and companies specializing in “virtual health” such as telemedicine.
“A Tale of Two Cities”
Arda Ural, PhD, EY Americas Health Sciences and Wellness Leader, cautioned that while 2021 will see M&A activity bounce back, the total value of deals is projected to be around the historical annual level of about $200 billion.
“2021 is, in short, a tale of two cities,” Ural said. “There are transitional issues in the front end of the year. And then there is the foundational dynamics of the industry that will propel the deal flow in the second half of the year once there is some kind of normalcy, once the transitional issues are settled down.”
Ural said the transitional issues include recovery from COVID-19 impacts as new vaccines and drugs reach patients, and the incoming U.S. presidential administration of Joe Biden.
“We would like to think that come January 20, we will see a normalcy that’s going to be able to predict some calm for the business community to get back into the M&A game,” Ural said.
By the second half of 2021, M&A dealmaking is expected to pick up speed as companies, especially smaller biotechs, continue to develop new therapeutics that attract interest from larger would-be buyers intent on replenishing aging pipelines, competing with biosimilars reaching the market, and/or sharpening their areas of therapeutic focus.
The $200-billion annual historical average is only two-thirds of the value of deals achieved in 2019, a year that saw a record-high total $306 billion in life-sci M&A transactions—down from the $357 billion reported by EY in last year’s Firepower report.
The change reflected the prior inclusion of debt or equity financing in the value of deals by a source of EY’s data, S&P Capital IQ, as well as some companies restating the values of their deals and other financial data.
COVID-19 Reshapes Development
Ural said biopharmas are also expected to gravitate more toward developing RNA-based drugs and vaccines compared to pre-pandemic years—an outgrowth, he said, of the COVID-19 vaccines successfully developed by Moderna (mRNA-1273) and the Pfizer/BioNTech partnership (COMIRNATY® or BNT162b2).
“I wouldn’t limit RNA to mRNA,” Ural said, referring to the messenger RNA used in both COMIRNATY and mRNA-1273. “There’s other modalities out there as well. De-risking RNA was one of the beneficial side-effects of COVID, so that’s very promising.”
Behner said COVID-19 has also renewed biopharma interest in developing treatments against infectious diseases—an area companies avoided in recent years due to lower reimbursements compared to therapeutics for other indications.
“This is an area that will clearly fetch a lot more attention. I think a number of companies that have exited this field will re-enter,” Behner predicted. He cited the resurgence of COVID-19 cases due to variants like one seen in the U.S., the United Kingdom, and some other countries.
“COVID will not go away,” Behner declared. “Many people seem to believe that, Oh yeah, we’ve got to go through one big campaign and in the middle of 2021 or towards the end of the third quarter 2021 we’re all vaccinated. We’re done. That’s not going to be the case.”
“This is going to be a continued field where vaccines need to be taken, and depending on how many mutations, we see probably continued development will be necessary,” Behner said.
Anti-infectives is one of six disease areas of therapeutic focus where opportunities for new M&A deals are likely to emerge in 2021, said Ambar Boodhoo, EY Americas Life Sciences Strategy and Transactions Leader.
The other five are: oncology, immunology, CNS disorders, cardiovascular diseases, and diabetes.
Drivers and Deterrents
The desire of biopharmas to sharpen their focus on one or a few therapeutic areas was one of four drivers of M&A activity during 2020, according to EY. The other three drivers were the ongoing need of companies to acquire new capabilities and innovations; concerns over the “growth gap” between companies’ revenue growth and overall industry sales expansion; and the large amount of cash that companies set aside for deals.
Ural said biopharmas remain interested in sharpening their therapeutic focus, especially in indications fragmented by numerous specialty areas such as oncology and immunology. He cited figures from the report showing that ten companies with more limited therapeutic focus– deriving greater than 50% of their revenue from one therapy area—outperformed 15 more diversified peers on four of five key metrics:
- Five-year revenue compound annual growth rate (8.7% vs. 3.6%).
- Five-year average return on invested capital (12.5% vs. 4%).
- Earnings before interest, taxes, depreciation, and amortization (EBITDA) margin (37.9% vs. 29.3%).
- Average valuation, enterprise value to revenue multiple (4.5x vs. 4.4x)
On the fifth metric, five-year average total shareholder return, companies with more diversified pipelines returned 38% to shareholders vs 11.1% for companies with focused therapeutic areas.
A sharper therapeutic focus is one reason Ural cited in forecasting a resurgence of dealmaking in 2021. Other reasons cited by EY include ample liquidity, the presence of private equity buyers, and a desire by companies to fill their growth gaps.
While COVID-19 impacted sales of therapeutics in the short-term, biopharmas limited their sales declines by pivoting toward developing drugs and vaccines targeting SARS-CoV-2, and maintaining robust supply chains—reflected in an industry growth gap that shrunk from $60 billion in 2019 before the pandemic to $34.6 billion in 2020 as of November 20. The 2020 figure represented a loss of $136.2 billion in lost future enterprise value, EY said.
EY calculated growth gap and enterprise value based on its own data as well as data from Capital IQ, IQVIA and Evaluate Pharma. Lost future enterprise value was calculated using current revenue multiples specific to the companies reporting growth gaps.
Future clinical trial delays and reduced sales could cause growth gaps to rise again—a factor that could drive new M&A deals in 2021. “Dealmaking is one of the most efficient ways to regain future value,” Boodhoo said.
EY also identified three deterrents to M&A:
- The ease with which biopharmas raised capital through initial public offerings and follow-on financings—more than $63 billion in total. Companies have exit options beyond M&A
- An average premium above share price for M&A deals of 74% due to high valuations.
- The disruption of traditional dealmaking wrought by COVID-19.
COVID-19 complicated efforts at dealmaking as buyers and sellers were forced to complete due diligence reviews and close transactions virtually rather than face-to-face, according to EY. The global pursuit of vaccines and drugs against SARS-CoV-2 diverted capital that otherwise would have been spent on acquisitions or clinical trials of drugs and vaccines for indications outside of COVID-19.
In addition, relatively strong capital markets continued to keep the valuations of potential acquisition targets high, maintaining the gap between deal values expected by buyers and offered by sellers, according to EY.
High valuations and strong public markets led acquirers to focus on smaller deals: As dealmaking slowed down during 2020, biopharmas hammered out smaller “bolt-on” deals defined as small to medium-sized acquisitions that account for less than 25% of the buyer’s market capitalization.
As a result of doing fewer and smaller deals, life sciences companies finished 2020 with record amounts of “firepower,” EY’s term for a company’s capacity to carry out M&A deals based on the strength of its balance sheet, specifically the amount of capital available for M&A deals.
During last year, biopharma companies deployed just 12% of their firepower, down from 20% in 2019. Biopharmas had a combined $996 billion in firepower—accounting for two-thirds of the $1.466 trillion in total life sciences firepower, up nearly 22% from $1.203 trillion in 2019, when biopharma accounted for 74%.
The other third of life-sci firepower was the $470 billion held by medtech companies. Medtechs coped with reduced revenue as healthcare providers canceled or deferred procedures and pivoted toward treating COVID-19 patients, according to the report.
Biopharmas also stepped up collaborations in 2020, with partners focused most often on developing platform technologies and vaccines, from R&D through manufacturing.
During 2020 through November 30, biopharmas inked 261 alliances valued at a total $140 billion, according to EY—of which 13% or $17.8 billion, a record-high amount, consisted of upfront payments. That’s about 45% more in value, and 11.5% more in number, than the 234 alliances totaling $96.7 billion reported for 2019.
EY based its optimism about 2021 in part on the pace of M&A transactions rebounding during the second half of 2020, citing the planned AstraZeneca-Alexion deal and Gilead’s $21 billion purchase of Immunomedics last October.
However, a third deal exceeding $10 billion was not counted—Thermo Fisher Scientific in August terminated its planned $12.5 billion acquisition of QIAGEN after the purchase ran into opposition from QIAGEN shareholders seeking a higher per-share offering price.
“The reason why we saw more deals towards the second half of the year is obviously that in the summer months and post summer months, the COVID numbers were down in many countries, and that allowed at least careful face to face visits and due diligence,” Behner said.