Fighting fit and itching to get back on its feet: M&A prospects in the pharmaceuticals and life sciences sector

Luca Borrelli Director, Head of Deals Pharma and Life science, PwC Switzerland 12 Oct 2020

Given its resilience to economic challenges, the pharmaceuticals and life sciences (PLS) sector has traditionally been an attractive haven for investors in periods of crisis and rapid change. This time is no exception. The interest in biotech and divestitures of non-core assets that was already driving mergers and acquisitions before Covid-19 remains intact, and after a short pause, deal-making looks set to continue unabated. PwC’s recently published global M&A insights are also reflected in what we’re seeing in Switzerland.
Four main themes driving M&A: 
  • Underlying trends

A long-term trend to more specialisation has been apparent for some time in the PLS sector. Large pharma companies in particular will continue to focus on their core strengths, shedding non-core assets and using strategic acquisitions and alliances to fill gaps in exciting and innovative areas. These include healthtech companies and tech-enabled service providers, which are driving integrated digital connectivity across the pharma ecosystem. Under pressure from large tech companies entering healthcare for the first time, established players will be keen to buy technology capabilities to digitalise the way they do business.

  • Rethinking M&A strategy 

Covid-19 has produced big winners and big losers in PLS. The winners include companies involved in vaccines, testing, treatments and therapies, ventilators and personal protective equipment. Businesses involved in immediate and near-term coronavirus response will be subject to consolidation-driven interest in the shorter term, while interest in broader ‘pandemic preparedness’ stories is likely to increase in the longer run. The losers have included healthcare service providers and medical device suppliers that have suffered from a lull in elective surgery post-Covid-19. Some will catch up again, but there will also be distress and consolidation stories in certain medical device segments. 

Health companies are having to rethink their business delivery models to cope with social distancing and changes in demand. Basically this means that established players are looking for (digital) tech acquisitions or partnerships to kick-start or augment their remote delivery capabilities. Covid-19 is also prompting major shifts in healthcare funding from private to public payers, and actors in the PLS industry may resort to acquisitions to adapt to the new market dynamics.

  • Macroeconomic impacts

PLS is apparently still seen as a safe haven in times of economic crisis: valuation multiples remain relatively high compared with other sectors, and companies continue to do deals. But the macroeconomic impact of Covid-19 won’t leave the PLS industry completely unscathed. In particular, governments seeking to keep healthcare budgets under control will put pressure on companies to reduce drug prices. This will have a knock-on effect with M&A implications, as companies sell off underperforming drugs and low-margin generic drug suppliers experience distress.

  • Trust and regulatory environment

Public and government sentiment towards the PLS industry has improved significantly in the wake of Covid-19. Administrations and regulators are also adopting a friendlier attitude to third-party capital as part of the healthcare ecosystem. All this is creating a more hospitable environment for private equity investments in healthcare, which is likely to result in a more competitive bidding landscape for assets.

A friendlier, more open regulatory environment −including expedited approval decisions − is also creating a window of shorter development and approval cycles, which may well lead to an increase in deals around drug and therapy developers.

Early on in the crisis there were concerns about drug and medical equipment supply chains, with some governments advocating making the medical supply chain a component of national security operating independently. This could have led to major upheaval and corresponding deals activity. However, the PLS supply chain has generally held up well, probably preventing the need for major M&A activity to address security concerns.

As the graph shows, there’s been a major slump in M&A activity over the last year or so. But as we’ve seen, the PLS industry is in fundamentally good shape. We therefore expect to see plenty of attractive opportunities emerging in the medium to long term, even though deals activity in medical devices will slow in the short term.

Global Pharmaceuticals & Life Sciences Deal Volumes and Values
What about M&A in the Swiss pharmaceuticals and life sciences?

Zooming in on Switzerland we see that the PLS sector has been resilient and has remained attractive for deals. Volumes in Q1 and Q2 2020 remained stable despite the impact of the Covid-19 pandemic on the overall economy. However, we observe that average deal values are down. This is because there haven’t been any transformational large deals, but rather selective bolt-ons on the buy side and specific funding rounds or product disposals on the sell side.

Swiss Pharma & Life Sciences Deal Volumes

There has been a total of 28 transactions with Swiss involvement. In half of these deals a Swiss company acted as the buyer, and in the other half as the seller. Despite the global Covid-19 pandemic, the Swiss PLS landscape has continued to be dominated by cross-border transactions, with only two deals between Swiss companies: 

Swiss Pharma & Life Sciences Deals by Geography

Switzerland has remained an attractive market for foreign investors and companies located outside Switzerland. At the same time we have seen Swiss companies focusing on deals in mainland Europe and the USA. Unlike the situation in 2018 and 2019, we haven’t seen acquisitions of Swiss companies in the UK and Eurozone in 2020, although this might be more a consequence of the ongoing uncertainties around Brexit. 

“Investors have traditionally seen PLS as a safe haven in times of crisis. Covid-19 has been no exception, and the industry’s positive response has built trust and helped create an even more favourable environment for deals going forward.”

Claude Fuhrer, Partner and Deals Strategy & Operations Leader at PwC Switzerland
The main driver of Swiss PLS deals activity mirrors the global macro trends

Swiss buy-side M&A in PLS has focused on acquiring specific know-how, scientific capabilities and market access. PLS remains attractive. For example, we have seen Nestlé strengthen its health science platform with targeted acquisitions to continue its growth strategy in the life science space.

Swiss sell-side M&A in pharma and biotech has been driven by two main factors. Firstly, Swiss biotech companies have been seeking funding to accelerate their R&D and product development. Secondly, there is an ongoing trend among pharma companies to align and refocus their product portfolio and supply chains. We expect this trend to continue, and while transactions in the first half of 2020 were on a smaller scale, we also expect larger deals processes to be launched. Evidence supporting this view includes the recent disposal of the OM Pharma business by Vifor (read here how PwC supported Vifor), the sale of two production sites in Spain to Siegfried by Novartis, and Lonza’s launch of the sales process for its Speciality Ingredients business.

The refocusing and reallocation of resources and capital is in turn likely to foster further M&A activities among Swiss PLS players going forward, especially once the uncertainties and economic ramifications of the current Covid-19 pandemic subside.

Medtech shows a bit of a mixed picture. As in pharma and biotech, there has been M&A related to R&D funding (e.g. EGS’s investment in Spineart), but also acquisitions with the goal of acquiring technology. We also saw succession-related M&A when Straub Medical was sold to Becton Dickinson & Co (read here how PwC supported Straub Medical). While medtech companies have been somewhat more seriously affected by the Covid-19 pandemic (with the lockdown impacting consumer-oriented companies and companies supplying hospitals feeling the effects of the postponement of elective surgeries), we expect M&A activity to pick back up in the mid-term as Swiss medtech companies again look to gain market access abroad through targeted acquisitions.

To summarise: fighting fit and itching to get back on its feet 

As soon as markets and financial institutions stabilise, we expect the number of deals and deal values in the PLS sector to rebound as larger and transformative transactions will likely resurge. Large pharma companies will continue to refocus their portfolios, divesting non-core assets and investing more in innovative treatments to address pricing pressure and the cost of developing new products and changing business models. In the short term there might be a certain lull in M&A in the medical devices segment, with the exception of some opportunistic activity. This spells greater deals activity in the medium to long term – especially given that the fundamentals are still very much intact and deal-making is key to companies’ value creation plans.

Contact us

Luca Borrelli

Luca Borrelli

Director, Pharma and Life Sciences, PwC Switzerland

Tel: +41 58 792 22 78

Claude Fuhrer

Claude Fuhrer

Partner, Deals Strategy & Operations Leader, PwC Switzerland

Tel: +41 58 792 14 23