The new normal in the pharma M&A

Published on October 13, 2020 by Usman Khan

Introduction:

The life sciences sector has not attracted as much attention from the average Joe as it has since the start of the coronavirus pandemic. The last epidemic that even came close to wreaking such havoc was the Spanish flu of 1919 — over 100 years ago. The world has, naturally, turned towards big pharma to provide hope of a potential cure. Over 165 pre-clinical and clinical trials for a vaccine are currently in progress.

The road to recovery for this crisis, unlike those for the most recent crises, is mired in uncertainty, and the pioneering life sciences companies are as uncertain about their future as we are.

Macroeconomics:

The world economy is forecast to contract by 4.9% (according to the IMF’s June 2020 update), with some of the erstwhile drivers of global growth (India and China) seeing significant dips in performance. The impact on low-income households is also disproportionately significant and is expected to wipe out substantial progress made towards eliminating income inequality since the 1990s. With several protectionist policies in force in the major economies at the start of the year, the pandemic has come as a further blow to proponents of globalisation. Yet, it remains more crucial than ever to ensure multilateral cooperation on several fronts. Many of the hard-hit emerging economies need liquidity assistance and external relief to bridge the shortfall in funding to fight the crisis. Apart from this, the global supply chain needs a major overhaul to achieve pre-pandemic efficiencies.

In terms of investor confidence, the life sciences sector enjoyed a unique run in the first half of 2020, outperforming other major sectors with regard to total shareholder returns:

Source: S&P Capital IQ, PwC analysis

Additionally, a number of macroeconomic developments globally have created a perfect storm of sorts that companies could take advantage of to pursue a well-thought-out acquisition strategy:

Source: S&P Capital IQ

Paradigm shift in healthcare consumption habits:

The life sciences and healthcare services sectors have been working at breakneck speed to deliver a cure and contain the spread of the virus since March. Yet, the industry itself has witnessed significant demographic changes in consumption patterns that would affect the long-term strategies of several key players. Consumer healthcare/over-the-counter (OTC) divisions have been propping up cash flow since the early days of the outbreak, but consumers have shown an unprecedented inclination towards accepting new digital habits. Patients have become more concerned with personal health issues and are more digitally engaged with their afflictions. The number of telemedicine consultations has also seen a significant increase globally.

New and innovative therapies have gained traction, and statements by the US Food and Drug Administration (FDA) regarding approval of such therapies have been received positively by pharma executives. For instance, former FDA Commissioner Scott Gottlieb recently suggested that 10–20 cell and gene therapies (CGTs) could be approved by 2025.

The sector may also be impacted by general changes in policy that usually follow such life-altering crises. For instance, after the 2008 recession, weaker economies enacted laws that lowered prices of pharmaceutical products and imposed greater restrictions on reimbursements. Governments may be less supportive of new therapies in future, although this may provide some benefit to specific patient groups.

Source: S&P Capital IQ

What happens to deal-making trends in the aftermath of a major crisis:

Companies generally try to avoid fire sales when a crisis hits. This is reflected in the deal multiples during the year that remain at pre-crisis levels. However, in the year following a crisis, the urgency to make deals is evident, and discounts can be found in transactions across sectors. A McKinsey study shows that following the dot-com bubble burst in 2002, average EBITDA multiples (across industries) stayed high (11.8x) but shrank the following year (10.4x). In 2008, multiples remained high at 13.1x and dropped to 10.6x in 2009.

What will kick-start M&A in the “new normal”:

Recipe for successful pharma M&A in the “new normal”:

The immediate instinct of most executives would be to focus on recovering lost revenue in the short term. However, as highlighted above, when deal making picks up after the crisis, there should be enough bargain opportunities available in the market that can create sustainable value for shareholders.

A recent survey by PwC of over 900 CFOs pointed at M&A being a core lever to executing a recovery strategy. Therefore, it is extra important for pharma companies to adopt a through-the-cycle approach to valuation, for the following reasons:

The major M&A trends we expect to see in the short to medium term are highlighted below:

The above points should drive home the message that a well-thought-out M&A strategy could be crucial for long-term success in this watershed year. Executives would need to rearm and reassess their strategy and identify specific themes and deal-screening criteria. They may choose to plug gaps in the commercial pipeline, expand in new geographies to enhance supply-chain capabilities or identify opportunities in the era of digitalisation. Either way, corporate development teams would be well advised to take a proactive approach and secure board commitment on expansion plans.

This will be crucial to thriving in the “new normal”.

How Acuity Knowledge Partners can help?

Acuity Knowledge Partners provides multi-sector expertise in areas of financial analytics and advisory services, with the life sciences sector as one of the major areas of focus. As a leading provider of research and valuation services to clients globally, we are uniquely positioned help identify value-unlocking opportunities in the pharma and biotech sector for a range of financial institutions comprising investment banks and sponsors. With domain knowledge and exceptional track record of timely service, we have partnered with clients to help scale up their sector coverage, drive down costs, and offer out of the box solutions with round the clock access to a talented analyst pool.

Originally published at https://www.acuitykp.com.

About the Author

Usman Khan, Delivery Manager, IB, has 5 years of experience in the investment banking and financial advisory sector, and currently serves as a Delivery Manager in a large UK-focused investment banking client account. Prior to joining Acuity, he served as an analyst in the capital structure advisory team at HSBC’s investment banking division. He has worked on a variety of corporate finance mandates, apart from typical M&A work, including dividend policy and credit ratings advisory services for clients in life-sciences, commodities, infrastructure, industrial, and services sectors. He is an MBA from the Indian Institute of Foreign Trade, Delhi (Class of 2015) and a commerce graduate from the University of Delhi (Class of 2012).

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Acuity Knowledge Partners

Acuity Knowledge Partners

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We write about financial industry trends, the impact of regulatory changes and opinions on industry inflection points. https://www.acuitykp.com/