The new normal in the pharma M&A

  1. Record-low interest rates
  2. Dry powder for both strategic and sponsor-backed acquisitions
  3. Banks warming up to lending to financially sound companies
  4. Bankruptcies and insolvencies of weaker players in various sectors likely paving the way for greater consolidation
  • Dry powder: As mentioned above, companies sitting on excess cash reserves had time to carefully assess investment and growth opportunities during the lockdowns. Big pharma has over USD150bn of dry powder to pursue high-growth opportunities and would keep a keen eye on developments in the novel therapeutics space to bridge gaps in the pipeline. Additionally, cash-rich private equity (PE) firms may be looking at opportunities as companies look to divest non-core assets
  • Fewer alternatives to utilise cash: Cash-rich companies, especially in the life sciences and technology sectors, tend to return cash to shareholders in the form of buybacks. However, in the present climate, this is unlikely to be a viable option. As a consequence, companies have more cash to scour for profitable inorganic growth opportunities
  • Benefits of scale: One of the major focus areas for inorganic growth is attaining cost synergies. These can be attained only by using an end-to-end assessment aimed at unlocking potential value, instead of merely focusing M&A strategy on short-term gains. The pharmaceutical gig is an expensive one, and it takes years of effort and several million dollars of investment to have a promising candidate. It is imperative that companies use M&A as a way to cut costs in this cumbersome journey and in doing so, add value for shareholders.
  • Revamping portfolio: The life sciences sector is unique in terms of the challenges it faces on the intellectual property front. Patent expiries and loss of exclusivity can be detrimental unless management is proactive in filling these gaps in the pipeline. (For example, TevaPharmaceuticals’ loss of exclusivity on Copaxone still sends shivers down the spines of those of us who follow the sector.) As highlighted in the previous point, drug development is years in the making and, quite often, the inorganic route is the way to go. This involves not only specialty prescription pharma acquisitions, but also looking to balance this high-growth opportunity with investments in OTC segments to maintain sustainability of cash flow in the long term.
  • For healthcare service companies — altering business model due to digitalisation: If there is one trend the pandemic has acted as a catalyst for, it is the disruption caused in the model of physician-patient consultation. While patients have traditionally been inclined to visit a doctor in person, social-distancing norms and lockdowns have shown the ease of transition to digital means. This has happened without any adverse impact on the level of care provided, and is likely to become a long-term trend. First movers in this space would have a substantial opportunity to capitalise on the market
  • For medtech companies — consolidation in sectors that suffered during the lockdowns: Sub-sectors of the medical device sector, such as dentistry and orthopaedics, have suffered due to the ban on elective procedures during the first half of the year. M&A in this sector will likely pick up and lead to market consolidation as weaker players are gobbled up by more resilient businesses
  • For pharma and biotech — expect a shift to specialty pharma and divestments in the OTC space: While OTC businesses have helped big pharma companies tide over much of the effect of the pandemic-induced lockdowns due to the “toilet-paper hoarding” syndrome, a number of companies are likely to look at high-growth opportunities in the specialty pharma sector. Prime targets of JVs and acquisition agreements would be the small to medium-size biotech companies engaged directly in the discovery of treatments/vaccines for the novel coronavirus

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