2020 Poised to be Another Life Sciences M&A 'Mega' Year

2020 will be another blockbuster year for life sciences mergers and acquisitions, according to a recent report from Ernst & Young Health Sciences and Wellness. And companies' interest in deepening their focus on a therapeutic area will continue to drive new deals this year.

Last year reached an all-time high of $357 billion in life sciences M&A activity, as EY’s 2019 M&A Firepower report predicted. Big pharma is expected to continue focusing on existing portfolios' specific therapy areas and particular business models. The 2020 EY M&A Firepower report further projects big biotech stepping up its M&A activity due to market growth challenges.

Big pharma deployed 35 percent of its firepower in 2019, EY says. With only 10 percent of its firepower triggered in 2019, biotech M&A was deterred by big pharma's high valuations.

EY expects big biotech companies to be more M&A active if valuations moderate and growth gaps intensify. Four out of the five companies in EY's data set have "an acute future growth gap in which the current growth gap is at least 10 percent of the company's 2023 sales forecast."

Strong capital markets, however, led to a more significant gap between what buyers expect and what sellers want. Most (69%) respondents to a September 2019 EY survey found that this valuation gap to be at its highest level since 2018, though deal volume is 29 percent below the average for the past five years. But portfolio optimization and growth gaps will be 2020 M&A catalysts.

By and large, companies looking for a deepened focus on a specific therapeutic area drove M&A deals last year. Target products overlapped with the purchaser's existing product portfolio in 20 out of the 25 biopharma deals that were announced in 2019 and EY analyzed.

The more therapeutically-focused biopharma companies in the 2019 M&A data set, which accounted for 10 out of 23 biopharma companies, outperformed other organizations on four out of five metrics. These include revenue, growth, return on invested capital, EBITDA margin, and average valuation. The remaining biopharma companies were best on total shareholder return.

Bayer AG Pharmaceuticals Division head Stefan Oelrich said, “unless there are deep internal research capabilities already, the targets developed outside our organizations are generally more differentiated – and therefore more valuable – than the ones developed internally.” 

A total of $1.4 trillion life sciences firepower remains available on the market for new opportunities in 2020, according to EY, “In 2020, firepower remains plentiful and we expect to see more activity in medtech and big biotech, with megamergers coming from companies with acute growth gaps,” said EY Global Health Sciences and Wellness Transactions Leader Peter Behner. “Opportunities will also arise in the cell and gene therapy and immuno-oncology areas as valuations for startups continue to moderate and as small- and mid-cap biotechs keep trading below averages, becoming interesting targets for big pharma companies.”