biopharmas move from mergers and acquisitions to strategic partnerships to access external innovation

NEW YORK, January 10, 2022 / PRNewswire / – Global life sciences mergers and acquisitions (M&A) activity totaled US $ 219 billion in 2021, against 159 billion US dollars in 2020, mainly driven by medtech (111 billion US dollars), according to 10e edition of the annual EY M&A Firepower Report. Biopharmaceutical M&A activity in 2021 fell to one of the lowest levels in a decade, totaling 108 billion US dollars, below 128 billion US dollars in 2020 and 261 billion US dollars in 2019. That’s not to say it wasn’t an active year for biopharmaceutical mergers and acquisitions: 2021 has been a story of volume. In the absence of a registered mega-deal, bolt-ons represented 88% of the total volume of transactions. Biopharmaceuticals closed the year with near-record levels of firepower, which EY teams define as a company’s ability to complete mergers and acquisitions based on a strong balance sheet. Only 9% of biopharma’s Firepower was deployed on mergers and acquisitions in 2021, up from 25% in 2019 and 12% in 2020.

A significant change in the allocation of capital to the detriment of mergers and acquisitions

The EY report finds that despite signs of a market downturn, sellers still have the edge. In 2021, target valuations remained high and capital was still available. Last year (at November 30, 2021), biopharmas have raised more than 80 billion dollars in follow-on financing, venture capital financing and initial public offerings (IPOs), just after the US $ 90 billion raised in 2020. This capital for companies in the start-up and growth phase has been further increased by the growing role of Special Purpose Acquisition Companies (SPAC), a trend which accelerated in 2021.

The innovation gap and the partnership imperative

A looming patent cliff increases the urgency of acquiring future innovation outside. The EY report suggests that the compound annual growth rate of large biopharmaceutical companies will drop sharply in 2024, from 5.6% to 2.6%, significantly underperforming the expected growth rate of 7.5% for the entire biopharmaceutical industry. The innovations driving the growth of biopharmaceuticals over the next five years are expected to come from outside the group of established market leaders and the established classes of biopharmaceuticals that have historically driven growth.

Subin Baral, EY Global Life Sciences Deals Leader, says:

“For buyers interested in owning advanced stage assets without scientific risk, there was no choice but to pay high premiums in 2021. In this context and given the need for external innovation to achieve future growth objectives, strategic partnerships will be essential for biopharmas. Although 2021 has been a strong year for alliances and partnerships, the investments have not gone far enough.

EY’s research found that since the start of 2020, leading biopharmaceutical companies have deployed around 1.5 times more firepower on alliances compared to mergers and acquisitions. In 2020, biopharmas signed 38 alliances with initial transaction values ​​greater than $ 100 million and four more than US $ 1 billion. In contrast, in 2021, companies prioritized smaller transactions with lower initial values.

To allocate capital sustainably in 2022, biopharmaceuticals should take into account the following:

  • Divest to invest. According to EY research, total returns to shareholders are higher for companies that divest. Despite the current fragmentation of the industry, it is also true that biopharmaceuticals have not done enough to proactively focus their business models. Indeed, the total disclosed value of disposals in 2021 was only 11 billion US dollars
  • Deploy more of their firepower on strategic partnerships
  • Continue to favor special offers rather than risking huge expenses for uncertain rewards.

The full EY report is available at ey.com/firepower.

Notes to Editors

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About EY Firepower

Now in his 10e year the EY Firepower rating measures the ability of companies to finance transactions based on the strength of their balance sheets. It has several key inputs including cash and cash equivalents, debt capacity including lines of credit and market capitalization. When building the model, the following assumptions were made: first, a company will not acquire targets exceeding 50% of its existing market capitalization; second, the debt-to-equity ratio of the combined entity created by a transaction cannot exceed 30%.

Although some life science companies have made acquisitions in excess of these upper limits, the intention is to apply a uniform methodology to measure relative changes in firepower. Firepower of EY measures the ability to conduct M&A transactions financed by cash or debt. It does not measure the ability to conduct stock-to-stock transactions. However, increases in a company’s stock price increase its firepower under the Firepower of EYthe formula of. Indeed, equity allows companies to borrow more to finance transactions.

About EY Health Sciences and Wellness

The rise of the empowered consumer, coupled with technological advancements and the emergence of digitally driven entrants, is changing all aspects of healthcare and care delivery. To remain relevant in today’s digitally-driven, data-infused ecosystem, all healthcare participants today need to rethink their business practices, including investment strategy, partnerships and creation of patient-centered operational models.

EY’s Health and Wellness Sciences Architecture brings together a global network of 34,000 professionals to develop data-driven approaches for customer engagement and improved outcomes. We help our clients achieve their strategic goals; design optimized operating models; and forming the right partnerships so that they can thrive today and succeed in the health systems of tomorrow. We work across the ecosystem to understand the implications of current trends, proactively finding solutions to business problems, and to seize the benefits of disruption in this age of transformation.

SOURCE EY

Shirlene J. Manley