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Pharma, medical and biotech: testing times for M&A?

Author: Nicholas Neveling

Published: 11 Sep 2023

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Solid long-term growth drivers have seen the pharma, medical and biotech sector navigate choppy M&A markets better than other industries. Nicholas Neveling looks at the longer-term prognosis.

Many sectors have seen challenges in dealmaking. The pharma, medical and biotech (PMB) sector has not been easy over the past 18 months, but that’s a short timescale to view it in. According to White & Case M&A Explorer figures, the sector saw annual deal value for 2022 come in at $375bn (£292bn), nearly a third down on the figures for 2021. To put that in perspective, there has only been one other year when there was more M&A value – $489bn in 2019. And when it comes to global M&A volumes, last year there were 2,852 deals, just 4% down on the highest year – 2021, when there were 2,979 transactions.

Perhaps unsurprisingly, 2023 has not started in the best of health, with a Q1 2023 deal value of $112bn, down from the $144bn secured in Q4 2022, but reassuringly up on the $79bn in the first quarter of 2022. There were 623 deals in Q1 2023, significantly down on the 812 in Q1 2022. It is definitely one of the better performing sectors now, with the technology, media and telecom sector facing major challenges, alongside the broader economic ones.

“Healthcare M&A hit record levels in 2021 and although activity softened through 2022 and into 2023, the sector has done better than other industries,” says Severin Matten, a director at private equity firm 3i.

Sylvester Oppong, partner and head of healthcare and life sciences corporate finance and M&A at EY, adds: “Pre-pandemic, the sector was already receiving significant levels of investment, with the pharmaceuticals sector investing capital into drug development and driving growth across the value chain. Investment levels increased significantly during the pandemic, as the pace of drug discovery and clinical trials accelerated materially, and the importance of the sector to society was made clear. This resulted in significant M&A activity, which has carried on, despite the macro challenges.”

Fundamental drivers

The relative resilience of the PMB sector has been underpinned by solid underlying growth fundamentals. Ageing populations, higher rates of chronic disease, the accelerating innovation and development of new treatments and drugs, big pharma outsourcing and the push to renew drug pipelines as patent protections expire have all contributed to sustained dealmaking across the economic cycle.

“M&A in pharma, medical and biotech has been on a steady upward trajectory over the past 10 years, and although markets have been more challenging during the past 18 months, the underlying fundamentals that have driven dealmaking remain in place – the population continues to age and there is still appetite to invest in innovation,” says Amar Shah, partner and life sciences lead at Deloitte. 

“There has been consistent M&A activity and investment in pharma and biotech licensing, with strong interest from dealmakers in novel therapeutics and orphan drugs (treatments for rare diseases that would not be commercially viable to produce without external funding) with new applications. Growth in medical devices and medical technology has also been strong.”

These long-term growth drivers have seen megadeals continue to proceed, despite tighter debt markets and macro-economic uncertainty. In March, Pfizer agreed a $43bn transaction to acquire oncology biotech firm Seagen in a deal that will see Pfizer refill its new drug pipeline and build its expertise in oncology, one of the main growth areas in global medicine. At the moment it is awaiting FTC approval in the US. That deal followed hot on the heels of Sanofi’s $2.9bn move for type-1 diabetes treatment developer Provention Bio and Amgen’s $28.3bn swoop for California-based biotech company Horizon Therapeutics at the end of 2022.

According to EY analysis, big pharma companies had more than $1.4trn of cash available to pursue deals at the start of the year. M&A is expected to be a key lever for replenishing drug pipelines at a time when companies are facing patent expiries that will see an estimated $200bn of top-selling branded drugs exposed to competition from generics when patents run out.

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Opportunities haven’t been limited to the mega-market. Mid-market players, particularly private equity firms, have continued to source attractive PMB deal targets, particularly in the outsourcing and pharma services verticals. “There have been significant levels of PE investment in technology, products and services that support the pharmaceuticals sector,” EY’s Oppong says. “PE funds have actively positioned their investment strategies to acquire businesses that have strong market positions and exhibit substantial growth in these areas. We have seen sustained investment interest in areas such as decentralised clinical trials, pharma communications, contract manufacturing and development and contract research organisations.”

Outsourcing is proving one of the key verticals in private equity healthcare strategies. Inflexion Private Equity, for example, has outsourced medical manufacturer SteriPack and Upperton Pharma Solutions, a specialist particle engineering contractor, in its portfolio.

“There is specific expertise that pharma companies, especially early-stage biotech companies, simply do not have in-house because they are so niche,” says Ben Long, head of healthcare at Inflexion Private Equity. Footprint optimisation is another key driver of outsourcing demand, he says – Upperton helps clients to develop new substances, before clinical trials start, using novel technologies to do so. SteriPack’s USP is that it manufactures lower-volume products and medical devices. 

“Companies in the space typically have enormous manufacturing plants that operate on high throughput,” adds Long. “They don’t want to shut a facility down and change over because there is a lot of cleaning and sterilisation that has to be done each time. SteriPack picks up lower-volume items to help clients optimise manufacturing footprints.”

Pharma outsourced

Pharma outsourcing has been one of the most active PMB sub-sectors for private equity investors, and while it is expected to continue delivering long-term growth, change is afoot.

Andrew Jones, life sciences strategy partner, EY-Parthenon (above), says the rapid pace of drug development is driving significant shifts in the type of expertise biotech and pharma companies require. “Numerous new technologies are now coming to fruition,” he says. “Novel advanced therapies, including cell and gene therapies and mRNA therapeutics, require a retooling of the industry and outsourced services that are sized appropriately.”

In July 2023, health tech company uMed raised £9.8m in a funding round, backed by Albion Capital. The cash will boost researcher and patient participation in clinical trials. Since its 2020 seed round, uMed has signed up more than 450 GPs in the UK and recruited more than 6,000 patients to clinical studies. The funding will extend its programme in Parkinson’s disease and accelerate its expansion into North America.

Molly Gilmartin, investment manager at Albion, says: “Clinical research has historically taken decades. uMed’s technology is uniquely positioned to revolutionise how this research is conducted.”

Specialism is key

But while PMB sector assets have sustained steady growth and financial performance through the macro-economic dislocation of the past 18 months, sector expertise has become essential, particularly for private equity dealmakers, and possibly most acutely in the biotech sector.

“Having deep sector knowledge to enable PE investors to engage technically with management teams becomes more relevant in a sector where understanding both the R&D risk and regulatory hurdles makes biotech markedly different from other sectors private equity might invest in,” says Heath Snyder, a managing director at Interpath. 

Inflexion’s Long adds: “The underlying growth drivers in healthcare are positive and strong, but it can be an easy place to lose money if you pick the wrong assets where you do not have the experience. We try to become repeat offenders in the same sub-sectors with outsourced pharma services our key focus. We have built very deep networks in this space and that has enabled us to do off-market deals.”

That need for specialist knowledge is echoed by 3i’s Matten, who says the specific regulatory risks in the PMB sector can easily leave dealmakers without the requisite expertise exposed. “The entire healthcare sector is sensitive and tightly regulated. Changes in regulation can up-end entire investment theses. The US Inflation Reduction Act 2022, for example, might affect reimbursements for drugs, which could shift the focus of R&D and the supply chain, with a ripple effect on service providers even in Europe. Regulation is a key piece investors have to be conscious of.”

For investors that are able to complement cash piles with sector expertise, the outlook for PMB M&A through the rest of 2023 and into 2024 is broadly positive, notwithstanding the challenges posed by higher debt servicing costs, higher wages and staff shortages.

“On the sell side, some vendors are reticent to push the sale process button given valuations, and there has been some stalling. But fundamentally their businesses are all performing well. They’re just dealing with the macro conditions that every sector is having to deal with,” says Deloitte’s Shah. “This is a resilient industry, and there are a few mid-market businesses that we expect to see come to market in the next six months.”

It is fair to say that the PMB M&A market did become frenzied through 2021. Long adds: “Some investors have been burnt by that, but overall there is still good appetite from dealmakers and banks are very much open to lending, so the macro picture hasn’t had that big an impact.”

Tech and health

The medtech and medical devices sub-sector has long sat in the shadow of the fast-growing biotech and pharma segments when it comes to PMB M&A – but that could be changing. “We have noted a pivot away from pharma services towards medtech assets. There is uncertainty around funding for biotech R&D in a tougher economy and what that means for the security of the servicing supply chains where PE has been very active in the past,” says Severin Matten, director at 3i (above).

Indeed, a cluster of high-profile medtech and medical devices deals have proceeded during the past 12 months, including Bridgepoint’s €900m (£772m) buy-out of Laboratoires Vivacy, a developer of injectable devices that are used in anti-aging treatments, ophthalmology, rheumatology and gynaecology, from TA Associates.

Interpath managing director Heath Snyder says medtech “is easier and much more measurable for PE, not least as medtech R&D has a shorter timeframe to commercialisation”.

Matten notes that establishing valuations has also been easier than in the biotech and pharma space. “Medtech was affected by the pandemic as elective procedures were cancelled, so valuations never climbed to the same levels observed in other verticals of the market. That has made it easier to agree on pricing in the current environment, as the gap in buyer-vendor valuation expectations is not as wide,” Matten says.

Some see a huge growth opportunity in medical device outsourcing investments. Inflexion’s Ben Long says: “As we see it, medical devices is probably 10 to 15 years behind pharma in outsourcing terms, so there is very, very strong growth of around 10% to 15% in the market.”