2020 was a tough year for everyone, and the life sciences industry was no exception. The Covid-19 pandemic caused significant disruption to many companies’ clinical trials; it forced many to pause or cancel ongoing research. However, Covid-19 did more than just impact the research and development (R&D) side of pharma companies, it also challenged life sciences mergers and acquisitions (M&As).
Research by consultancy firm Ernst & Young (EY), which this week published its 2021 M&A Firepower report, concluded that although no-one expected a repeat of 2019’s high level of M&A activity – with an annual deal total of $306bn and four mega-deals – 2020 was a year like no other, with Covid-19 posing an unexpected hurdle to M&A. The challenges of doing due diligence and closing deals virtually, as well as high valuations creating a seller’s market, created major barriers to deals.
According to EY, the value of M&A activity across the life sciences industry in 2020 totalled $159bn and there was only one mega-deal: AstraZeneca’s December acquisition of Alexion. For EY, mega-deals are those valued at around $40bn for biopharma. This $39bn deal accounted for a quarter of the annual life science M&A spend in 2020.
Not all doom and gloom: positive 2020 M&A trends
EY global health sciences and wellness strategy and transactions leader Peter Behner noted in a webinar that there was a point in the middle of year when he didn’t think the M&A value for 2020 would hit $100bn. The AstraZeneca-Alexion mega-deal suggests there is sufficient liquidity in the market for companies to strike once they had the opportunity, according to Behner.
Another noteworthy element is that despite a broadly unfavourable deal-making environment, life sciences companies were able to continue signing deals, even if they were of lower value than in 2019. The volume of biopharma deals signed in 2020 was similar to the 2017, 2018 and 2019 figures. This was because the pharma industry pivoted from signing large M&As to focus on smaller collaborations and bolt-on deals in priority therapeutic areas.
Bolt-on deals are small to medium-size acquisitions that represent around 25% of the buyer’s market capitalisation in a certain area, according to EY. In terms of bolt-ons, EY’s analysis suggests that this type of deal accounted for 82% of biopharma M&A in 2020, while the mega-deal accounted for 2%.
In terms of alliances, the EY M&A report found that biopharmas spent $17.8bn on these types of deals, which were used to hedge risk and add new capabilities to their portfolio. According to Behner, the trend towards alliances has been building since 2013, and reached an all-time high in 2020. Through to the end of November, there were 261 partnerships worth up to $140bn in upfront and milestone payments, according to EY’s analysis. One of the most important alliances signed in 2020 was Pfizer’s expansion of a 2018 partnership with BioNTech to develop the world’s first Covid-19 vaccine authorised for emergency use.
Optimism for 2021: building on 2020 successes
Although the Covid-19 pandemic is far from over – the vaccine rollout is still in the early stages in developed countries, such as the US, UK and elsewhere in Europe – the EY M&A Firepower report is optimistic about what 2021 has in store for biopharma deals.
The consultancy firm believes that many of the positives of 2020 remain in play, meaning 2021 is likely to be an active year for deals, particularly in terms of volume. Behner spoke about how the 2020 “bolt-on frenzy” is likely to continue for biopharma as the industry looks to mitigate financial risk. EY Americas industry markets leader for health sciences and wellness Arda Ural agreed, stating in the webinar that “you can count on the fact that bolt-ons will continue”.
In addition, the EY report found that one of the drivers for a promising 2021 is that life sciences companies ended 2020 with record levels of ‘firepower’, which is a company’s capacity to make deals based on the strength of its balance sheet. This is because, as noted by EY global health sciences & wellness capital efficiency leader Ambar Boodhoo, biopharmas only used 12% of their firepower in 2020, compared to 20% the year before.
Lessons from the Covid-19 pandemic
Ultimately, the global pandemic has forced biopharma companies to evolve. Ural noted that biopharma executives can now be more confident to place bets on digitalisation in their business models. It has also become clear that not everything about deal-making must be done in person, Ural added.
Also focusing on the role of technology, Behner noted that the pandemic has caused a significant re-orientation towards telemedicine, leading to multiple digital health deals. He noted that biopharma will need to further embrace this trend and find innovative ways to combine diagnostics with drugs and remote monitoring, which will require alliances as they do not have these capabilities in-house today.
A final learning from the pandemic will be the need to focus on some areas that were previously overlooked, such as infectious diseases. Behner noted you can bet on a renewed interest in infectious diseases in the near future as a result of the Covid-19 pandemic. Boodhoo stated that some of the companies that have backed away from infectious diseases in recent years may decide to return to the space now.
Boodhoo noted that anti-infectives is one of the areas where biopharma firms are likely to focus their deal-making. Behner added that RNA will definitely be an area of focus in the future; Ural argued that the Covid-19 pandemic – where two of the frontrunner vaccines have been mRNA-based candidates – has de-risked this entire RNA space. Behner provided the example of CureVac, which followed the same approach as BioNtech with Pfizer, and decided last week to team up with Bayer on development of its mRNA Covid-19 vaccine.
Finally, although there are definitely some positives in the first half of the year, Ural predicted that 2021 is going to be a year of two halves. He argued that deal-making activity is likely to pick up once vaccines become increasingly available and there is a return to some form of normality.