Rethinking Access to Capital
M&A for Life Sciences:
A Bullish Outlook
COVID-19 has placed the life sciences industry front-and-centre in the ongoing international crisis. The sector has an opportunity to solve the global pandemic, but the hunt for vaccines and therapeutic cures are not without pitfalls for those involved. This loads additional risk considerations on any M&A plans.
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Life Sciences M&A
Deal Activity
Mergers and acquisitions in the life sciences sector involve a number of risks, which often underpin delicate transitions. Alongside significant regulatory challenges, organisations often face intellectual property risks, cyber vulnerabilities, and must navigate product liability claims. Mitigating and managing these risks is paramount.
From a commercial risk perspective, acquisitions and disposal of subsidiaries are also significant claims drivers, while selling a drug at a fixed price raises bribery and corruption issues.
From a people perspective, life sciences organisations spend significant amounts on employee benefits, particularly on health and retirement, and as competition for talent intensifies, these costs will rise. Implementation and management of programmes can carry significant cost – and risks. These should be carefully considered as part of any due diligence and integration project.
Industry-Specific Considerations
Real-Time Impact
of Climate Change
How We Are Already Seeing The First Signs
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Preparing for Divestiture/ Carve-out
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According to deal statistics compiled by MergerMarkets, comparing 2021 to 2020, the EMEA region saw 30% increase in M&A deals and 40% increase IPOs announced in the life sciences sector, where the target’s dominant country was in EMEA.
A number of significant life sciences transactions took place over the last 12 months, particularly in the contract research organisation (CRO) space:
All figures in U.S. Dollars
Overall, record levels of deal activity in 2021 resulted in the most active M&A year ever – surpassing a previous all-time high reached just before the financial crisis in 2007.
With its strong R&D focus, life sciences is one of the most active and dynamic industries. However, it is also confronted with more risks than ever before, including substantial regulatory compliance requirements. As a result, we are seeing many buyers looking to add to, or improve upon, their R&D pipeline. More widely, the industry is shifting from a focus on delivering volumes of products to delivering improved patient outcomes and value to healthcare systems.
Many organisations are conducting a strategic review of their business. An increasingly frequent trend is to identify non-core business divisions and to sell them – both to release cash reserves, or to satisfy internal strategic or risk frameworks. Combined with record levels of private equity capital available for investment, we expect a significant volume of M&A activity in 2022: carve-outs, take-overs, mergers and IPOs.
Two mega-sized corporate separations underway in the sector are worthy of note: GSK’s announced the separation of $50 billion+ Consumer Healthcare business is expected in mid-2022. Meanwhile, Novartis signalled interest in a potential divestiture when it launched a strategic review of the $20 billion+ Sandoz generics unit in Q3 2021.
The 2021 acquisition of asthma inhaler maker Vectura is also fascinating, as an example of an industry cross-over by the tobacco giant Philip Morris.
From a US perspective, the Biden administration has improved industry sentiment and created consensus that the new administration will likely bolster M&A growth. According to MergerMarkets research, 60% of respondents believed the Biden administration will be favourable for life sciences deal-making, with 35% believing it will be very favourable.
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Climate Displacement
(Disaster Relief / Emergency Management)
Risk Management
Supply Chain / Commercial Risk
Health
Transition Risk / Regulatory Requirements
Physical Risk
Climatological Normals
It is not just about physical risk but the need to divest and better balance “green” portfolios in response to regulatory and stakeholder pressure that organizations have to consider.
The (re)insurance industry plays a critical role in reducing the protection gap and working with the public sector to bring capital, analytics and resources to priority areas including:
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Medline
A consortium of private equity firms has reached a deal — reportedly worth about $34 billion — to acquire family-run Medline, the medical supply and equipment company
Thermo Fisher Scientific has announced a definitive agreement to acquire leading clinical research organisation (CRO) PPD for $17.4 billion
Thermo Fisher / PPD
ICON plc acquired PRA Health Sciences, Inc. in a cash and stock transaction valued at approximately $12 billion. Transaction closed on 1 July 2021.
Icon/PRA
Carve-outs remain a significant trend, with potential deals to include Danone SA selling its Specialised Nutrition unit (could be valued at around €29-32 billion) and Sanofi considering selling its Consumer Healthcare Division, which could fetch a valuation of $30 billion. In the case of Sanofi, the consumer division split is likely to be delayed, as the active pharmaceutical ingredients (API) unit separation takes priority as a result of the COVID-19 pandemic.
Preparing for Purchase / Bolt-on
Disruptive forces affecting life sciences firms are creating new operational threats and strategic risks that need to be identified and managed.
As the nature and breadth of transaction risks are changing, we are seeing savvy dealmakers expand due diligence beyond the typical legal and financial areas to cover specialities like credit, insurance, health and benefits, retirement liabilities, cyber and IP.
Regarding employees, the identification and retention of the most valuable talent through the transaction process is increasingly important for the success of the future organisation.
Inadequate preparation by the seller or lack of focused approach from the buyer, may lead to delays in deal completion, added transaction costs and the need for lengthy and complicated transitional services agreements (TSAs).
With thorough assessment and preparation, it is possible to manage complex carve-outs and maximise deal value. In Aon’s experience, the following areas present particular risks, which benefit from early mitigation:
Intellectual Property (IP)
Identify IP-related deal value issues early in the sale process to enable mitigation. Run IP analytics to support patent portfolio taxonomy, in order to segment portfolio for separation of IP assets
Information Technology (IT)
Uncover dependencies and challenges in separation, take control of data, and establish and execute a robust cyber separation strategy. Cleanly separate software, hardware and vendor arrangements from the parent before integrating it into the new company’s systems.
People M&A Solutions
Start early to map activities needed to transfer employee benefits and other HR-related systems, including engaging with workers’ councils where required. Have a communication plan that clearly explains the strategic objectives of the deal to ensure employee buy-in.
Insurance
Transfer existing insurance coverage where feasible, and identify likely gaps. Ensure that cyber insurance is in place on day 1.
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If you would like to discuss any aspects of these insights, or to better understand our capabilities in this area, please do not hesitate to get in contact with our team.
Lars Sørensen
Global Life Science Industry Leader
lars.sorensen@aon.com
+1 312 286 8482
Bruno Monteiro da Silva
M&A and Transaction Solutions - EMEA
brunomonteirodasilva@aon.com + 351 910 075 286
Anne-Christine Fischer
Global Consulting Life Science Industry Leader
anne-christine.fischer@aon.de
+49 176 1266 2810
Cyril Smith
Account Director, Life Sciences
& Practice Lead
cyril.smith@aon.ie
+353 1 2666811
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Combined with record levels of private equity capital available for investment, we expect a significant volume of M&A activity in 2022: carve-outs, take-overs, mergers and IPOs.
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