Life sciences mergers and acquisitions (M&A) activity totalled US$159b in 2020, down from US$306b in 2019, reaching one of the lowest levels since 2014, according to the 2021 EY M&A Firepower report. A single megadeal – AstraZeneca’s December purchase of Alexion Pharmaceuticals – accounted for a quarter of the annual life sciences M&A spend in 2020.
- 2020 life sciences M&A value fell to US$159b
- Only 12% of biopharma’s Firepower was deployed
Setting aside the challenges of doing diligence and closing deals virtually due to the COVID-19 pandemic, persistently high valuations for biopharma and medtech targets kept many would-be buyers on the sidelines, in what was already expected to be a difficult year. In this unfavorable environment, biopharma acquirers refocused their energy on alliances and smaller, bolt-on deals in high-priority therapeutic areas. Medtechs experienced revenue slowdowns due to the cancellation or deferment of procedures in 2020.
The EY report finds that despite 2020 market volatility, life sciences companies closed the year with record levels of Firepower, which EY defines as a company’s capacity to do M&A based on the strength of its balance sheet. Only 12% of biopharma’s Firepower was deployed in 2020, compared with 20% in 2019. Medtech’s Firepower for deals expanded 41% in 2020, reaching an all-time high, yet only 7% was deployed this year, down from 10% in 2019.
These trends point to 2021 being an active year for life sciences deals, following an uptick in deals in the second half of 2020. Biopharmas are likely to focus on smaller acquisitions and partnerships that mitigate financial risk, while medtechs are likely to spend more aggressively on acquisitions to close increasing growth gaps (the difference between companies’ revenue growth and the overall industry’s sales expansion).
- Volume over value: There was only one biopharma megadeal in 2020. High valuations and strong public markets likely led acquirers to focus on smaller deals.
- Alliances remained a way to hedge risk and gain access to must-have technologies or products, especially digital. In terms of both volume and value, biopharma alliance activity in 2020 was thriving: through to November 30, buyers signed 261 partnerships worth close to US$140b in upfront and milestone payments.
- Shrinking growth gaps in biopharma: Robust supply chains and quick pivots to COVID-19-linked products, especially vaccines, have helped big biopharmas limit the near-term sales impact caused by the virus. As a result, growth gaps shrank in 2020 from US$60b to less than US$35b.
- Unused Firepower in medtech: Major medtechs have significant capital reserves. Combined with the fact that at the top 35 medtechs, growth gaps increased by US$9b to US$29b, as procedures were delayed or cancelled, 2021 could be the year that medtechs unleash their dealmaking power. Two of the year’s largest life sciences deals showcase that potential, with opportunities emerging in diagnostics and remote care.
Commenting on the findings of the report, Stelios Demetriou, Partner and Head of Strategy and Transactions Services at EY Cyprus, remarked: “The year 2020 was an impressive year for Medtech, as M&A Firepower approached a historical high for the industry of nearly US$500 billion. Life sciences M&A activity is beginning to rebound but will not reach the heights of 2019. However, multiple factors point to an active deal-making year in 2021. For biopharmas, therapeutic focus, especially in fragmented areas like oncology or immunology, remains an important long-term driver for deals as the need to reduce commercial complexity grows. Growth gaps could also create new urgency for deals depending on clinical trial delays or sales slow-downs caused by the pandemic.”
The full report is available at www.ey.com/firepower.