Resilient and profitable prospects: health industries poised for continued M&A success stories
09 April, 2021
In times of volatility and uncertainty in particular, investors look for safe investment opportunities. It is no wonder that interest in pharmaceutical and life sciences (PLS) and healthcare services (HCS) targets is now becoming increasingly evident, as these sectors have always been safe harbours in times of crisis. Consequently, the pace of M&A activity has picked up in the last six months, leading to numerous
deals in the industry, some of which have been iconic. Investors’ appetites for deals are being driven by recent developments shaped by innovation, technology and regulation, especially in the Europe, Middle East and Africa (EMEA) region. PwC’s most recent global mergers and acquisitions (M&A) insights also hold true in our observations for Germany.
Industry-specific drivers
We have witnessed pharmaceutical and life sciences companies shifting their focus towards developing innovative treatments rather than sticking to non-core activities and conglomerate setups. For instance, the latest achievements in cell and gene therapies, mRNA and digital analytics are rekindling industry leaders’ interest in acquiring competitors with a focus on innovative treatments. These leaders are more inclined to dispose of their non-core portfolios, using the sales proceeds to nourish the development of speciality platforms. For consumer-centred businesses (e.g. over-the-counter products), strategically viable expansions into areas such as wellbeing and nutrition are currently sought after.
Business model disruption
Companies in both the PLS and HCS sectors are currently experiencing upheaval, which is being driven by the incorporation of digital analytics, smart health devices and consumer-centric diagnostic and therapeutic offerings into their business models. Digital solutions, such as better and interoperable practice management software, are also helping healthcare providers increase quality, streamline their processes and save costs. We are seeing more and more players from PLS and HCS acquiring or teaming up with tech companies to embrace this skillset, which is enhancing their interactions with payers, providers and consumers.
Capital availability
A mixture of low interest rates, abundant financial resources and high investor demand and expectations typically results in a ‘heated’ M&A market, with high valuation prices and fast-paced dealmaking. This environment is unlikely to change in the next 12–18 months. Private equity (PE) fund managers are under more pressure than ever to put their financial resources to good use. They still remember that active buyers emerged as winners from the global financial crisis ten years ago. As a result, they feel compelled to act and find investments with secure and ample prospects, despite the uncertainty of the global economic environment. The increased entry of capital providers such as family offices and generalist PE houses is also increasing the competition for PLS and HCS companies. Moreover, we are seeing a trend towards asset-heavy targets: PE firms are now more willing to buy business models that include a high capex component than they were in the past (e.g. healthcare targets with expensive, high-quality MedTech).
Environmental, social and corporate governance
Stakeholder awareness with regard to environmental, social and corporate governance (ESG) issues has grown during the pandemic. The major concerns are the way the world handles issues around sustainability, climate change, and inequality in access to healthcare in particular. Factors such as who gets access to what treatment and when in a particular jurisdiction might determine whether a deal is executed or rejected. HCS investors are also trying to avoid risks related to reimbursement, conflicts of interest and medical malpractice. We expect to see dealmakers in the PLS and HCS sectors taking ESG criteria more seriously in their future purchasing decisions.
Geopolitical developments
The pandemic and political events such as the US presidential election and Brexit have occupied much of the public’s attention in the last few months. Meanwhile, China has enacted a new regional free trade agreement and introduced an economic plan for the next four years, underpinning its ambition to push its regional PLS industry. Thus, Chinese-backed acquisitions, particularly in biotech, are likely to take place over the next six to twelve months.
Your expert for questions
Tobias Klimpe
Global and Germany Health Industries Deals Leader at PwC Germany
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EMEA at a glance
We are witnessing a resurgence in deal value and deal volume in EMEA health industry markets since mid-2020. This powerful recovery even outperforms M&A activity on a global scale. Pharmaceutical and biotech companies across the region focused on acquiring smaller, innovative companies in order to build new platform technologies, and to acquire digital talent and regulatory/policy expertise to boost their research and development processes. This trend also increased the number of cross-border deals. Furthermore, companies across EMEA accelerated the adoption of innovative solutions in order to address increased market demand and rising competition amid the COVID-19 pandemic, leading to more investments in the sector.
“Despite uncertainty due to Brexit, M&A activity across the region is expected to further increase in the near future owing to consolidation activities and increased demand for pharmaceutical products and health tech.”
What about M&A in the German health industry?
Focusing on recent German developments, we see that pharmaceutical and life sciences M&A deal volumes are remaining at a moderate level, with a slight uptick in Q3 2020. Deal value, on the other hand, dramatically increased in the second half of 2020. Its peak in Q3 2020 was largely due to the acquisition of Varian Medical Systems by Siemens Healthineers for around $16.4 billion. Q4 of 2020 is still showing strong investor appetite, with a total deal value of $3.0 billion.
Buy-side M&A was driven by pharmaceutical and life sciences companies aiming to accelerate their adoption of innovative solutions to cater to rising demand and increased market competitiveness. Large players such as Boehringer Ingelheim are refocusing on their core businesses and therapeutic areas to gain a competitive edge in the post-COVID period. They are therefore acquiring assets and platforms with top-notch capabilities in drug discovery, artificial intelligence and human biomodelling tools, which will also serve to improve their operational efficiency. For instance, the deal between Siemens Healthineers and Varian Medical Systems represents a landmark M&A transaction in the sector. It will create a global healthcare leader, offering an integrated platform of end-to-end oncology diagnosis and post-treatment solutions by combining the two companies’ complementary product portfolios.
Additionally, companies within the healthcare services sector pursued consolidation activities through acquisitions, seeking to scale benefits. Like many other industries, some segments of the health services sector witnessed low cash flows. Many support care services were not able to operate amid the pandemic, resulting in increased consolidation efforts, as larger companies in the sector explored opportunities to absorb struggling smaller rivals. For example, in December 2020, Fresenius, a German healthcare provider, agreed to acquire the entire share capital of Luarmia SL (Eugin Group), a Barcelona-based family planning centre operator, from the bankrupt NMC Health PLC for a total of $527.0 million.
German pharmaceutical and life sciences companies remained attractive targets, displaying resilience in the midst of the economic crisis created by the pandemic. In fact, industry-specific investments continued to grow in terms of both deal volume and deal value. Medical devices and biotech firms were especially popular, as they presented new opportunities for investors to strategically acquire assets and platforms with unique capabilities.
Many hospitals providing primary and elective care are experiencing consolidation and roll-ups following winding down of government financial support and their continued lack of liquidity. The consolidation of healthcare facilities continues, as single players and small groups are integrated into larger provider groups with greater funding and financial reserves. As the economy reopens, the demand for elective surgeries and non-essential appointments such as dentistry has also been catching up, with those previously neglected areas ramping up again. This has resulted in improving investor confidence.
Summary
Healthcare industries are poised for continued M&A success
Dealmakers across the pharmaceutical and life sciences industries, as well as healthcare services, are still confronted with uncertainty and volatility in the wake of the COVID-19 pandemic. Furthermore, challenges and developments that had existed before the pandemic have now been exacerbated by the crisis. Amid such challenges, however, promising opportunities are arising. Pharmaceutical companies are looking to realise their ambition of gaining specialist capabilities by acquiring mid-sized biotech firms. Large healthcare service providers will use their market power to facilitate market consolidation. We therefore expect the momentum for dealmaking in the PLS and HCS sectors to persist. These sectors will thus remain the go-to areas for investors both during and after the pandemic.
“Looking forward, we anticipate significant deal activity as a result of a pivot on the part of large pharmaceutical companies towards innovation-led value creation.”
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