What lessons does 2017 provide for setting your company’s transaction strategy in 2018?
In the wake of year-end US tax legislation, conditions are ripe for a surge in life sciences M&A as business leaders weigh strategic priorities for capital allocation decisions to generate inorganic growth. Despite relatively high target valuations, M&A remains essential for growth, especially as technology’s health care convergence threatens traditional business models.
Here are six essential questions to consider in formulating your 2018 M&A strategy:
Do we build scale, diversify or expand our geographic reach?
The core strategic alternatives for today’s biopharma and medtech companies haven’t changed, and companies will continue to rationalize portfolios to focus on their innovative cores — or diversify.
Are we ready to buy?
Waiting for attractive targets to become less expensive or for geopolitical uncertainties to
resolve shifted dealmaking from M&A toward risk-sharing alliances and joint ventures in 2017, particularly in biopharma. As the implementation of US tax reform becomes a question of “when,” not “if,” can we afford to wait any longer to pursue transformative M&A?
Does our business model deliver value, not just a drug or device?
Successful companies will use M&A and partnerships to establish platforms of care to drive value for multiple stakeholders. And in the process, adapting their strategies to the increasing sway of payers, with a focus on diversifying away from commercial and policy risk, reacting to new competition in core markets or moving beyond the pill/device into services that help to differentiate their products.
Will there be a return of mega-mergers?
As incursions from technology behemoths threaten the health care status quo, traditional biopharma and medtech leaders may find mega-mergers more tempting as a means to protect profitability, maintain competitiveness in key therapeutic areas and build scale to confront new challenges in the supply chain. The transformative CVS/Aetna merger may exacerbate these challenges, as payers move to drive value through lower costs.
Are we vulnerable?
Yesterday’s acquirers may be tomorrow’s targets. Several large and acquisitive companies have seen their abilities to continue to consolidate threatened by slowing growth forecasts, weakened valuations and excessive debt. Companies more accustomed to hunting for acquisition targets may find themselves on the other side of the deal table.
Will buoyant capital markets empower targets to remain independent?
Small and mid-sized biopharma and medtechs have their own trade-offs to navigate: raising capital to advance promising and cutting-edge science is a realistic alternative to acquisition — for now.
In 2018, facing continued pricing and market access challenges and increased competition in key markets, life sciences companies must confront important decisions on how to generate needed growth. Given the pace of technological change and altered customer expectations, M&A must remain on the C-suite agenda. Well-capitalized non-traditional buyers, whether they are technology giants or new health care or financial entrants from Asia-Pacific, are also interested in the same M&A opportunities, threatening to upend current market dynamics.
Originally published on EY.com
EY Legal Services Contacts:
Jean-Christophe Sabourin – Global Transaction Law Leader
Virginie Lefebvre – Life Science Sector Leader for Law