M&A in the life sciences sector is booming as companies look to fill product lines, build core competencies and find the next super drug. However, challenges to growth and funding need to be overcome

The life sciences (pharmaceuticals, biotechnology and medical sectors) industry is experiencing its busiest periods of M&A activity since the financial crisis, as life sciences companies seek out cross-border deals that will give them multinational reach and access to new product pipelines. The first six months of 2015 saw $164.3bn worth of deals – an increase of almost 53% on $107.5bn in the same period of 2014 – while the second half of 2015 began with a burst of new transaction announcements.

These included the Israeli company Teva Pharmaceutical’s $40.5bn purchase of the generics division of Allergan, a US-based pharma company. This is the largest deal announced so far in 2015. That deal, unveiled in July, was just one of four transactions worth more than $1bn announced in July. The next largest transaction, Celgene’s purchase of Receptos, was valued at almost $6.7bn.

M&A began gathering pace in 2014, and was fueled by several drivers. For many life sciences companies, acquisitions are now the preferred way to deliver the growth rates their investors have become accustomed to, with the costs and risks of developing new products in-house invariably far higher than buying a business that already is far along in the development of a breakthrough drug. As one CEO of a European pharma company observes: “It makes sense to acquire companies involved in late-stage R&D as the failure rate of early-stage R&D is so high and the mistakes are only realised when resources and time have already been utilised.”


At the same time, relaxed monetary policy in Western markets means capital is less costly than ever before. The US Federal Reserve has now held the federal funds rate at close to zero for more than six years – and speculation that the Fed will soon begin to raise interest rates is putting pressure on life sciences companies to cash in on this window of opportunity.

As companies reassess their plans against this deal-friendly background, they plan further spin-offs, divestitures and new combinations.

This dealmaking environment is transforming the nature of certain life sciences companies. Mylan, for example, whose $35bn bid for Ireland’s Perrigo would result in a company which is currently a manufacturer of generic drugs becoming a diversified healthcare business. The deal follows Mylan’s purchase earlier this year of a portion of Abbot Laboratories, which saw Mylan transform into a Dutch concern.

There is every reason to expect life sciences companies to continue to try to reinvent themselves in this fashion. As the chart below reveals, more than nine in 10 life sciences businesses (94%) currently expect to explore the possibility of an acquisition over the next 12 months – this rises to a full 100% for companies whose annual revenue is more than $5bn.

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A significant number of companies are also planning other initiatives that could help them secure new products – tie-ups with contract research organisations, for example. But with so many life sciences companies now in acquisition mode, a further spike in M&A activity looks likely. All the more so, since more than a third of companies (39%) are planning divestments. As Reed Smith corporate partner James Wilkinson in London notes: “As more companies engage in M&A transactions, some will inevitably be left with non-core businesses that they will want to dispose of to buyers for whom these units are a better fit.”

New horizons

The majority of life sciences businesses expect their acquisitions to be cross-border transactions, as they seek to capture the opportunities offered by growing markets overseas – particularly where growth in their existing markets may be slowing. For example, the director of M&A at one European pharma company focused on oncology drugs says: “We have been considering cross-border deals because our markets are stagnant and offer limited opportunities for growth based on the current volatile market conditions.”

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Reed Smith on cross-border transactions

 Most of what we see has a cross-border nature to it: companies striving for growth in a saturated marketplace are looking to develop their portfolios, diversify their products, move into new markets and restructure their businesses through divestments.

James Wilkinson, Reed Smith corporate partner, London

In some cases, these deals are likely to see life sciences companies taking their existing products to new markets. The chief executive officer (CEO) of an Asian-Pacific (APAC) business explains: “Products that were bestsellers are being pushed to the exit as other businesses are able to fill their pipeline faster – we now see potential in international markets where we can possibly lower the risk of losing out to the competition.”

For other companies, by contrast, the motivation for an international transaction is the desire to find new products to refresh their existing portfolio. “Patent expirations have reduced our capability to gather the same revenues as in the past,” says the director of M&A at a US-based life sciences business active in the neurology sector. “We are investing in research and development (R&D) and an offshore acquisition of a like-minded business can help us in a significant way.”

In terms of regions, the most popular area with acquisitive life sciences companies is APAC. Indeed, 28% of respondents report they are targeting their search on the APAC region. Part of the draw is the region’s large population base combined with developing markets, where demographic changes and increasing personal incomes are combining to create ever larger potential customer bases for pharmaceutical businesses. The Indian market alone, for example, is expected to see pharma sales grow at 15% per year in the years ahead.

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Just as important, however, is the increasing willingness of many APAC countries to welcome international companies. China, for example, has announced that it is considering relaxing restrictions on international entrants in order to encourage foreign investment.

“The populations of these countries are large and their governments are pushing for reform in the healthcare sector,” says the director of M&A at one APAC life sciences business. “Regulators are expected to offer an adequate amount of support and this would be a driver for success in an acquisition, enabling easy market entry and growth of market share in a new region.”

Similarly, the CEO of a US life sciences company says: “Many APAC governments are seeking greater access to generic pharmaceutical products and this will not be achievable by local businesses; the market is currently untapped as many international businesses gave up in the face of regulation, but we now see an opportunity for unprecedented growth through an acquisition in the region.”

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Reed Smith on M&A in China

 Despite the slowdown, life sciences companies are still actively exploring opportunities in China. Corporates are doing deals to access new markets, expand their distribution as well as targetting local R&D capabilities. Corporates need to be aware of challenges such as limited assets with the right synergies and the Chinese government’s support for local businesses.

Mao Rong, Reed Smith counsel, Beijing

APAC is certainly not the only region of interest to cross-border buyers. In Europe, buyers are attracted to the high spending of governments on healthcare and point to the relatively low valuation on which many countries in the region now trade, particularly given the strength of the dollar against the euro. In May, 2015, Baxter International of the US paid $900m for the acquisition of Sigma-Tau Finanziaria of Italy, for example.

In North America, potential targets are prized for their technology and R&D prowess, while the stable regulatory regime is also an attraction. Eight of the 10 largest deals so far this year have involved the purchase of US companies, ranging from Teva’s acquisition of Allergan to Shire’s deal to buy NPS Pharmaceuticals.

Other markets are also attracting interest. One director of M&A at an APAC life sciences company says: “We plan to open a manufacturing plant in Bahrain, where the purchasing power of patients means we can earn a decent return, costs are low and the ease of doing business is good.” In sub-Saharan Africa, meanwhile, the CEO of a US life sciences firm says: “The improving economic activity and the development of the middle class in the region will transform healthcare development in Africa.” The executive predicts a significant increase in dealmaking in the area.

It would seem from these findings that life sciences companies currently favour deals over organic growth. Brian Miner, Reed Smith corporate partner in Philadelphia and leader of firm’s US Mergers & Acquisitions Practice, agrees, saying the former is less risky. “A transaction reduces the risk of access to developing markets because you’re buying a company already proven in that territory, rather than having to start from the ground up,” he says.

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Reed Smith on de-risking strategies 

 We continue to see the outsourcing of R&D in order to de-risk drug development – the acquisition of an earlier stage single or two-product company with a product close to stage three trials, say, gives a pharma company better visibility than with in-house development, and they’re still getting in before a premium for approval is payable.

Brian Miner, Reed Smith corporate partner in Philadelphia and leader of the firm’s US Mergers & Acquisitions Practice

New visions

As well as deciding which geographical regions to prioritise for M&A activity, businesses must also decide what type of company to target. The chart below underlines the extent to which life sciences companies see acquisitions as a crucial source of new products as their existing portfolios struggle to deliver sustainable revenue growth. Almost three-quarters (74%) of companies hope to buy companies with products that have early-stage R&D potential, while almost as many (69%) are targeting companies active in late-stage R&D. Respondents’ interest in making acquisitions in personalised medicine (70%) is explored in more detail in chapter two of this report.

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The data also suggests that many pharmaceutical companies are keen to diversify by moving into new areas of business. More than half the companies in this research (58%) are looking to make acquisitions in areas where they do not currently have expertise. Meanwhile, less than a third (29%) are focusing on companies within their own area of expertise. “It is quicker, potentially less expensive and certainly less risky to buy in this expertise than to develop it from scratch in-house,” says Reed Smith’s Brian Miner.

Machines and marketing 

Meanwhile, while businesses are prioritising these M&A targets, they must manage other demands on their resources. These will include different types of acquisitions – as the chart below shows, some 59% of life sciences companies see a technology deal as a priority for investment over the next 12 months. For example, the vice president of M&A at one APAC life sciences company says: “Technology is our main area of investment focus as we see changes taking place in treatments and effectiveness increasing based on the right use of tools and technology; the possibility of printing tissues and muscles with 3D printers has inspired us.”

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This area has already seen some unusual partnerships. For instance, Novartis has been working with Google to develop contact lenses that can measure people’s blood sugar levels in real time.

Alongside M&A, many companies are now focusing on how they get their products to market, with more than three-quarters (79%) citing marketing and distribution as an investment priority. In Europe, the director of M&A at a leading pharmaceutical company says a more benign regulatory climate is encouraging. “We plan to increase investments in marketing our branded products mainly because of less regulatory intervention and attractive margins,” the executive says. “Our focus is on leveraging synergies for positioning of our products in international markets.”

While selling more of their existing products, life sciences companies must also prioritise the development of new treatments. More than two-thirds (70%) plan to increase investment in drug discovery and early-stage R&D over the next 12 months, while more than half (60%) will spend more on clinical trials.

In the US, the director of strategy at one pharmaceutical company stresses the need for a virtuous circle – better distribution boosts sales and facilitates a larger M&A budget. “By investing in marketing, we aim to maximise revenues, enabling us to focus more on creating similar therapies for other medical conditions,” the director says. “That can help us retain market position in the long run.”

The power of private equity

 There was a time when private equity firms were active buyers at every level of the life sciences sector. Today, these investors are far less likely to be found backing early-stage biotech companies, but are increasingly competing for the best deals among more established pharma businesses, where they are attracted to the growth potential of several sectors.

 Notable deals this year include CVC Capital Partners’ $2.03bn purchase of Iceland and US-based Alvogen and Capital International’s $200m purchase of an 11% stake in India’s Mankind Pharma.

Money talks 

In fact, many pharmaceutical companies are already sitting on large cash piles. In the US alone, one analysis published by Moody’s earlier this year suggested that businesses in the pharmaceutical sector had combined cash reserves of $136bn.

This is a further driver for dealmaking in the sector, as companies come under pressure from shareholders to put that money to good use, or to return it to investors. It also explains why 87% of companies expect to be able to finance their next deal from cash on hand (see chart below), including many businesses in Europe and APAC. The vice president of M&A at one European life sciences company says: “We find it rational to use funds when available instead of taking up loans which demand commitment and adherence.”


Still, the supportive conditions for creditworthy companies in the debt market are encouraging some businesses to seek this type of finance, particularly as there are other advantages to raising money this way. “We will focus on debt capital markets as they represent an integrated global platform, which can help with funding, and also enable us to get to know investors in the region, which can help in future,” says the CEO of a European life sciences company.Image title

Not that raising funds is guaranteed to be straightforward, warns Reed Smith’s James Wilkinson. “Established businesses with strong products that have been producing revenues for some time have less difficulty tapping into external capital,” he says. “But it has been hard for earlier stage businesses, particularly outside of North America, where the appetite for and understanding of this sector is very different.”

As the chart opposite shows, large numbers of life sciences companies point to a range of barriers that potentially hamper their efforts. One major issue is clearly the highly competitive nature of the sector (highlighted by 74% of respondents). In the US, the director of M&A at one mid-sized life sciences company complains: “Patients are looking for effective treatments and businesses are making this possible through investments in technology that at times seem to be way beyond their budget.” In Europe, meanwhile, the CEO of a European pharmaceuticals business says: “Fundraising is difficult mainly because competitors create new products and commercialise products to eliminate their opponents.”

The uncertain outlook is another challenge, as businesses wonder whether the economic recovery in the West is sustainable and whether China’s problems will lead to a global slowdown. “The uneven economic environment only adds to the pressure,” says the CEO of a European specialist in immunotherapy drugs. “Businesses cannot be sure about the response of populations towards products as competition is high and regulatory bars are rising – that makes fund-raising a challenge.”

Meanwhile, a minority of investors are simply turned off by the life sciences industry – 43% of respondents said that the greatest challenge to raising funds was a lack of interest from investors. As the CEO of a US business warns: “The majority of investors are following a diversified investment approach to avoid risk,” the executive says. “The pharmaceutical sector is exposed to risks of regulation, quality, compliance and competition which investors would prefer to avoid.”

Fighting fires

While pondering these fund-raising challenges, life sciences businesses must also confront other difficulties that threaten their growth strategies. As the first chart below reveals, companies in the sector see a very broad range of barriers standing in their way, while the second chart below suggests they will draw on a wide range of strategies as they seek to develop new products.


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The need for diversification is one pressing issue says the director of strategy at a US life sciences company. “As competition in the industry is high, companies will focus on broadening drug portfolios as demand tends to reach uncertain levels at some point in time,” the executive says. “In some areas over-the-counter drugs are selling well, while in others personalised medicines are strong, so having a good mix of therapies will help counter the competition.”

Companies will need to be imaginative in order to prosper, adds the CEO of a leading European specialist in diagnostics. “We will see more companies entering new geographies through partnerships to create new revenue streams, while having a broad range of products could prove highly productive.”

Finding those partnerships may be difficult, however. Competition for the right alliances will be intense, with three-quarters of companies seeing partnerships with new entrants and biotech businesses as likely to be of most benefit to their product development. Already, almost two-thirds of companies (65%) see identifying complementary commercial partnerships as their greatest growth challenge.

That challenge must be confronted, says Carol Loepere, Reed Smith partner in Washington D.C. and chair of Reed Smith’s Life Sciences Health Industry Group. “The trend that we’re seeing is for collaborations where there may be a long-term licensing or a co-promote arrangement which may in the future result in or lead to an acquisition,” she says. “The collaboration model is a very promising one – for cross-border arrangements and for developing in a particular market.” That certainly worked for Skyepharma and Mundipharma, two UK life sciences firms, which together developed the Flutiform respiratory drug now sold in 18 European countries as well as global markets such as Australia and Israel.

One important strategy as pharmaceutical businesses seek to free up funds for further investment in growth strategies will be to identify potential cost savings. Companies are already targeting a broad range of areas for such savings. As shown in the chart below, tax-related strategies are a priority for almost three-quarters of companies (71%) while new delivery systems are front-of-mind for close to two-thirds (64%).


Reed Smith’s James Wilkinson points out that the spate of inversion deals seen in the US last year, with US businesses using acquisitions to shift their headquarters to overseas markets for tax savings, has now ended, following a tightening of the rules. In the best-known example, Mylan’s purchase of Abbott Laboratories saw it become a specialty and branded generic pharmaceuticals business based in the Netherlands that was expected to drop its US tax rate from 25% to 21% in its first year.

Nevertheless, Wilkinson believes tax will remain an important element of dealmaking. “While inversion deals are likely to be less common following the IRS’s intervention, tax is a crucial feature of any deal and it’s vital to structure transactions in the right way,” he says. “One of the first things we do when advising on any transaction in this sector is to consult our tax experts in order to ensure we’re planning strategically for these issues.”

Many companies are exploring other options – for example, they see a focus on reimbursement rates as potentially lucrative – this is likely to prove to be a well-used approach in developed markets. “We are aiming at recovery of funds through a high drug price tag,” says the director of M&A at a European life sciences company. “We don’t feel this will be an issue as the patient that has the funds and the urgency to recover will certainly avail of our personalised medicine considering its rate of efficacy.”