Fifth episode of EY M&A Compass, the in-depth look at the Italian M&A market developed by EY together with BeBeez
Article published in BeBeez Magazine no. 21 of 25 May 2024
by Stefania Peveraro
M&a activity in life sciences is growing worldwide: investments in the sector reached $191 billion in December 2023, exceeding the 2022 total by 34%, all spread over 118 deals, only slightly down from 126 in 2022. And the trend is set to get stronger, especially as a “consequence of an increasing involvement in m&a by the main players in the sector, i.e. the large multinational pharmaceutical companies, which aim to fill their gap in terms of revenues and pipeline through acquisitions of companies with late-stage or pre-commercial products”.
This was explained by Daniela Gianni, partner, Strategy and Transactions, EY Italia, on the occasion of the fifth episode of EY M&A Compass, the in-depth analysis on the Italian m&a market developed by EY together with BeBeez, who underlined: “Looking ahead to 2024, we can confidently predict that the rebound in m&a investments in 2023 and the positive results of the first quarter of 2024 are just the beginning of an important m&a trend in the sector and the investment in innovation a strategic necessity for the big market players. The challenge, however, will not only be the closing of the right deals, but having the experience to execute them masterfully and extract the expected value to ensure future growth.”
Going back to the numbers, the effervescence of the sector is evidenced by the fact that the big players in the industry, such as Novo Nordisk, Merck, AstraZeneca, Amgen, AbbVie, Roche, GlaxoSmithKline, Eli Lilly, Sanofi, Novartis, Biogen and Bristol Myers Squibb have signed at least one transaction worth at least $1 billion in 2023, and that already in the first quarter of 2024, 10 deals above $1 billion have already been recorded. Not only that. In some cases, these were colossal transactions. For example, Pfizer’s acquisition of Seagen for USD 43 billion. In this regard, it should be mentioned that the Seagen deal was the largest acquisition in the life science sector after AbbVie’s acquisition of Allergan in September 2019 for $63 billion. And already in the first quarter of 2024 there were 10 deals above $1 billion.
In Italy, however, this trend is yet to be seen. According to EY’s latest report on m&a in Italy, in fact, the life sciences sector had a weight of only 6% in the first quarter of the year on the total of 294 m&a transactions with Italian companies as protagonists, while in the first quarter of last year the weight had been slightly higher, i.e. 7% of the 285 total transactions mapped then (see here a previous article by BeBeez and here the EY report). And, if we consider only the m&a activity made by Italian companies abroad, the weight of these deals was 9% out of a total of 58 in the first three months of 2024, just as in the first quarter of last year the weight had always been 9%, but out of a total of 71 deals, which means that in absolute terms the number of deals on foreign targets has decreased.
That said, it is hard to imagine that our country might not be riding the wave and indeed, at least on the private equity investor front, this attention is already being seen. In fact, in 2023 BeBeez Private Data mapped 29 private equity deals, including add-ons, club deals and divestments, announced or closed on Italian companies in the sector out of a total of 552 total private equity transactions during the year, while between January and the end of April 2024 it has already mapped 11 out of a total of 132.
Click above to see the fifth episod of EY M&A Compass
with Daniela Gianni, partner, Strategy & Transactions, EY Italy
Question. Can you give us some data on who the main investors in life sciences are globally?
Answer. There is no doubt that corporate investors again dominated the ranks of m&a transactions in the sector in 2023, with 69% of investments being led by large pharmaceutical companies, up from 38% in 2022. The return to action of corporate m&a players drove the average deal size increase (+77% in biopharma in 2023). And Q1 2024 confirmed this trend, with 29 transactions, in line with the 28 in Q1 2023, just as confirmed is the interest in the biopharmaceutical sector, the most active, with 45% of transaction volume.
Q. But why are the big pharma companies buying so much right now?
A. The big pharma companies are using m&a leverage to make themselves ready for two major secular challenges facing the industry. Firstly, that of healthcare reforms and secondly that of demographic changes. On the first point, pharmaceutical companies are facing tighter pricing and market-access policies in historically relevant geographies as healthcare systems are implementing reforms to curb healthcare spending. In the US, the government has announced the first 10 products subject to negotiation under the Inflation Reduction Act (IRA). In the European Union, a bill is being discussed to reduce the exclusivity period from 10 to 8 years for new drugs that are not launched in all 27 member states within two years of their first launch. In Germany, the government is addressing national pharmaceutical regulations (AMNOG 2.0) with further reforms to control drug costs. In Italy, the long-awaited reorganisation of the Italian Medicines Agency (AIFA) is underway. In Japan and China, governments are pursuing similar initiatives to reduce drug prices. These worldwide initiatives bring the pharmaceutical industry face to face with uncertainty and the prospect of significant pressure on its profitability model. And then, I said, there is the issue of the combination of rapidly ageing populations and declining birth rates. Switzerland, for example, forecasts a 30% increase in public health spending by 2050, driven mainly by long-term care spending. South Korea and China (among others) are already facing the economic consequences of having fewer adults of working age to help finance health services for their growing elderly populations. These changes underline the urgent need to invest in prevention and new ways to reduce the future costs of disease.
Q. So, you mean that, given these challenges, big pharma is gearing up to acquire specific skills in the market that will be needed to meet them?
A. Absolutely, yes. Let me give you a very practical example. By 2028, it is estimated that the entire global life science market will have grown by about $407 billion to $1.39 trillion; and of this growth, $142 billion (35%) will come from oncology. The 10 market-leading companies in oncology held 77% of the market in 2022, but on a like-for-like basis, due to revenue and pipeline gaps, they are projected to decline in importance to 60% in 2028. This trend indicates that the products that will drive the projected growth are not currently within the portfolio of the leading companies, and these companies therefore have a strong incentive to acquire these assets to maintain their leadership position. At the same time, other new entrants have strong incentives to try to gain market share in oncology. The growth potential of oncology as a segment is therefore reflected in m&a investments, which have not surprisingly strongly favoured this therapeutic area. Competition for oncology assets has resulted in higher premiums for oncology companies, with an average valuation of 11.9 times total target revenues.
Q. In fact, examples of transactions in this area were the acquisition of Fusion and Gracell by AstraZeneca (for $2 billion and about $1 billion, respectively); the one of Harpoon by Merck (for $892 million); and also in the first quarter, the merger between AvroBio and Tectonic was announced, with new funds raised at the same time. What do you expect for the rest of the year? Are there particular sub-sectors where you think we will see more interest?
A. I definitely expect m&a activity in the biopharma sector to remain high for the rest of 2024. On the target side, biopharmaceutical companies will continue to seek strategic transactions as a means of accessing new capital and accelerating development programmes, and given the unattractiveness of the stock market, private sale transactions represent a viable alternative that large pharma companies are well inclined to take up. Certainly, then, treatments for central nervous system (CNS) disorders will create significant growth opportunities. New technologies in cancer will indeed produce a corresponding decline in deaths from cancer diseases, but correspondingly an increase in the incidence of degenerative diseases such as Alzheimer’s is expected. Investment in CNS therapies will continue and expand beyond anti-amyloid, towards vaccines and stem cell therapies. Innovation in the treatment of cardiovascular diseases will then expand into new areas. On this front, four trends will emerge or accelerate in 2024: better use of digital health and AI for prevention and primary care; the continued use of personalised medicine to offer personalised treatments; and the identification of new molecular drug targets, such as Lp(a) levels for CVD, to detect the disease earlier. Pharmaceutical companies will continue to move towards personalised cell and gene therapies. Personalised medicine, with more than 3,500 drugs in development, will remain a focal point for pharmaceutical innovation. Germany’s ambitious plans to exploit genome sequencing in routine healthcare, the rise of mRNA vaccines and next-generation therapies incorporating CRISPR technologies suggest the direction in which the industry is heading.
Q. From an advisor’s point of view, what are the particular aspects to be taken into account when structuring m&a transactions in life sciences?
A. First of all, the choice of target: the key to long-term success is to invest in innovations that offer transformative benefits for patients. Secondly, costs should not be underestimated and synergies should not be overestimated: in life sciences, the average integration cost is 10.3% of the target’s turnover, higher than in all other major sectors. Therefore, it is particularly relevant to pay care and attention during due diligence to regulatory compliance and quality aspects, as well as to the possibility of consolidating R&D activities. Finally, great attention must be paid to the integration programme: the sector’s high growth rate does not make it immune to the risk of value destruction.
Below are the previous episodes of EY M&A Compass:
Click here to read the first episode of EY M&A Compass
Click here to read the second episode of EY M&A Compass
