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The Covid-19 pandemic had a major impact on the economy in general and, as a result, had a major impact on the M&A market in all industries, particularly the life sciences and healthcare (LSH) industries. For example, hospitals are facing financial difficulties from reducing selection procedures to preparing for Covid-19, including costly purchasing of personal protective equipment. Therefore, pharmaceutical companies are struggling with forced concentrations of product portfolios and reducing sales of certain products. While it seems impossible to predict future developments, timing and recovery from the ongoing pandemic with ample certainty, we provide a broad overview of what is expected in the 2021 LSH M&A market.
The negative meaning of the pandemic
In light of continued uncertainty and rapid developments regarding COVID-19, we expect a certain hesitance in the LSH-related M&A market during 2021. Substantial government-aid programs in the EU and at national level, for example, have continued to stabilize the situation to a certain extent, but we might see a severe recession following the insolvency of many companies in the first half of 2021. From a risk perspective, executives might prefer 'smaller-ticket' Transactions may increase the total number of M&A M&A transactions, but may result in larger transactions and lower overall volume. The goals and their business plans are scrutinized more carefully as a result of more uncertain and partially lower company valuation and liquidity. You may also see guarantees and coverage (W&I) insurance that plays an even greater role in filling the widening risk allocation gap between sellers and buyers.
With regard to funding, rising funding costs and macroeconomic recession could lead to worsening conditions for exploited funding. As a result, private equity and venture capital investors will have a high level of capital to deploy and will benefit from these opportunities. This is especially true for small businesses, when it comes to low revenues and fewer assets to pledge as collateral.
The general harmful impact on the LSH M&A market can also be attributed to uncertain geopolitical situations, but given the business model is partly domestic, mostly resilient and generally robust, this may have less impact than other industries (such as certain consumer industries, part of the transportation sector).
Positive results
There is no immunity due to the problem, but the LSH industry is generally relatively resilient. Aging, expansion into development markets and digitalization remain reliable drivers. Emerging sectors in developing markets include generics and biosimilars due to price pressure and the need to produce huge amounts of products. Established generic producers can be more attractive as M&A goals compared to investments in developing new products with uncertain outcomes.
Key players in the pharmaceutical and medical device space continue to diversify by acquiring startups and investing in new technologies. Investors in other industries have felt a presence in the LSH market through organic and inorganic growth. At the same time, large pharmaceutical companies will continue to sell non-core companies to focus on high-growth specializations. The same demand for growth and digitalization in the specialty sector attracts health technology startups and venture capitalist companies.
Due to Covid-19, certain financial challenges can pose smaller, less capitalisation, and/or other challenging challenges for LSH companies to integrate or cooperate to survive. The further need for various focus areas of digitalization and R&D, such as Telehealth, will also lead to an increased need for M&A transactions and a restructuring of departments and companies that could lead to the continued increase and growth of health technology startups. It is expected to increase the focus on antiviral drugs, monoclonal antibodies, vaccines, diagnostics, medical supplies, and tackling the COVID-19 pandemic.
In the LSH industry, economic development is likely to be quick and often predictable. Some pharmaceutical companies or joint ventures (such as the Pfizer/Biontech Alliance) are expected to make significant profits from recently developed vaccines. This assumes that these vaccines will soon be approved and distributed throughout the EU after UK's rapid-tracking regulatory approval. For other pharmaceutical companies, current high stock prices and valuations can soften places where the companies involved cannot actually develop the vaccine into the market. These developments create micromarket selection processes with incentives involving corporate failure or negotiation, acquisition, or other cooperation with successors.
Legislative proposal
There are several LSH-related legislative proposals in the EMEA, particularly Germany. This could be passed in 2021 and affect M&A transactions. Examples of reproduction include:
With the launch of the EU Medical Device Regulation (MDR) postponed to May 2021, there have been an increase in medical device R&D costs and significant hurdles for general manufacturing and market access since 2022. The delay in launch has led to a longer preparation period for the year, but further market consolidation is still expected in light of some of the previously forecast supply chain disruptions and additional regulations that have been partially driven by a tough financial situation due to COVID-19, resulting in further market consolidation in light of SMEs to incur additional costs for additional regulations. In Germany, the Digital Versorgung und Pflege-Modernisierungs-gesetz continues to promote and shape the digitalization of the LSH sector, thus leading to an increase in M&A activities. German law on emergency medical reform (Gesetz Zur Reform der notfallversorgung) improves the efficient use of money and personnel in this subsector.
summary
Overall, the LSH-related M&A market is currently slowing down due to the general resilience of the LSH sector and the inherent opportunities offered by the ongoing crisis (e.g., vaccine production and deployment), but we believe that such a crisis in the LSH&A market is relatively slow and short-term. The recovery could be faster than most other industries and M&A markets. With the initial meaningful number of vaccinations and the beginning of a general economic recovery expected in 2021, the LSH-related M&A market should similarly return to previous strengths and continue to positive trends. Additionally, more dynamic subsectors are expected for market participants who will produce the vaccines, medicines and medical devices needed to overcome the peak of the pandemic in 2021.
