Life sciences M&A update

Given the cost-of-living crisis, high inflation and the rise in the price of debt, it may not seem like the ideal time for businesses to be acquisitive.

But M&A activity is a key element of how the life sciences sector works. For large and listed life sciences companies, investing in smaller businesses is a vital way to invest cash, to diversify, and to meet shareholder expectations regarding value creation.

For innovative start-ups in the sector, such external investment is needed in order to develop their products, to grow their organisation and their customer base, and to expand internationally. Furthermore, these small companies are often very much science and technology led, and they may require support from larger, or more established, companies to access the skills and experience needed to fulfil their commercial potential.

So, we know that in this sector, at least, there remains appetite to buy or invest, and many other businesses seeking that investment. But during these uncertain times, what is the level of activity likely to be? And where will it be concentrated?

Here are three trends likely to shape the market in the coming months

1. Expect a drop in activity as businesses go back to basics

Over recent years, there has been an elevated level of M&A activity in the life sciences sector. This was driven, in part, by relatively cheap debt and the fact that private equity funds and other potential buyers had a great deal of money to invest. This high demand and eagerness among buyers allowed some owners to complete transactions that they were not in fact fully prepared for.

In these more straitened times, however, buyers and investors will expect a far higher degree of readiness. Those looking to secure investment or make a sale will need to deliver clear financial information and show they understand it fully. They will need to be able to explain how they are getting through current challenges, including inflation and increased staff costs. And they will need to provide clear evidence and justification for valuations based on multiples of revenue or of profit.

Greater readiness takes more time, and we appear to be returning to a norm of between six and 18 months for this process. As business shifts back to timeframe, , there is likely to be a lag in activity, resulting in a slight dip in life sciences M&A volume es in the first half of 2023, before they pick up in the second half of the year.

2.  AI-driven businesses will remain in high demand

When it comes to which types of business will be in demand, it is likely that pharma services businesses that harness the latest technology, in particular AI, will remain popular. AI capabilities offer bigger life sciences companies the opportunity to deliver their services in a smarter, digital way, which is exactly what they need to do in this post-Covid environment.

It is possible for established companies to develop AI capabilities themselves. However, given the investment required in time and focus – which may be at the expense of the company’s core activities – and with the risk of successful implementation - most life sciences companies may choose to buy in that technology and expertise.

There is, however, one key question that potential investors – and potential sellers – should carefully consider: “What exactly is unique about this particular business’s use of AI?”

As the technology – along with people’s understanding of it – matures, it is no longer enough for a business to state that it is “AI driven” to impress potential buyers. Those looking for investment have to be able to define what is unique about what they do with AI, show ownership of the IP, and ensure that their core processes can’t easily be replicated by other means.

3. Businesses that can help the ailing NHS will be popular among investors

Anyone who follows the news in the UK will be aware of the pressures facing the NHS. Hospitals in particular are struggling, with the result that patients are facing increased waiting times for many tests and procedures.

Life sciences companies can help reduce pressure on the UK’s hospitals by developing the tools that allow health workers in primary-care settings – GP surgeries and community pharmacists – to take on more tasks that otherwise would have required diagnosis and treatment in a hospital.

Services that are already moving into primary care include physiotherapy and mental health treatment. But with advances in technology, more diagnostic work could also be undertaken in a primary-care setting, including, for example, tracking moles that could lead to cancer, and monitoring of respiratory and heart conditions.

Not only could this alleviate pressure on the NHS, but by cutting waiting times and increasing earlier-stage interventions, it could also improve patient outcomes. And businesses that can deliver something so clearly needed will obviously be highly attractive to potential investors.