Dealmaking activity in the global healthcare sector to rebound in 2019, says Baker McKenzie

Mergers and acquisitions will increase by seven percent in 2019 compared with 2018's drop.

Dealmaking activity in the global healthcare sector dropped five percent in 2018 to $308 billion, as political uncertainty and new onerous regulations came into force, law firm Baker McKenzie said in a report Monday.

However, dealmaking in the healthcare sector is expected to rebound in 2019.

In its report issued with Oxford Economics, Baker McKenzie predicted that deals in the sector will increase to $331 billion in 2019 — or up 7 percent as a number of cross-border and domestic megadeals are set to close.

Source: Baker McKenzie

The health care sector is increasingly considered to be an important part of the global economy as populations in a number of countries grow older and the demand for affordable health care is on the rise.

Baker McKenzie’s 2019 predictions do not include the announcement on January 3, 2019, by US-based Pharmaceutical company Bristol-Myers Squibb that it will acquire US-based biotechnology company Celgene for $74 billion.

Key trends

Despite a lackluster performance in 2018, pharmaceutical companies are still shedding non-core assets as they aim to specialise and gain access to new technology.

Many of the industry’s biggest pharma companies conducted these transactions with one another in 2018, including Shire’s (US-based) $2.4 billion sale of its oncology business to Servier (France-based), and Proctor & Gamble’s (US-based) acquisition of Merck KGaA’s (Germany-based) consumer health business for $4.2 billion.

Jane Hobson, the healthcare M&A partner at Baker McKenzie, explains that as well as divesting, companies are also wanting to grow their product pipeline, as competition for the next innovative drug becomes fierce.

“As companies compete to add drugs to their portfolios, we’re seeing more early-stage acquisitions and licensing, sometimes before proof of concept,” Jane said.

"Also, a lot of the medical device companies are shifting their business models so that they don’t just offer a medical device. Instead, they offer a solution or patient support around it, or they offer to run a service for a hospital. Many manufacturers are having to buy in that expertise."

Meanwhile, the sector is also witnessing a continued rise in deal activity around the proliferation of healthcare technology.

“For the past few years, we’ve seen healthcare companies increasingly seeking to meet the demands of this fast-changing healthcare market,” said Ben McLaughlin, the global chair of Baker McKenzie’s healthcare industry group.

“Pressure to lower costs and adjust to value-based care models, as well as meet the demands of technology-driven consumers and the rise in consumer healthcare devices, mean that buyers are looking to acquire companies capable of evolving within the landscape,” said Ben.

US and Asia dominating deal activity

Oxford Economics and Baker McKenzie experts forecast that companies will be most active in the US and Asia in 2019. Thanks to populations with relatively disposable incomes, companies in both regions will try to attract new technologies.

“The long-term outlook for the sector is especially positive in mature economies with aging populations, like the US," said Alan Zoccolillo, Baker McKenzie’s healthcare M&A partner.

In terms of public listings, the biotech sector has been helped by speedier approvals by the Food and Drug Administration in the U.S, as well as eased listing requirements for such companies in major deal-making center Hong Kong.

Hong Kong's Stock Exchange (HKSE) in April last year implemented new rules that allow biotech companies that aren’t yet profitable or without revenue to list to issue shares even before they record revenue or profits.

“In comparison, those listed on China’s main exchanges – Shanghai and Shenzhen – must prove three consecutive years of profit and revenue before listing. The new rules mean in Hong Kong the number of biotech companies coming to the market in the early stages of research and development and with no profit or turnover is expected to grow,” said Ashok Lalwani, Baker McKenzie’s healthcare IPO partner.

Asia will play host to a number of megadeals in 2019, including Japan’s largest corporate takeover, Takeda’s acquisition of Irish pharmaceutical company Shire for $58 billion.

Challenges facing healthcare transactions

Deal activity is to reach its cyclical trough in the healthcare sector in 2020, as political uncertainty and regulations take their toll. These include trade tensions between the US and China and the UK’s withdrawal from the EU.

Hideo Norikoshi, also a health-care M&A partner at Baker McKenzie, cited privacy protection in the form of Europe's General Data Protection Regulation (GDPR) and other similar rules.

“Political challenges aside, data protection may be a challenge for a lot of healthcare players thanks to GDPR and other similar measures. These regulations will force companies to protect patients’ data, but at the same time, they need to collect data for the development of new drugs. Whether regulators tend to enforce protection or make data available to responsible parties, M&A activities will be impacted.”