Divesting is a strategic pillar for enhancing life sciences companies’ growth. Read our life sciences divestment study.
Driven and enabled by technology, most life sciences companies expect to divest within next two years, with the majority expecting to divest even sooner.
Jeff Greene

Jeff Greene

EY Global Transactions Leader

Life Sciences

+1 212 773 6500


Divestment Study for Life Sciences

Technological change is having a profound effect on the divestment strategies of leading life sciences companies.

  • First, the digital transformation of health care requires life sciences executives to reconsider whether their portfolio of businesses and therapeutic areas is optimal for future growth.
  • Second, technology, data and analytics are helping many businesses to make much better divestment decisions, maximizing value and efficiency as they execute transactions.

With the shift towards a digitally-enabled, patient-centric approach to products and services, life sciences companies are scrambling to position themselves. Eighty-three percent expect to make divestments within the next two years, very often as they seek to free up capital for technology investments or to dispose of assets that are a poor fit with the evolving environment.

Industrials Divestment Study

Technology, not only a driver of divestments, can be an enabler of deal value. Life sciences businesses confident in their ability to shift towards a more data-centered divestment strategy report superior results from their portfolio reviews and transaction outcomes. Analytics tools underpin an increasingly structured and systematic approach to divestment.

Such discipline will be crucial as more life sciences companies pursue divestments to amass firepower (a company’s ability to do M&A based on the strength of its balance sheet) and jettison underperforming and non-core assets. Alongside the challenges of technology transformation, life sciences executives continue to confront ongoing pricing pressures, market access challenges and increasing competition in all of their key markets.

The need to fund new technology investments was a trigger for the last divestment made by 46% of life sciences companies, with biotech businesses (52%) particularly likely to cite this option compared to biopharmaceutical (48%) and medical device businesses (38%).

This imperative continues: 46% of life sciences executives surveyed say the need to fund new technology investments is making it more likely they will make divestments over the next year; that figure rises to 50% among biopharmas.

Industrials Divestment Study

The potential payoff is enticing. According to our global study, businesses across all sectors that understand how technology affects their value are 15% more likely to achieve a sale price above expectations and 12% more likely to achieve a higher valuation of the remaining business post-divestment. However, life sciences businesses can’t afford to wait. Competitors are now overhauling their portfolios and the threat of new entrants from other sectors — especially the tech industry — look to disrupt the life sciences supply chain.

Such pressures weigh heavily on life sciences executives. Almost three-quarters (74%) say their companies feel compelled to exit certain businesses so they can reinvest, often in new areas. Close to half (47%) report that their strategic priorities have changed and that they are divesting non-core businesses.

Other factors driving divestments will continue to be important: 79% of executives point to a deterioration of the regulatory or reimbursement outlook; 73% are addressing capital allocation priorities such as dividend payments or share buybacks; and 67% worry about declining growth potential.

Life sciences companies are turning increasingly to analytics to bring data-driven discipline to their portfolio reviews and divestment execution.

Descriptive (performance) analytics focuses on historical performance
Predictive (applied) analytics offers insight into likely future performance of the business and its marketplace
Prescriptive (dynamic decision modeling) analytics can generate operational decisions based on predictive scenarios

According to our global findings of businesses surveyed, those that apply consistent data-driven analytics to drive decision-making in their portfolio reviews are 33% more likely to achieve a sale price above expectations than those that do not.

In addition, all companies surveyed that consider their predictive analytics capabilities to be effective in making portfolio decisions are:

  • 81% more likely to achieve a sale price above expectations
  • 35% more likely to complete their exit sooner than expected
  • Twice as likely to achieve a higher valuation than expected for the business that is not sold

Achieving those gains relies on access to accurate, timely and sufficiently granular data to unlock value through portfolio optimization. This is a challenge for life sciences, given its often complex IT infrastructure.

For example, cost allocation can be inaccurate, making it difficult to assess profitability at a stock keeping unit (SKU) level. Insights gleaned from more detailed data analytics can provide insights to divestment teams to address any inaccuracies in capital allocation.

This trend will continue as more life sciences companies embed analytics in their divestment process, building decision-making platforms that provide regular feedback at every stage of the transaction life cycle.

Improvements in reporting, with customizable dashboards and user interfaces accessible to executives outside of IT, offer further benefits — but only to life sciences companies that continue to invest in their data.

This is the dawn of the health care platform: marketplaces where patients can connect with manufacturers, payers and even policymakers to find products and services tailored to their individual needs – drugs, devices and therapies sourced from multiple providers.

More than half of life sciences executives (57%) say this patient-centric shift has been the biggest driver of their latest divestment planning. A quarter (26%) are narrowing their therapeutic focus to devote greater resources to assets with the greatest prospects for success in the platform economy.

And as emerging technologies continue to shape health care in unpredictable ways, a wait-and-see approach is likely to fail. Already, 17% of executives say they are quicker to divest underperforming businesses than in the past to free up capital for more productive use elsewhere.

Industrials Divestment Study

In an uncertain market environment – most obviously in the US, where health care reform remains divisive – making any kind of revenue projection is challenging. Instead, sellers are seeking new ways to bridge the value gap, accepting they must share some of the risk with buyers if they want to maximize revenues.

As a result, contingent compensation has become a mainstream deal feature. In 2015, 22% of executives said they would not accept contingent features in a transaction; in 2016, this figure fell to 13% and it now stands at just 2%.

Industrials Divestment Study

The nature of the contingency varies from deal to deal. Manufacturing volume or yield targets, regulatory approvals and sales are all popular milestone criteria.

Research and development (R&D) technical success is an increasingly common contingency in drug development, ever a key risk for buyers. In recent years, the number of life sciences businesses prepared to accept this as the basis for contingent compensation has steadily increased, from 33% in 2014 to 50% and 60% in 2015 and 2016, respectively, reaching 61% in the latest study.

As sellers seek to justify higher valuations, they will need to address buyers’ caution. If deal rationale is built on innovation and R&D, this form of contingency may be needed to secure a higher price.

Increasing numbers of life sciences companies now see their R&D pipeline as a potential source of hidden value. While not necessarily proactive about it, 67% of executives say they will respond thoroughly to third parties interested in licensing R&D assets. Almost a quarter (23%) actively seek to out-license their R&D.

Life sciences companies are regularly under pressure to commercialize their pipelines and identify the next drivers of business growth. The temptation may be to hold on to as broad a range of R&D assets as possible. However, companies risk losing out on its potentially greater value to third parties. Executives should assess their R&D assets for hidden value. Unlocking that value, through some form of traditional divestment, joint venture or other more creative collaborations, may prove to be the right strategic decision.

Industrials Divestment Study
Focus on technology to drive divestment value

After a year of peak life sciences M&A activity in 2016, 2017 was relatively subdued — particularly for biopharma — but it still ranked within the top five annual M&A performances of all time. The total value of M&A in the sector is expected to surpass US$200b in 2018, particularly as US Tax reform offers some certainty for those companies considering divestments and acquisitions.

A number of large biopharma companies are considering divestments in 2018. Securing value from divestments — by making the right portfolio choices at the right times, as well as getting a good price for the deal — will be as important as ever.

Technology holds an important key: the race is on for life sciences companies to reposition themselves for an era of digital transformation. They will need to focus on assets that will prove competitive on the emerging health care platforms of tomorrow. Analytics, meanwhile, provide the means to plan and execute divestments more successfully.

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