Market insight: The life sciences sector

Life sciences may not be the easiest sector to define in a handful of words, but one thing is clear – it is an industry enjoying sustained growth and increasing company sales activity.

So how should life sciences be described? Well, it encompasses the application of biology and technology to improve health and lives. That includes the research, development and manufacturing of products and services in areas such as pharmaceuticals; medical technology; biotechnology; food processing; cosmeceuticals and nutraceuticals;genomics; diagnostics; and technologies to improve health through digital means.

KBS Corporate’s extensive experience in managing successful transactions, allied to our ongoing engagement within this dynamic market, has provided us with a unique perspective to analyse the company sales landscape within the life sciences sector.

Current landscape

Most company sales in the life sciences sector are biotech-related transactions aimed at generating growth. Of the 745 global transactions in 2023, 91% had a value below $1bn, while 54% were below $100m.

Biotech and pharma deals accounted for the lion’s share of deal volume at 61% and 23% of total value respectively. Smaller medtech transactions delivered 29% of the number of deals but only 15% of deal value.

A few large transactions, such as Pfizer’s acquisition of cancer drugmaker Seagen for $45.7bn, had an outsized impact on the jump in transaction value and slightly increased average deal sizes across the biotech and pharma sub-sectors.

Key drivers and motivations for acquirers

1. Programmatic approach to M&A

Pharmaceutical companies, a subset of life sciences, have utilised M&A as a tool to replenish their portfolios. The patent cliff allows competitors to sell generic versions of drugs. Therefore, pharma is faced with fierce competition, new drugs take time and resources to develop and are subject to regulatory scrutiny. Certain companies have thus delved into traditional therapeutic areas, whilst others have embraced AI or acquired firms that create new drugs. This approach includes multiple relatively small transactions to ensure any portfolio gaps are filled.

2. Market Consolidation

This has been a key driver for both trade buyers and private equity investors. Pharma companies have merged or been acquired to ensure they maintain pricing power, especially in high-margin sectors such as rare diseases and oncology. Biotech firms have gained access to resources, expertise and new markets. PE funds tend to acquire a multitude of smaller companies within life sciences e.g. CROs, CDMOs, joining them into one platform (buy-and-build model).

3. Cross-sector convergence

M&A has blurred traditional sector boundaries between industries (e.g. diagnostics, wearables, subscription-based healthcare and Software as a Medical Device (SAMD)). Moreover, the fragmented market allows space for consolidation between complementary industries such as regulatory firms, consulting firms and CROs. Thermo Fisher Scientific acquired PPD to boost its range of services across the clinical development spectrum.

4. AI healthcare

AI is set to continue revolutionising the healthcare and life sciences sectors. Generative AI has shaped the pathways to new diagnostic tools, drug discovery, personalised medicine and care delivery. Venture Capitalists have heavily invested into AI-focused life sciences since 2020.

Biotech, a segment of life sciences, has utilised AI to expedite drug discovery. GenAI has aided in creating more efficient processes and shortening lead optimisation timelines. Moreover, AI has transformed how diseases are detected. For example, AI technologies used in MRIs can identify early-stage illnesses such as cancer to start treatments early or to personalise treatment. Tempus AI’s strong IPO shows the opportunities within this space.

EBITDA multiples in this sector

For companies operating in the UK life sciences sector, EBITDA multiples have generally ranged between 10x and 16x, with some premium deals achieving even higher valuations.

Factors driving higher valuations and EBITDA multiples in this sector

Key valuation drivers include:

Growth rate: Higher growth rates lead to higher valuation multiples, with the market anticipating greater revenue and profits in the future.

Risk factors: Sectors with higher risk, such as early-stage biotech, may generate larger multiples. This is often due to speculative bets on cures or innovations that pay off.

Investor sentiment: Bullish markets with high investor confidence often lead to higher multiples, while shifts in market enthusiasm can lead to temporary spikes in valuation multiples.

Strategic interests of private equity and investment buyers

The breadth of the life sciences market leaves many companies having little market share, so private equity funds typically pursue a buy-and-build investment model. For example:

• Synova Capital’s investment in Charnwood Molecular
• Pamplona Capital Management’s acquisition of Parexel
• FairJourney’s combination of operations with Iontas, funded by GHO Capital

What types of businesses are strategic acquirers pursuing?

Strategic acquirers in the life sciences sector primarily target companies that can drive growth and profitability, and typically focus on the following key areas:

Pharmaceutical Companies: Acquirers are seeking companies with promising pipelines, especially those developing innovative drugs or treatments. For example, acquisitions of pre-commercial biotech assets are common to fuel growth.

Medical Technology (Medtech) Companies: These companies are often acquired to improve profitability and optimise portfolios. Acquirers are interested in businesses with advanced medical devices and technologies that can enhance their product offerings.

Biotechnology Companies: Small biotech businesses with strong R&D capabilities are attractive targets for larger pharmaceutical companies and private equity players. These acquisitions provide the financial support needed for R&D and product development.

Diagnostics and Services: Companies offering diagnostic tools and services that can improve patient outcomes and streamline healthcare processes are sought after.

Speciality and Niche Companies: Businesses focusing on specific therapeutic areas or niche markets are appealing because they offer unique products and services that can complement the acquirer’s existing portfolio.

Overall, strategic acquirers are looking for companies that can bring innovative solutions, enhance their market position and drive long-term growth.

Market Insight

The global life sciences market is projected to grow at a CAGR of 10.28% through to 2033.

Key growth factors:

1. AI: GenAI, along with other Machine Learning technologies and ‘big data’, is revolutionising the industry. It has enhanced efficiency in drug development and clinical trials. Pfizer and Sanofi are utilising AI to reduce timelines by up to 70%. AI investments reportedly could generate up to 11% in value relative to revenue across functional areas. Moreover, the introduction of AI can generate 12% cost savings of total revenue.

2. Personalised Medicine: With a systemic shift towards personalised medicine, treatments are adapted based on an individual’s genetic profile. Investment in R&D is prominent in this sector, with growth expected to rise from $2.2tn in 2023 to $4.5tn by 2033.

3. Ageing Population: As the global population ages, demand increases for healthcare, with many countries’ national healthcare services under already immense pressure. Life sciences companies in this sector which focus on rare or chronic conditions are presented with opportunities to address potential age-related issues.

Research has shown that 86% of health industry CEOs who had made a significant acquisition in the past three years planned to make one or more acquisitions in the next three years.

As pharma companies continue to face patent cliffs, they seek M&A opportunities to refill their pipeline and achieve their long-term growth plans. Bolt-ons with assets that have already carried out market research, have promising study outcomes and strong revenue potential (those in Phase III trials) are what pharma looks for.

Oncology continues to be a main area of therapeutic investment, with nearly 40% of deals and 45% of funds invested.

Which companies in this sector have been sold by KBS?

MTL Projects sold to Normec Group

Founded as Mark Thompson Lifesciences (MTL), the County Durham-based company was sold to testing, inspection, certification and compliance leader Normec. Mark Thompson posted an online review in which he wrote that KBS Corporate “were professional and value-adding from the beginning, good to deal with and highly responsive throughout – would highly recommend”.

Callisto sold to Productlife Group

Callisto, a leading UK pharmaceutical consultancy which specialises in regulatory affairs, pharmacovigilance and GMDP, was sold to PLG, a global leader in regulatory, scientific, compliance and digital transformation consulting services for the life sciences industry.

AMPCS sold to Calibre Scientific

Essex-based analytical solutions company AMPCS was sold to Calibre Scientific, a diversified global provider of life science tools and diagnostics.

Kalon Biological sold to Calibre Scientific

Kalon Biological, which specialises in the development and production of medical diagnostic kits and commercial enzyme immunoassays EIA kits for the healthcare industry, was the first of two companies sold to Calibre Scientific by KBS Corporate.

If you have a company within the life sciences space, contact us to learn more about the range of investment and exit options available.