In mergers and acquisitions (M&A), 2023 was not the Covid-19 rebound year industry experts anticipated. Global deal activity reached a 10-year low (opens a new window), as high interest rates made it more expensive for companies to finance acquisitions. What’s more, cross-border deals have become tougher to complete following more stringent merger control and foreign direct investment regulations in many countries.
Healthcare in particular saw a mixed set of results. According to research from PwC (opens a new window), the value of healthcare M&A deals fell by 32% between 2022 and 2023. By contrast, life sciences grew by 22% over the same period, largely due to the completion of several ‘megadeals’ – transactions exceeding $5bn. Overall, however, global deal value jumped 41% between Q3-Q4 2023 (opens a new window).
Strong appetite for innovation
Nevertheless, healthcare and life sciences continue to provide high-value assets. For example, investor interest in GLP-1 drugs – used to help counter diabetes and boost weight loss – is likely to fuel M&A activity in 2024. Shares in pharmaceutical firms Eli Lilly and Novo Nordisk – leading producers of GLP-1 drugs – have skyrocketed over the last year, with the former reaching an estimated value of $719bn according to Reuters (opens a new window). Other market players are already looking for an entry point; in January 2024, Swiss drugmaker Roche completed its acquisition of Carmot Therapeutics (opens a new window), another GLP-1 drug developer.
Elsewhere, the market is developing an appetite and solutions for innovative early-stage pharmaceutical, biotech, and medical device companies, including low/pre-revenue university spinouts. Areas such as artificial intelligence (AI), telehealth, and analytics are also attracting attention, as the healthcare sector grapples with staffing challenges, rising costs, and reductions in government funding.
Meanwhile, large-cap pharma companies continue to reduce research and development (R&D) expenses through divesting non-core assets. This cash will likely be directed towards funding new investments, as companies look to sustain their growth plans in the face of oncoming patent cliffs towards the second half of the decade.
Understanding potential risks
Due diligence is critically important in life sciences M&A transactions. Investors need to understand a host of potential risks around regulatory, intellectual property (IP), taxation, data privacy, product liability, supply chain, material contracts, and employment matters. To ensure nothing slips through the gaps, investors are including specialists in their teams to adequately understand everything surrounding the project.
Investors must also be cautious when investing early, as costs can rapidly scale up for a project that might lead nowhere or cause harm to end users.
Insurable risks in healthcare and life sciences M&A
Insurers have historically had little appetite to cover healthcare and life sciences transactions, due to limited underwriter experience in the field. Many also adopt a cautious approach to IP-heavy businesses, and the heightened potential for reputational damage in life sciences.
However, insurer appetite is growing to cover identified Tax, IP-related, and other legal contingent risks. This is particularly so where there is a defensible position as to why the risk will not materialise, or where there is a sound strategy to mitigate the risk.
Common IP and Tax insurable risks on healthcare and life sciences transactions include:
Gaps in title to and ownership of IP assets – including where there has been a failure to obtain valid legal assignments.
Complex IP ownership and exploitation issues – such as those arising in joint ventures and university spin out situations.
Identified third-party infringement risk – particularly for third-party patents.
R&D credits – particularly for businesses developing new pharmaceuticals or processes. The rules can be complex when looking at a business’ operating in multiple jurisdictions.
Patent box regime – including claiming Tax relief where a business owns or exclusively licenses patents granted in certain countries and has undertaken qualifying development for the patent.
Tax risks including but not limited to; Employment taxes, Permanent Establishment/Residency, Withholding Tax, Losses, Transfer Pricing, and VAT.
Heavy regulation – last year, many US states introduced tougher regulations on major health care deals (opens a new window) to try and control soaring health spending.
For more information, please visit our Healthcare (opens a new window), Life Sciences (opens a new window), and Transactional Risks (opens a new window) pages or contact:
Izabela Gnieciecka, Vice President Solicitor, Transactional Risks
E: izabela.gnieciecka@lockton.com (opens a new window)
Lewis Parle, Head of Intellectual Property Risk, Transactional Risks
E: lewis.parle@lockton.com (opens a new window)
Mat Bond, Head of Tax Liability Insurance, Transactional Risks
E: mathew.bond@lockton.com (opens a new window)
Faz Zaheer – Tax Liability Insurance Broker, Transactional Risks