As M&A costs rise, new Accenture report offers alternative strategies

Rising deal premiums and shrinking profit margins are threatening the sustainability of the traditional approach to mergers and acqusitions, according to a report by Accenture. The firm expects growth-minded companies will turn to other pathways.

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Biopharma companies may want to pause before they plow ahead with their next acquisition. The costs are rising and the potential returns are falling, according to a report published in late June by accounting and consulting firm Accenture.

Other growth strategies, however, could prove more promising in the years ahead, noted the report, which predicts that companies will begin to change strategy.

“From shifting trends in partnerships to new models of thinking required to support acquisitions, we are deeply entrenched in a period of transformation for the life sciences industry,” the report’s authors wrote.

M&A has long reigned as the growth strategy of choice for the top 30 biopharma companies, according to the Accenture report, titled “Scientific innovations for more sustainable growth.” In fact, over the last 15 years, acquisitions have delivered 60% of the firms’ marketed assets.

However, several factors threaten the sustainability of the M&A approach, the report said. Acquisitions, for example, are growing more expensive due record-high premiums for biotech deals. For deals valued at more than $500 million, Accenture said the takeout premium was 71% in 2021, up from 51% in 2018. The firm attributed the increase to the growing amount of venture capital funding pouring into biotech companies.

“According to biopharma executives we interviewed, it became almost impossible to create value from late-stage asset acquisitions due to record high transaction premiums in 2021,” the authors wrote.

At the same time, biopharma companies are facing pressure on profit margins, which jeopardizes their ability to pay for acquisitions, according to the report.

The stock market, meanwhile, has tended to frown on the traditional M&A approach, based on an analysis by Accenture. The firm found that traditional deals led to a negative short-term impact on stock prices in relation to the general market.

To suss out the trends, Accenture divided inorganic growth approaches into four pathways: builder, architect, ecosystem and controller.

The builder pathway, which refers to traditional late-stage acquisitions, has been the most common, representing 36% of transactions between 2010 and 2021. Behind it at 34% is the architect pathway, which refers to acquisitions of early-stage assets. One example cited by Accenture is Sanofi’s $3.2 billion purchase of Translate Bio.

Accenture expects companies will continue to pursue deals under the architecture pathway. But that strategy may change. Instead of focusing on early-stage assets, buyers may look to gain access to platform technologies. Examples include Pfizer’s $300 million deal giving it access to Beam Therapeutics and research into in vivo base editing for rare genetic diseases of the liver, muscle and central nervous system, according to Accenture.

The firm also sees promise in the ecosystem pathway, which covers acquisitions of know-how and capabilities to speed up innovation or reach customers in new ways. Examples cited by Accenture include analytics, artificial intelligence and  new devices.

Between 2010 and 2021, ecosystem deals represented 16% of the total number but only 1% of the deal value, Accenture said. However, the firm said, an ecosystem deal was one of the largest deals announced in the runup to the J.P. Morgan Healthcare Conference in January 2022: the collaboration between Sanofi and Exscientia, an AI-powered drug discovery company.

Ecosystem deals also provide the biggest short-term bounce to stock prices, according to the analysis by Accenture.

Controller deals – which refer to those struck for purposes of geographic expansion or vertical integration – also could grow, particularly as biopharma companies seek growth in China, Accenture said.

Biopharma companies rely on a mix of the four pathways, with the mix varying based on a company’s age and size. Smaller, high-growth companies are more likely to pursue architect deals, Accenture found.

In wrapping up its report, Accenture recommended a series of actions largely focused on architect and ecosystem deals. The recommendations included combining biotechnology platforms and capabilities to create value; developing a corporate culture that can accommodate multiple platforms; and creating an internal team to ensure efficient use of resources between therapeutic areas.

“Similar to a venture capital operating model, this team would incubate novel science and technologies while evaluating and managing various S&T (science & technology) collaborations that provide access to experts, skills, capabilities, and relationships,” the report’s authors wrote.

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