Executing divestments successfully in biopharma: the dos and don’ts

By Rishi Unnikrishnan, Senior Manager, and Vanessa Parra Ferreira, Senior Manager, Deloitte

As companies evolve and review their portfolios, boards have long used divestitures as a strategic tool to sell brands or business units that they no longer consider as part of their core business. The cash proceedings are then invested in assets and services that are more closely aligned with their business growth strategy. In the biopharma industry, the number of divestments has increased dramatically over the past two years. In this blog we explore the common rationale behind biopharma divestiture transactions and how a five-step approach can help ensure the divestiture transaction realises optimal value.

What is a divesture transaction?

A divesture transaction is the process of liquidating assets with the express intention of generating value.¹ Importantly, a divestiture is a critical instrument in the corporate growth toolbox, with organisations that remain divestiture-ready better prepared to pursue it more effectively and benefit from it than those that reserve it for times of crisis.²

Importantly, as innovations emerge, new business realities evolve, and some business units or assets are relegated to ‘non-core’ status. Agile organisations are then able to implement a strategic approach to divesting these non-core assets and business units to free up capital to invest in ‘core’ focused areas.

Why do life sciences companies divest and what are the common types of divestments?

While there are various reasons for divestiture in the biopharma industry, the three most common situations are:

Business unit divestments: synergies that existed in the past to keep business units together no longer hold true due to technology or market disruptions. Recent examples are the spin-off of the consumer health units Haleon by GlaxoSmithKline (GSK) and Kenvue by Johnson & Johnson (J&J). While digital technologies and eCommerce have allowed the consumer health business units to reach consumers directly, biopharma units continue to be highly regulated and depend on healthcare professionals (HCPs) and off-line distribution channels for market access.³
Product divestments: innovative therapeutics replace older technologies, leading biopharma companies to sell some products that relied on older technologies. Even though most of these deals do not receive widespread media attention, they are important for companies to generate cash, simplify their product portfolio and thereby the associated higher costs in manufacturing and distribution.⁴
Manufacturing facilities’ divestments: following changes in the product portfolio, biopharma companies typically review their manufacturing footprint and may choose to consolidate manufacturing in certain facilities while divesting others that are no longer core to their portfolio. As production technologies become more mainstream and widely accessible to other players, there are opportunities to streamline processes and drive down production overheads through outsourcing site operations to external pharma services providers. Use of CMOs (contract manufacturing organisations) can drive down costs through economies of scale.⁵

How prevalent are divestiture transactions in biopharma?

Although the proportion of divestitures and spinoffs have remained largely stable at between 13-17 per cent of global M&A volume over the last six years, the life sciences industry has been a significant outlier.⁶ According to our analysis of Mergermarket data, the number of divestment transactions in the top 15 biopharma companies in 2022-2023 has almost tripled (see Figure 1). This trend is set to continue as illustrated in Deloitte’s 2024 sixth biennial Global Divestiture Survey of mergers and acquisitions and restructuring leaders, with 78 per cent of life sciences respondents indicating that they are considering at least three divestments in the next 12-18 months, up from 41 per cent in 2022.⁷

Figure 1: Number of divestments made by the top 15 biopharma companies by year

Source: Mergermarket data on M&A activity

While it might appear contradictory, the uptake in divestiture transactions is related to the imminent ‘patent cliff’. Specifically, by 2030, 190 drugs (including 69 blockbusters) will lose exclusivity, representing 46 per cent revenue at risk for the top 10 pharma companies over the next decade.⁸ With such a large potential impact, biopharma companies need innovative products to cover the gap – and are investing significantly more to find these innovative products – either through increased R&D spend or inorganic growth through M&A. Global R&D expenditure in 2023 is 25 per cent higher than in 2020 and is expected to increase another 15 per cent by 2028.⁹ Moreover, persistent inflation and high interest rates post COVID have driven up the cost of capital and dampened investor sentiment, impacting market funding. Biopharma companies are therefore reviewing their product and asset portfolio more frequently to divest lower margin generic products and non-core facilities and unlock cash to fund future growth. This may explain the significant uptick in divestment activity we are seeing in the biopharma market.

How can life sciences companies successfully execute a divestment?

With more frequent divestments, organisations need to become ‘divestiture ready’, pursuing a portfolio review strategy more proactively and acting swiftly to ensure full deal potential is achieved. Such divestments especially in life sciences are long processes that need to be managed carefully: 60 per cent of the divestiture transactions in life sciences take 7-12 months (compared to 49 per cent in Telecom & Media, 50 per cent in Energy & Resources and 38 per cent in Financial Services).¹⁰

Top executives in the life sciences industry understand this challenge – a deep dive into the responses in the Divestiture survey from life sciences companies identified two actions to maximise deal value:

companies need to better prepare and have a clear ‘exit and separation-readiness assessment’ before market engagement
having a clear value creation case ready to be executed before the deal and a tailored sale process specific to bidders prior to engaging them.¹¹

Based on our cross industry experiences in advising clients on divestitures, we have identified a five-step approach that can help optimise the odds of divestment success.

Conclusion

Active portfolio management and consequent asset divestment is an important lever to drive shareholder value. Indeed, Deloitte considers that ‘shedding components of an organisation is as important a strategic tool as acquiring new ones through an M&A approach- or- an M&A&D approach’.¹² A well-executed deal starts way before the lawyers sign the contracts – and does not end until the last manufacturing authorisation is transferred. Defining a profitable growth story for the stand-alone business, acting decisively and with confidence while planning and executing cross-functionally at pace can help facilitate a smooth divestment process and deliver on the anticipated value.

Rishi Unnikrishnan - Senior Manager, Deloitte

Rishi is an SM in the M&A UK practice, focused on Lifesciences and ER&I clients at Deloitte, helping them on M&A Strategy and Supply Chain transformation. He has worked on both buy and sell side M&A in IMO/SMO, Op Model design, Cost Transformation and SC strategy projects. Rishi has 16 years of Industry and consulting experience focused on M&A integration and SC Transformation. In 10 years at Bayer, Rishi worked across the Pharma, Cropscience and Consumer Health businesses on various M&A, SC and Strategy roles. He has worked on project assignments across the EU, Asia and the Americas with global, regional and local teams. Prior to Bayer, Rishi led digital transformation programs at IBM and Infosys. Rishi speaks fluent German. Rishi is currently supporting the Cost Transformation SGO and M&A pursuits and is happy to chat about M&A Ops and Digital transformation in Lifesciences.

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Vanessa Ferreira, Senior Manager, Deloitte

Experienced in strategic planning & execution. Successful track record on M&A deals-pre assessment (valuation-due diligence) to post completion (integration) on both the buyer and seller side. Passionate about Innovation and Interpersonal Connections. Eager to execute and deliver results in multi-cultural environments. Sharp minded, hands-on, relationship builder.

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