"We are just starting to scratch the surface on digital therapeutics, but we believe that it is going to be a huge market opportunity and transformative for patients. Scientific progress, augmented intelligence and digital data are transforming the traditional healthcare models."

Arda Ural


February 27, 2019

EY offers a broad range of services across a number of sectors – what are the firm’s key services to the life sciences sector specifically?

EY provides traditional assurance services, which make up approximately 45% of the company’s revenue.  In addition, we also offer tax and advisory services, and more recently for over a decade, transaction advisory services, which is the smaller, but faster growing services group of the firm. Within the M&A space, we advise clients across the entire transaction cycle from target selection, handling accounting or tax implications of any acquisition or separation, all the way through to operationally merging, integrating, carving-out or spinning of a business.  EY provides services to all types of clients within the life sciences industry, from small biotechs, medical technology companies to large pharma. Globally, EY employs approximately 260,000 personnel and has revenue close to US$35 billion in 2018.

Could you elaborate on EY’s approach to advise pharma and biotechs, post-acquisition?

We recently carried out research on what deal modality delivers the most value – whether it is transformative, bolt-on or geographic expansion acquisition – and after completing the analysis, we saw that bolt-on deals led to faster value creation for the acquiring company; mostly within a one-year period. The transformative deals had a longer timeline for value creation - a period of three to five years. The results indicate that what companies do after acquisition depends on what the acquiring company would like to do with the assets. For example, the deal could revolve around accessing a technology that is adjacent to the company’s existing capabilities, or around accessing an entirely new field of expertise or capability.

With regards to the transformative mega merger deals, it is not only about the top line, but also about cutting costs from the infrastructure, finding a common goal with respect to market channels, and dropping certain overlapping functions. Bottom line plays seem to be the driving force in mega mergers, which is why value creation takes longer than in the case of bolt-on acquisitions. With the tax reforms that happened in 2018, we have also started to see more creative deal structures entering the M&A space. 

Where do you see the most opportunity for the biopharma industry to derive greater value and cost savings, and where does EY fit in driving this?

We believe that the value of consultancy and analytics lies within the prediction of population health and the deployment of interventions for patients before they have to go to the hospital. Approximately 4% of patients consume 45% of resources, which is a very skewed consumption pattern. If we can identify the 4% patients and take care of them before they need hospital services, healthcare costs can by decreased significantly.

We are just starting to scratch the surface on digital therapeutics, but we believe that it is going to be a huge market opportunity and transformative for patients. Scientific progress, augmented intelligence and digital data are transforming the traditional healthcare models. The industry has to embrace Pharma 4.0 to stay competitive as providing the personalized experience demanded by patients will require life sciences organizations to find new ways of working. Partnering with others in the industry to share data, medicine and resources while anticipating trends and regulatory changes will help ensure sustainability in this increasingly evidence-based, outcomes-focused sector.

With the new CFIUS review process likely to impact cross-border transactions, is EY seeing more internal M&A activity between U.S. companies?

The expanded CFIUS (Committee on Foreign Investment in the US) review process of critical technologies has already started to affect incoming foreign capital into the United States from China since the signing of the mandate as a pilot in November of 2018.  This change is expected to delay closings of some deals and/or discourage some cross-border investors from investing in specifically biotechnology assets in the US. We will have to wait and see if the new regulation will have a material impact on the M&A activity in 2019, but logically, we believe that there will be a slow down in terms of cross-border transactions and VC investment from Asia including but not limited to China.  It will also impose a compliance burden to Biotech CEOs since they have to declare and file qualifying investments under FIRRMA (Foreign Investment Risk Review Modernization Act) signed into law in August 2018.

After a slower-than-expected 2018, do you expect to see increased M&A activity in 2019? 

We believe that the promise of the tax reform, with regards to M&A activity, did not completely disappoint in 2018, but it also did not live up to the broader market expectations. There was approximately US$198 billion in M&A activity across the life sciences sector, which is generally in line with 2016 and 2017 figures. We are entering 2019 with cautious optimism and do not anticipate a short-term recession that would derail this trend. We do, however, believe that now is the perfect time for divestment and portfolio optimization for a company on the selling side of the M&A space given favorable valuations within the life sciences, especially in medical technology space that defied the market volatility we observed in the beginning of the year. Our research of 1,436 divestitures in 2008-2019 period also supported the hypothesis that disciplined divestors created double the capital efficiency when compared to non-divestors and over 20% higher shareholder value.

How do you expect pricing structures within the biopharmaceutical space to evolve?

Healthcare costs are continuously increasing, and governments, businesses and individuals are paying more than ever. The headwind the biopharma industry is experiencing for some time is to be able to show value, and ultimately price therapies in an outcomes-based modality.  However, there is a multitude of confounding factors impacting patient outcomes outside of the potentially favorable impact of the medication, including compliance with therapy, behavior changes, adherence to prescribed medication, genetic risk factors, or co-morbidities. The challenge for all stakeholders across the fragmented health ecosystem – payers, health care providers, hospitals, and biopharma and med tech industry– is to recognize the need to move away from historic payment models based on product utilization and rebates towards value-based models that reward improvements in health outcomes.  Sharing the longitudinal patient data across this ecosystem will be a key success factor for measuring outcomes to inform the contract reward and trigger points as well as identifying intervention types, timing and modes. Outcome-based contracts, which tie a product’s performance to emerging evidence of improved patient outcomes, have the potential to reduce healthcare spending and change the healthcare price trajectory to more sustainable levels, while continuing to reward product makers for risky but important innovations.

What are EY’s key objectives for 2019 in the life sciences space and what would your message to life sciences companies be for the year ahead?

EY aims to build a better working world and we will continue working towards this goal. The objective is also to help companies across the biotechnology and pharmaceutical sectors to harness digital disruption by forming the right alliances. We want to ensure capital efficiency for our clients in the life sciences industry and we want to play a role in companies’ value creation.

In 2019, companies will have to get used to operating in an uncertain environment. Geopolitical risks and cross-border trade regulations will require companies to be agile and be able to pivot their strategy on the go.  2019 is also a year for companies to look at portfolio optimization to create the most value possible by considering divestitures to fuel innovation internally through R&D investments, or externally through bolt-on acquisitions.


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