Big pharma stayed on the sidelines in the 2013 mergers and acquisitions (M&A) market despite a continuing need to close a revenue “growth gap” that is expected to reach USD 100bn by 2015. While pharma companies have more “firepower” – or capacity for conducting M&A deals – they now face the dual challenges of higher valuations for attractive assets and relatively less purchasing power when compared to competitors in big biotech and specialty pharma, according to EY’s new report, The shifting balance of firepower.
“With strong shareholder returns and robust pipelines at a few companies, big pharma was largely absent from M&A in 2013,” said Glen Giovannetti, EY’s Global Life Sciences Leader. “As they face significant growth challenges ahead, pharma companies will need to become more acquisitive, but the growing strengths of big biotech and emerging pharma are leading to both increased competition for deals and more expensive targets.”
Key findings highlighted in the report include:
• Pharma’s growth gap remains: The projected 2015 growth gap for big pharma – the additional revenue needed to keep pace with the overall drug market – remained essentially unchanged at USD 100 bn. The inability of big pharma to close this growth gap was due to both a lack of significant M&A and slowing sales, with revised third-quarter guidance indicating that aggregate 2013 sales are expected to decline by about 1%.
• Pharma’s firepower increases: EY’s Firepower Index revealed that big pharma’s firepower increased by nearly USD 100bn, or 15%, in 2013. This increase was almost entirely driven by rising equity market valuations, which accounted for more than 90% of the increase.
• The balance of firepower is shifting: Despite an increase in overall firepower, big pharma’s share, when compared to big biotech and specialty pharma, has fallen significantly from 85% in 2006 to 75% in 2012 and 70% in 2013. In addition, as valuations of big biotech and specialty pharma companies outpace those of big pharma, the relative firepower of big pharma (i.e., adjusted for higher target prices) has actually declined by more than 20% over the last year. These shifts should heighten the competition for deals in 2014. Big biotech and specialty pharma have already proven to be significant competitors for assets, with these sectors accounting for more than 80% of M&A activity by announced deal values in 2013.
Implications for 2014 and beyond
The shifting balance of firepower report identifies several factors and considerations likely to affect M&A in 2014 and beyond:
• Acquisitions to hedge pipeline disappointments seen as likely: Among the likely big pharma acquirers in 2014 will be those with growth gaps who decide to hedge potential disappointments in product launches and R&D.
• Divestitures to pursue growth targets may be seen: Given the rise in target valuations, some big pharma companies may turn to divestitures to boost firepower in 2014. EY estimates that approximately 12 divestitures by big pharma – principally from non-core businesses – could be worth up to USD 100bn in incremental firepower that could be redeployed for M&A.
• Use it or lose it: For companies whose firepower is expected to remain the same or shrink, “use it or lose it” may become the focus – driving a surge in M&A activity.
“With both declining relative firepower and a smaller share of the total, big pharma companies need to allocate their limited resources carefully, increasing the importance of robust deal valuations, due diligence and integration,” said Jeffrey Greene, EY’s Global Life Sciences Transaction Advisory Leader.
“To succeed in this environment, firms need the right capabilities, resources and processes. Amid elevated target prices and rigorous investor scrutiny, there is little room for error,” adds Greene.
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