Pressure on pharma M&A
pharmafile | January 7, 2013 | News story | Research and Development, Sales and Marketing | Ernst & Young, M&A, MA, mergers
The world’s largest pharma companies will be under greater pressure to merge with or purchase other firms over the next few years in order to drive growth, according to a new report.
Ernst & Young’s ‘Closing the gap? Big pharma’s growth challenge and implications for deals’ says it is the only way many multinationals in the sector can hope to move forward, as mature markets stagnate and emerging ones slow down.
However, there is a catch: by analysing the balance sheets of the 16 largest US, European and Japanese pharma firms by revenue, the report points out that their capacity to cut the necessary deals has fallen.
The report points to big pharma needing an additional $100 billion by 2015 simply in order to keep up with overall market growth as its resources wane and competition grows for good-looking assets from biotech and speciality pharma companies.
This means that many big pharma companies will want to speed up moves towards mergers and acquisitions in 2013, rather than relying on organic growth to create shareholder value.
But Ernst & Young’s so-called ‘Firepower Index’, a measure of capacity for conducting M&A deals based on cash, debt, credit lines and debt capacity, and market capitalisation, says big pharma’s financial clout in this area fell by 23% between 2006 and 2012.
Continued pressure on drug pricing plus more borrowing to fund higher dividends, stock repurchases and previous transactions are among the key reasons for this weakness. At the same time, the power of biotech and specialty pharma companies – including generics manufacturers – has increased, Ernst & Young says.
Using the same index, the ‘firepower’ of big biotech rose 61% and that of speciality pharma was up 20% – which means big pharma’s share of combined acquisition capacity has fallen from 85% in 2006 to 75% last year.
“While the dynamics of the pharma industry remain fluid, the deal environment in 2013 and beyond will be more complex and competitive,” says Glen Giovannetti, Ernst & Young’s global life sciences leader.
“The finite resources of many big pharma companies, and the need to make prudent acquisitions to address the immediate growth gap, mean they will likely be even more selective about the targets they pursue,” he added.
In order to cut the mustard over the next few years, big pharma firms need to look at bolt-on acquisitions, get rid of non-strategic assets and look at more offshore and emerging market deals, the report suggests.
Adam Hill
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