Bleak revenue prospects and persistent price pressure: increase in M&A activity expected in pharmaceuticals sector

“EY Firepower Index and Growth Gap Report 2016”

  • Share
  • M&A volumes in 2016 at USD 201 billion, increase of 14%
  • Large pharmaceuticals groups with high transaction-related needs and far superior financial strength will be active on the market in 2017
  • US election is likely to result in regulatory and fiscal changes
  • Acquisition of US seed manufacturer Monsanto by Bayer largest deal of the year, Lonza deal in top ten

ZURICH, 24 JANUARY 2017 – The global pharmaceuticals industry continues its reshuffle, with a special focus on mergers and acquisitions: last year, the total value of mergers and acquisitions rose by 14% from USD 177 billion to USD 201 billion. This was the finding of the current Firepower Study compiled by audit and advisory firm EY. An end to the M&A boom in the pharmaceuticals sector is not to be expected. On the one hand, companies are likely to continue to attempt to grow through acquisitions. On the other, recent geopolitical upheaval, in particular after the presidential election in the US, will provide further impetus for the transaction market. EY expects global transaction volumes to surpass the USD 200 billion threshold in 2017 as well.

Growth often only possible through acquisitions
The main reason for the persistently high merger activity is the lean outlook for revenue. Payers such as health insurers and the state still refuse to accept price hikes for older products and are also holding back growth prospects for new therapies. “The restructuring of the pharmaceuticals sector remains in full swing. Groups aim to adjust their portfolios, to sharpen their focus and to increase their appeal to investors. At the same time, they are faced with considerable pressure to innovate. Those looking to achieve ambitious growth targets in a market with only slight growth and to include new active ingredients in their portfolios will be unable to avoid acquisitions,” comments Gerd Stürz, Life Sciences Leader at EY Switzerland.

Credit also remains cheap, the willingness to spin-off entire company divisions is high and investors are rewarding active portfolio management. “A few years will pass yet until this process is complete. M&A activity will stay at a high level over the coming years,” adds Jürg Zürcher, long-standing Life Sciences Partner at EY Switzerland. According to the EY study, the deal volume will settle at around USD 200 billion over the coming years – until 2013, a total volume of around USD 100 billion was standard.

Big pharma most active
Acquisitions by big pharmaceutical groups rose sharply last year, up 152% from USD 56 to USD 142 billion – primarily due to the Bayer/Monsanto deal. Over 70% of the transactions surveyed were completed by big pharmaceutical­ companies. By contrast, the top biotechnology companies were much less active than in the previous year, spending just under USD 4 billion on acquisitions, following USD 21 billion in the previous year. At USD 42 billion, M&A expenditure by specialty pharmaceuticals companies was also below the prior-year level of USD 50 billion. Generics manufacturers spent USD 13 billion on acquisitions, compared with just 49 billion in 2015.

Financial strength has declined across the sector
Falling share prices and the uptake of debt to finance M&A activities over recent years have meant financial strength has declined by roughly 20% to around USD 900 billion at present. Specialty pharmaceutical companies and large biotechnology firms have recorded the biggest drops, with 62% and 24% respectively, while big pharma has seen the smallest contraction at 17%. In spite of the loss of overall financial strength, many companies remain in a position to complete sizeable transactions. In particular, big pharmaceuticals and biotechnology groups have used only around 10% of their funds for M&A in recent years.

2017: new challenges in the US
The political climate in the US could increase the willingness to make transactions this year, with possible regulatory and fiscal reforms in the US providing an additional boost for the global transaction market. The potential repatriation of profits to the US is especially significant. With this, cash in the amount of approximately USD 100 billion could flow into the country. This would provide US companies with significantly greater financial room for maneuver for transactions.

“Charting a new course for fiscal policy in the US could mean limiting or completely eliminating tax advantages for US companies in M&A transactions. Global pharmaceuticals groups targeting growth on the US market could, by contrast, implement their M&A plans in the US quicker than planned,” Gerd Stürz explains. Pharmaceuticals groups currently have combined financial resources in the amount of USD 650 billion at their disposal, and thus account for almost 70% of the entire purchasing power of the industry. It is therefore to be expected that the most attractive takeover candidates are acquired by big pharma.

Lonza/Capsugel deal among top ten
At USD 64 billion, the purchase of the US seed manufacturer Monsanto by the German life sciences group Bayer was by far the biggest deal of the year. This was followed, at some distance, by the acquisition of the medical technology producer St Jude Medical by the US pharmaceuticals group Abbott Laboratories as well as by the acquisition of the US oncology specialist Medivation by the pharmaceuticals giant Pfizer. The acquisition of the capsule producer Capsugel by the Swiss pharmaceuticals supplier Lonza is the only transaction with a Swiss connection among the big deals. “The two Basel pharmaceuticals giants made only very specific acquisitions last year. For them, it was more about securing innovation and filling the pipeline rather than merely generating revenue. The possible acquisition of Actelion by the pharmaceuticals giant J&J will likely be one of the biggest deals this year, if it were to happen,” says Jürg Zürcher in his assessment of the Swiss market.

The ten biggest transactions in 2016

Buyer Target company Transaction value
(USD million)
Status
Bayer AG (DE) Monsanto Co (USA) 63,874 Pending
Abbott Laboratories (USA) St Jude Medical Inc (USA) 30,466 Complete
Pfizer Inc (USA) Medivation Inc (USA) 13,790 Complete
Boehringer Ingelheim-CHC (DE) Sanofi SA (Animal Health Business) (FR) 12,581 Pending
Mylan NV (USA) Meda AB (SWE) 9,917 Complete
AbbVie Inc (USA) Stemcentrx Inc (USA) 9,794 Complete
Abbott Laboratories (USA) Alere Inc (USA) 8,281 Pending
Canon Inc (JP) Toshiba Medical Systems Corp (JAP) 5,902 Complete
Yunnan Baiyao Holding Co Ltd (CHN) Yunnan Baiyao Group Co Ltd (CHN) 5,691 Announced
Lonza Group AG (CH) Capsugel Inc (USA) 5,500 Pending

 


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Details of the study
The EY Firepower Index measures the capacity of companies to finance transactions. It takes into account cash and cash equivalents, existing debt and credit lines, as well as debt capacity and market capitalization. Accordingly, the purchasing power of a company increases with increasing market capitalization or an increase in cash or cash equivalents, respectively with a fall in debt. Further details on the methodology are provided in the study. The figures were updated in the news release at year-end.
http://ey.com/firepowerindex

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