Biopharmaceutical M&A expected to soar in 2017 as pricing pressures dim global revenue outlook

San Francisco, 9 January 2017

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  • M&A value exceeded US$200b in 2016
  • Payer “growth gap” quickly becoming a reality for many in sector
  • Big pharma enters 2017 with distinct firepower advantage and need to deal

The biopharmaceutical industry’s desire for inorganic growth is expected to intensify an already heated mergers and acquisitions (M&A) environment in 2017. This is according to the EY M&A Outlook and Firepower Report 2017 that was launched today. With new regulatory and tax environments expected following the changing geopolitical landscape, most notably in the post-election US, expectations are that the industry may roar past the US$200b in global M&A deal volume seen in the last three years.

The EY report finds the industry’s need to engage in M&A has become amplified as payers continue to push back forcefully on price increases for older drugs while dampening the growth trajectory of newer drugs, creating a potentially daunting payer-driven revenue growth gap. As the probability of revenue shortfalls increases across the global industry, even companies with solid growth prospects may look to pursue M&A in 2017 as a defensive safeguard.

Pamela Spence, EY Global Life Sciences Leader, says:
“While innovation and access to patients remain the industry’s biggest challenges, escalating pricing pressures are impeding growth aspirations across the sector. Biopharmaceutical companies need to utilize their firepower strategically to address these challenges and create competitive advantage. With a positive dealmaking climate emerging for 2017, companies should look to seize the opportunities that will exist to address their growth challenges in a meaningful way.”

The EY Firepower Index measures biopharma companies’ ability to fund M&A transactions based on the strength of their balance sheets and their market capitalization. A company’s “firepower” increases when either its market capitalization or its cash and equivalents rise – or its debt falls. This year marks the fifth year of the EY Firepower Index.

Key findings highlighted in this year’s report include:

  • “New normal” US$200b deal environment persists in 2016: Total M&A volume across the biopharmaceutical industry exceeded US$200b in 2016, a level unheard of prior to 2014 but in line with the deal volume of the previous two years. Big pharma was responsible for the lion’s share of this deal activity with over 70%.
  • Finding growth in traditional strongholds is becoming increasingly difficult: Yesterday’s breakthrough innovations in disease areas, such as autoimmune disease and oncology, have become today’s crowded therapeutic battlefields, forcing the industry to seek therapeutic “white spaces” in underserved areas. For example, Alzheimer’s disease remains high-risk, but pharmaceuticals represent only about 1% of the US$250b in related global health care costs.
  • Overall firepower on the decline: Falling equity valuations and debt raised to fuel previous years’ M&A have resulted in roughly a 20% decline in firepower across the industry. Specialty pharma and big biotech companies have experienced the largest declines, down 62% and 24%, respectively, while big pharma dropped only 17%.
  • But plenty of firepower remains: Even with falling firepower levels, there are many companies with the ability to make large and potentially transformative deals. Notably, big pharma and big biotech companies have spent only about 10% of their firepower on M&A annually over the past several years.

Implications for 2017

The report identifies several industry challenges and considerations likely to drive M&A in 2017 and beyond:

  • US political climate could drive deals: Potential regulatory and tax reform in the US could create an even more heated global deal environment. Of particular significance is the potential repatriation to the US of roughly US$100b in cash, which would provide US companies with considerable firepower to complete deals.
  • Big pharma likely to dominate dealmaking in 2017: Now in possession of nearly 70%, or US$600b, of the total industry firepower, big pharma is in the driver’s seat for acquiring the most desirable M&A targets.
  • Specialty pharma may sit one out: Speciality pharma will likely find it difficult to compete in M&A in 2017 due to both falling valuations and its three-year marathon of M&A transactions. On average, specialty pharma valuations have fallen 34% during 2016, and no fewer than six of the largest 10 specialty pharma companies have exhausted their firepower.
  • Ex-US advantages could wane: US tax policy reform could also lessen or erase the dealmaking advantages that companies with ex-US tax domiciles have enjoyed. It may also spur global pharma companies seeking US market growth to accelerate their M&A plans.

Jeffrey Greene, EY Global Life Sciences Transaction Advisory Services Leader, says:
“Over the next 12 months, biopharma dealmaking could reach unprecedented heights with big pharma possessing both the firepower and the growth imperative to take it there. In this potentially frenetic deal environment, companies will need to be prepared to move quickly to make the right strategic acquisition on the right terms.”

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About the EY Firepower Index
Now in its fifth year, the EY Firepower Index measures companies’ capacity to fund transactions based on the strength of their balance sheets. It has four key inputs: 1. Cash and equivalents; 2. Existing debt; 3. Debt capacity, including credit lines; and 4. Market capitalization. In constructing the model, the following assumptions were made: first, a company will not acquire targets that exceed 50% of its existing market capitalization; second, the debt/equity ratio of the combined entity created by a transaction cannot exceed 30%.

While some pharma companies have made acquisitions that go beyond these upper limits, our intent is to apply a uniform methodology to measure relative changes in firepower. The Firepower Index measures capacity to conduct M&A transactions financed with cash or debt. It does not measure the ability to conduct stock-for-stock transactions. However, increases in a company’s stock price do boost its firepower under the EY Firepower Index’s formula. That is because equity enables companies to borrow more to finance transactions.

In our report, companies were classified as big pharma, specialty pharma/generics or big biotech based on their size, geographic reach and product portfolio. Seventeen big pharma companies were analyzed for this report, while 10 specialty pharma/generics firms and 12 big biotechs were included.

How EY’s Global Life Sciences Sector can help your business
As populations age and chronic diseases become commonplace, health care will take an ever larger share of GDP. Scientific progress, augmented intelligence and a more empowered patient are driving changes in the delivery of health care to a personalized experience that demands health outcomes as the core metric. This is causing a power shift among traditional stakeholder groups, with new entrants (often not driven by profit) disrupting incumbents. Innovation, productivity and access to patients remain the industry’s biggest challenges. These trends challenge the capital strategy of every link in the life sciences value chain, from R&D and product supply to product launch and patient-centric operating models.

Our Global Life Sciences Sector brings together a worldwide network of 11,000 sector-focused professionals to anticipate trends, identify their implications and help our clients create competitive advantage. We can help you navigate your way forward and achieve sustainable success in the new health-outcomes-driven ecosystem.

For more timely insights on the key business issues affecting life sciences companies, please go to ey.com/VitalSigns. You can also visit ey.com/lifesciences or email global.lifesciences@ey.com for more information on our services. To connect with us on Twitter, follow @EY_LifeSciences.