Press release

Big pharma under pressure for M&A to close US$100b growth gap

San Francisco, 7 January 2013

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Top pharmaceutical companies are facing a widening “growth gap” that will increase pressure to drive growth through M&A. But ‘big pharma’s’ attempts to make deals will be challenged by its diminished resources and fiercer competition for attractive assets from rapidly growing big biotech and specialty pharmaceutical companies. A new report by EY, Closing the gap? Big pharma’s growth challenge and implications for deals, estimates that the growth gap will reach approximately US$100b by 2015. In other words, ‘big pharma’ will need an additional US$100b revenue in 2015 just to keep up with overall market growth. The report, released today, makes a comparison between industry analysts’ estimates of ‘big pharma’ sales over the next three years and a forecast for the global drug market by IMS Health. 

  • “Firepower Index” finds big pharma’s capacity for M&A has decreased just when it needs transactions for growth and shareholder returns
  • Report identifies key upcoming trends for ‘big pharma’ transactions: more bolt-on acquisitions; more divestitures; and more offshore and emerging market deals

Glen Giovannetti, EY’s Global Life Sciences Leader, says:

“While the dynamics of the pharma industry remain fluid, the deal environment in 2013 and beyond will be more complex and competitive. Life sciences companies that are positioned appropriately should benefit from increased competition and see higher premiums. However, 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.” 

Big pharma’s growth and “firepower” gaps

With continued flat sales in mature markets, ‘big pharma’ — defined as the 16 largest US, European and Japanese pharma companies measured by revenue — has increasingly looked to emerging markets to drive overall revenue growth. However, a slowdown in these markets has widened the “growth gap” facing the industry. Thanks to a flat outlook in developed markets — in part a result of stagnation in the Eurozone — and a slowdown in emerging markets, sources of organic growth are under pressure. As a result, many big pharma companies are likely to accelerate their search for inorganic growth through M&A in 2013. However the capacity of ‘big pharma’ to conduct such deals has diminished in recent years. This is due to less available operating cash resulting from slower revenue growth - due partly from continued pressure on drug pricing - and increased borrowing to fund higher dividends, stock repurchases and previous transactions. In the report, EY introduces the concept of a “Firepower Index” that measures life sciences companies’ capacity to fund transactions based on the strength of their balance sheets. According to EY, the financial capacity or “firepower” of ‘big pharma’ to conduct deals has declined by 23% between 2006 and 2012.

Big pharma’s new competition for assets

Even as big pharma’s deal making ability has shrunk, the firepower of big biotech and specialty pharma (including generics) companies has increased. According to the Index, between 2006 and 2012, the firepower of big biotech increased by 61% while specialty pharma’s firepower also rose by 20%. As a result, big pharma’s share of the combined acquisition capacity of these three segments has fallen from 85% in 2006 to 75% in 2012.

Implications for 2013 and beyond

In addition to a more competitive and complex deal environment, the report identifies several key trends for transactions in the coming months and years.

  • More bolt-on acquisitions: Only a handful of big pharma companies now have the firepower to pursue M&A targets above US$60b. However with big biotechs and specialty pharma companies having joined big pharma in their capacity to engage in smaller deals, more bolt-on acquisitions are anticipated.
  • More divestitures: As pharma companies look to boost firepower and sharpen their strategic focus, it is likely they will consider more divestures of non-strategic assets. Both corporate investors and private equity are seen as likely acquirers.
  • More offshore deals and emerging markets deals: The need to address the growth gap will drive pharma companies to look for attractive acquisitions everywhere. For US buyers, high tax rates in the US may increase the attractiveness of using offshore cash reserves to buy non-US companies. With 2012 emerging market sales growth rates for ‘big pharma’ declining by about 50%, many companies will need to close this gap through more deals in emerging markets.

Jeffrey Greene, EY’s Global Life Sciences Transaction Advisory Leader, concludes:

“With fewer options for organic growth, pharma companies will need transactions and, more than ever, measures to build and conserve firepower are vital. Pharma companies addressing the growth gap through M&A will seek to increase and preserve their firepower by improving working capital management, divesting non-strategic assets, conducting more careful strategic diligence to ensure targets are valued appropriately in the face of stiffer competition, and employing novel deal structures to mitigate risk.”


Notes to Editors

About the EY Firepower Index
The EY Firepower Index is a measure of companies’ capacity for conducting M&A deals and has four key inputs:

  • Cash and equivalents
  • Existing debt
  • Credit lines and debt capacity
  • Market capitalization

Underlying the Index are the assumptions that a company will not acquire targets that exceed 50% of its existing market capitalization, and that the debt to equity ratio of the combined entity created by a transaction cannot exceed 30%.

About EY’s Global Life Sciences Center
EY’s Global Life Sciences Center brings together a worldwide team of professionals to help life sciences companies address their challenges at every stage of development. From the emerging biotech or medtech firm to the well-established, global pharmaceutical company, our industry teams bring deep experience in providing assurance, tax, transaction and advisory services. The Center works to anticipate market trends, identify implications and develop points of view on relevant industry issues. Whether it’s forming innovative alliances, improving operations, new regulations or exploring new markets, we can give you a clear perspective on how to drive value in an increasingly complex, competitive and risk-driven environment. It’s how EY makes a difference. For more information, please visit or email You can also connect with us on our Changing Business of Life Sciences blog,

About EY
EY is a global leader in assurance, tax, transactions and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential. 

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