“EY Firepower Index and Growth Gap Report 2016”

Pharmaceuticals companies on a shopping spree

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The pharmaceuticals sector is experiencing an exceptional year: companies in the sector once again far exceeded the M&A record they set the year before. At just under USD 328 billion, the sector spent more money than ever on mergers and acquisitions. This corresponds to an increase of more than half. Traditional pharmaceuticals companies, in particular, have again invested more, according to the EY Firepower study. Nearly half the total is based on Pfizer’s acquisition of Allergan. But this activity has left its mark: debt is rising and the capacity for takeovers is slowly declining. Nevertheless, the spending frenzy looks set to continue.

Zurich, 3 February  2016 – The funds that companies can mobilize for purchases (their so-called firepower) have declined slightly compared to last year, according to calculations by the consulting and auditing firm EY. These funds are currently at just under USD 1.18 trillion, or 6% less than the firepower for the year before. They remain considerable and a third higher than when the firepower was first measured in 2007.

 EY Firepower Report Infograph 2016

“Pharmaceuticals companies want to clean up their portfolios and position themselves with more focus. At the same time, they want and need to bring more innovation to market. So they’re taking advantage of the opportunities on the M&A market now,” says Jürg Zürcher, Life Sciences Leader at EY Switzerland of the figures. “Various factors are coming together in a historically unique situation: credit is cheap, many companies have accumulated their own capital and the willingness in the sector to swap entire divisions is higher than it’s ever been. This new normal should keep M&A activity at a high level in the coming years.”

The year in M&A was defined by megadeals in 2015
The high level of transactions in the sector was marked by one megadeal in particular: the takeover of Allergan, which Pfizer purchased for USD 160 billion. This is not only the largest deal in the history of the life sciences sector, but also the third-largest acquisition ever. There have never been acquisitions of this size before, and they are not likely to occur with any frequency in the future either. According to estimates by EY, transaction volumes are likely to hover around USD 200 billion – as recently as 2013, a total volume of about USD 100 billion was normal.

“There will be a greater number of smaller deals in the future. Companies are focusing and strengthening specific divisions. At the same time, smaller companies are coming onto the market and, despite not having the firepower of big companies, they are becoming active on the acquisition market,” says Jürg Zürcher.

With Pfizer’s megadeal, the volume of M&A among big pharmaceuticals companies soared last year: from just under USD 87 billion in 2014 to USD 209 billion in 2015 – almost as much as the entire sector combined spent in 2014. Companies in the biotech and generics sectors also spent more for transactions – albeit at a lower level. Big biotech increased its expenditures for mergers and acquisitions by 355% to more than USD 21 billion, while generics companies spent USD 49 billion, an increase of 184%.

Only special pharmaceuticals companies had a lower volume – a decrease by more than half to under USD 50 billion. “Special pharmaceuticals companies are seeing a saturation effect. Relatively speaking, they have had the most firepower in recent years. As a result, they have defined the M&A market, making purchases at a brisk pace. At some point, you’ve got to hit the ceiling,” says Jürg Zürcher.

Firepower of special pharmaceuticals companies lower by half
The effects of the spending frenzy of the past few years is now being felt in the firepower of special pharmaceuticals companies as well. It fell by 47% from the year before, to USD 60 billion. The firepower of big pharmaceuticals companies fell as well, albeit less dramatically, by 6% to USD 781 billion. Only big biotech companies recorded growth, up 6% to USD 337 billion.

“There has been an IPO boom among big biotech companies over the past few years,” explains Jürg Zürcher. “Companies have shot up in value as a result of these stock listings and they can now play an entirely different role in terms of firepower than they did before as well.”

Seven US companies among the top buyers
There are no Swiss companies among the largest deals, either as buyers or as targets of an acquisition. The two heavyweights conducted larger transactions in the previous year. The list is dominated by US companies, which conducted seven of the ten top deals – led by Pfizer, which also bought Hospira for EUR 16.8 billion. The Israeli group Teva Pharmaceutical Industries occupied second place with its USD 40.5 billion takeover of the Allergan generics division. Irish biotech group Shire claimed the ninth and tenth spots with its USD 6.6 billion takeover of Dyax and its USD 5.1 billion acquisition of NPS Pharmaceuticals. Shire continued its spending in 2016 with the announcement of the takeover of biotech company Baxalta for USD 32 billion.

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. Further details on the methodology are provided in the study. The figures were updated in the news release at year-end. www.ey.com/firepowerindex


 

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