Firepower Index and Growth Gap Report 2016

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As the specialty pharmaceutical sector sees its ability to pursue large acquisitions evaporate, long-promised organic growth from big pharma new drug launches has finally arrived. But a renewed focus on value-based pricing, staunch competition across key therapeutic battlefields and consolidating payer clout may weaken the industry’s ability to reach revenue targets for both new and legacy therapeutics.

In 2015, biopharmaceutical industry mergers and acquisitions soared above 2014’s record US$200 billion aggregate value. With the US$160 billion Pfizer/Allergan megamerger announcement, the year’s deal-making frenzy has vaulted over US$300 billion.

The major strategic forces that shaped 2014 continued into 2015, as specialty pharmaceutical companies led by Valeant, Endo and Teva, as well as big biotechs such as Celgene, took advantage of historically low interest rates to pursue focus, scale and growth opportunities.

But big pharma, although involved in a few significant deals, notably the blockbuster “Pfallergan” combination, remained largely on the sidelines. This reluctance — chalked up at times to the high valuations enjoyed by target companies — was particularly striking given the industry’s largest players’ “growth gaps” (see box for definitions).


Growth gap: the difference in the sales growth of a biopharma company or biopharma sub-sector (e.g., big pharma) relative to overall drug market sales. It is based on IMS Health’s global drug market forecast and analysts’ estimates of company sales.

EY Firepower Index:  measures a company’s ability to do M&A based on the strength of its balance sheet. Together, a company’s market capitalization, cash and cash equivalents and debt capacity provide the “firepower” for deals. Thus, a company’s firepower increases when either its market capitalization or its cash and equivalents rise — or its debt falls. For more details, please see the Appendix on page 18 of the PDF version of this report. 

Top 2015 deal trends

  • The US$160 billion Pfizer/Allergan merger takes total announced deal value to new heights. This largest-ever life sciences deal (and third largest in any industry) closes Pfizer’s growth gap. How will others use their firepower?
  • As big pharma emerges from the shadow of its patent cliff, new breakthrough therapies in significant unmet disease areas have begun to drive industry growth. But internal R&D successes won’t be enough for many of the industry’s biggest players who will still need to turn to M&A to reach growth goals.
  • Payer consolidation, the increasingly fraught debate over drug pricing, the arrival of biosimilars and competition in key therapeutic areas may dampen biopharmas’ growth projections. This should exacerbate growth gaps, fueling more M&A.
  • Focused acquisitions and divestitures have therefore become paramount. Deals targeting narrower therapeutic battlegrounds, emerging and exciting scientific opportunities, geographic strongholds and strategic gaps will drive the M&A agenda.
  • Is US$200 billion M&A the new normal? As deals drive more deals, competitors are forced to respond. Few large companies have the financial wherewithal to pursue transformative acquisitions, but targeted M&A and divestitures have and should continue to pick up the slack.

Record M&A: a new normal?

EY - Record M&A: a new normal?

Therapeutic battlefields heating up: focusing firepower

Winners and losers are likely to emerge in lucrative specialty markets (including oncology, diabetes and autoimmune diseases, such as multiple sclerosis and rheumatoid arthritis), in an absolute sense and relative to each company’s own growth expectations.

Those three markets account for about US$200 billion in projected 2015 sales or about 40% of all prescription brand sales. Diabetes and oncology alone account for about 80% of the net branded prescription pharmaceutical sales growth over the next five years. Payer pressure is a key reason for this competitive dynamic and the M&A that may flow from it.

The more crowded markets become, the more important it is for companies to soberly analyze their prospects and respond accordingly: spend firepower where one can gain share while improving future growth prospects and divest in those areas where one is likely to become an also-ran.

Oncology: most competitive battlefield

EY - Oncology: most competitive battlefield

M&A outlook for 2016: is US$200 billion the new normal?

Specialty companies will continue to pursue inorganic growth, but high levels of debt and shrinking equity valuations have combined to decimate specialty pharma’s aggregate firepower. Barring any real progress on preventing inversion deals (either through tax reform or anti-inversion legislation), those companies instead may be targets for similarly sized biopharma players in search of a friendlier tax domicile.

And while the ongoing renaissance in drug approvals and breakthrough innovation continues to propel the biopharmaceutical industry, the collective force of payer consolidation and rising health care costs is pushing up against biopharmaceutical companies’ growth imperatives. This is the fault line underpinning the past few years’ earthquake of M&A: the inversions, divestitures and bolt-ons. With big pharma growth gaps potentially expanding, focused M&A and divestitures are likely to accelerate.

The pool of potential targets to close existing or potential growth gaps has never been greater or more diverse. So if the big pharma and biotech sub-sectors use only 20% of their available firepower in 2016, even if that firepower were to decline by 10% (and assuming zero deal flow from the specialty and generics sectors), another US$200 billion year may be on the horizon:

  • Divestitures have represented about a quarter of the past two years’ aggregate M&A value. This should continue as portfolio transformation ramps up and the strategy demonstrates positive shareholder returns.
  • With payer pressure and therapeutic battlefield competition continuing apace, biotechs will be more likely to deploy their firepower.
  • Specialty pharmas’ aggressive dealmaking of the past few years may limit their activity in the near term or position them as acquisition targets, but they’ll return to the table soon enough: M&A is in this group’s DNA.
  • Big pharma’s growth gaps persist for most; pro-forma 2017 analysis suggests Pfizer has effectively closed about 20% of the group’s core US$100 billion growth gap. The pressure for others to follow suit is unlikely to abate, and the momentum generated by the largest deal in industry history should not be underestimated.

The likely continued instability along this fault line suggests US$200 billion annual M&A may be the new normal. For this reason, companies need to be equipped with the requisite skills and resources to compete successfully and rewrite M&A playbooks for more nimble pursuit of multiple strategic targets.