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E&Y: big pharma faces 'firepower' gap to finance M&A

World News | January 07, 2013


Kevin Grogan

E&Y: big pharma faces 'firepower' gap to finance M&A

Major drugmakers are under pressure to drive growth through mergers and acquisitions, but big pharma's attempts to make deals will be challenged by "diminished resources and fiercer competition for attractive assets from rapidly growing big biotech and specialty pharma companies".

That is one of the key findings of a report from Ernst & Young which notes that even as big pharma's dealmaking ability has shrunk, "the firepower of big biotech and specialty pharma (including generics) companies has increased". According to the consultant, between 2006 and 2012 the 'firepower' of big biotech has increased by 61% while the financial capacity of specialty pharma is up 20%.

However the capacity of big pharma to conduct such deals has diminished, due to less available operating cash resulting from slower revenue growth (partly from pressure on drug pricing) and increased borrowing to fund higher dividends, stock repurchases and previous transactions. According to E&Y, the firepower of big pharma to conduct deals has declined by 23% between 2006 and 2012.

The report goes on to argue that with continued flat sales in mature markets, big pharma has increasingly looked to emerging markets but a slowdown in those areas has widened the "growth gap" facing the industry. E&Y estimates that this gap will reach approximately $100 billion by 2015, so in other words, big pharma needs to find that much in revenue just to keep up with overall market growth.

More bolt-on deals and divestitures

As a result, many big pharma companies are likely to accelerate their M&A activities in 2013. The report claims there will be more bolt-on acquisitions as only a handful of firms now have the firepower to pursue M&A targets above $60 billion.

The consultant also expects to see more divestures of non-strategic assets, as well as more emerging markets deals. Glen Giovannetti, E&Y's global life sciences leader, said that "while the dynamics of the pharma industry remain fluid, the deal environment in 2013 and beyond will be more complex and competitive".

He added that "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".

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