The mergers and acquisitions (M&A) landscape looks set to become much more competitive for big pharma in 2014 as it loses out to big biotech and speciality pharma in the race to snap up quality assets and keep up with overall market growth.
According to Ernst & Young's (EY) latest Firepower Index, big pharma’s firepower - i.e the capacity for conducting M&A deals - jumped by nearly $100 billion, or 15%, in 2013, though this was almost entirely driven by rising equity market valuations, which accounted for more than 90% of the rise.
This means that the number of big pharma companies, as well as big biotech and specialty pharma companies, able to step up for deals greater than $30 billion has nearly doubled in just a year.
However, big pharma's share of this overall firepower compared to big biotech and specialty pharma continued to fall significantly, dropping from 85% in 2006 to 75% in 2012 and 70% in 2013, the report notes.
In addition, as valuations of big biotech and specialty pharma firms outpace those of big pharma, the latter is having to grapple with dual challenges of higher valuations for attractive assets as well as a drop in relative firepower (adjusted for higher target prices), which has actually declined by more than 20% over the last year.
This is likely to boost competition for deals in 2014, EY says, noting that big biotech and specialty pharma have already proven to be "significant competitors for assets", accounting for more than 80% of M&A activity by announced deal values last year.
$100 bn growth gap
The projected 2015 growth gap for big pharma remains largely unchanged at $100 billion, and the inability of big pharma to close this gap was "due to both a lack of significant M&A and slowing sales, with revised third-quarter guidance indicating that aggregate 2013 sales are expected to decline by about 1%," according to the report.
A year ago it was widely believed that 2013 would be a busy year for acquisitions by big pharmas seeking to fuel growth, but actually they only closed "a handful of small bolt-on deals, and their share of M&A transactions fell to a new low".
Going forward, pharmas must now become more acquisitive to help address significant growth challenges ahead, but their re-emergence in the M&A arena "will ultimately be determined by how boards and senior management teams realign strategic priorities in response to core business performance, R&D results, competitor moves and investor expectations," it notes.
“With both declining relative firepower and a smaller share of the total, big pharma companies need to allocate their limited resources carefully, increasing the importance of robust deal valuations, due diligence and integration,” said Jeffrey Greene, EY’s Global Life Sciences Transaction Advisory Leader. “To succeed in this environment, firms need the right capabilities, resources and processes. Amid elevated target prices and rigorous investor scrutiny, there is little room for error,” he stressed.