Big pharma was largely absent from merger and acquisition activity in 2013 but returned to vigorous deal-making last year with spending of nearly $90 billion; however, this group was outspent by specialty pharma, which deployed more than $130 billion in M&A transactions in 2014, says new research.

Many big pharma firms used M&A last year to create more focused businesses and close persistent revenue growth gaps, which are expected to total $100 billion by 2017, while the aggressive activity of specialty pharma allowed some firms to gain the scale necessary to compete in a challenging global pricing environment, according to EY’s Firepower Index and Growth Gap Report 2015.

Now in its third year, the Firepower Index measures biopharma companies’ ability to fund M&A transactions based on the strength of their balance sheets and their market capitalisation. A company’s firepower increases when either its market capitalisation or its cash and equivalents rise, or its debt falls.

“We expect 2015 to be a year of robust and highly competitive M&A activity in the biopharma industry, marked by a continued rise in deal premiums. This will be challenging, especially for some big pharma firms still in need of acquisitions to meet market growth expectations,” said Glen Giovannetti, leader of global life sciences at EY.

“There is now a scarcity of targets that can offer a meaningful impact on closing revenue shortfalls – what we call ‘growth gaps.’ Moreover, competition for deals has increased from specialty pharma and big biotech companies, which have increased their firepower,” he added.

The moves by many big pharma companies in 2014 to divest their non-core assets and created more strategically-focused businesses have bolstered their firepower to compete for attractive acquisition targets, but closing growth gaps remains challenging for many such firms. Nevertheless, companies enter 2015 with bolder aspirations and a continued emphasis on therapeutic focus and/or adding scale.

Among EY’s forecasts of the factors likely to affect M&A activity in 2015 and beyond are:

- continued stronger shareholder returns from biotech and specialty pharma, combined with overall market growth projections, are expected to put additional pressure on many big pharma firms with growth gaps to do deals in 2015;

- greater competition for high-quality growth assets due to the strong buying power of both specialty pharma companies and big biotechs mean high valuations for target companies will continue into 2015;

- given the high premiums expected for attractive assets in 2015, transformational M&A will be an option only for a select few. As a result, big pharma companies may continue portfolio pruning, coupled with bolt-on acquisitions, to develop or maintain critical mass in key therapeutic areas; and

- shareholder activism is increasing at a time when several companies that announced divestitures in 2013-14 generated superior returns for investors.