From the Wires
Big pharma will increasingly tap M&A to close $100 billion growth gap, but path to deals grows more complex
Ernst & Young's newly released "Firepower Index" finds big pharma's capacity for M&A has decreased just when it needs transactions for growth and shareholder returns
By: PR Newswire
Jan. 7, 2013 12:01 AM
SAN FRANCISCO, Jan. 7, 2013 /PRNewswire/ -- Big pharma companies are facing a widening "growth gap" that will increase pressure to drive growth through mergers and acquisitions (M&A). But big pharma's attempts to make deals will be challenged by its diminished resources and fiercer competition for attractive assets from rapidly growing big biotech and specialty pharma companies. These and other findings were released today by Ernst & Young in the report Closing the gap? Big pharma's growth challenge and implications for deals.
"While the dynamics of the pharma industry remain fluid, the deal environment in 2013 and beyond will be more complex and competitive," said Glen Giovannetti, Ernst & Young's Global Life Sciences Leader. "Life sciences companies that are positioned appropriately should benefit from increased competition and see higher premiums. However, 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."
Big pharma's growth and "firepower" gaps
With continued flat sales in mature markets, big pharma—defined as the 16 largest US, European and Japanese pharma companies measured by revenue—has increasingly looked to emerging markets to drive overall revenue growth. However, a slowdown in these markets as a result of various factors has widened the "growth gap" facing the industry. By comparing the gap between IMS Health's forecast for the global drug market and industry analysts' estimates of big pharma sales over the next 3 years, Ernst & Young estimates that this growth gap will reach approximately US$100 billion by 2015. In other words, big pharma will need an additional US$100 billion in revenue in 2015 just to keep up with overall market growth.
Thanks to a flat outlook in developed markets— in part a result of stagnation in the Eurozone — and a slowdown in emerging markets, sources of organic growth are under pressure. As a result, many big pharma companies are likely to accelerate their search for inorganic growth through M&A in 2013. However the capacity of big pharma to conduct such deals has diminished in recent years. This is due to less available operating cash resulting from slower revenue growth— due partly from continued pressure on drug pricing — and increased borrowing to fund higher dividends, stock repurchases and previous transactions. According to Ernst & Young, the financial capacity or "firepower" of big pharma to conduct deals has declined by 23% between 2006 and 2012.
Big pharma's new competition for assets
Even as big pharma's deal making ability has shrunk, the firepower of big biotech and specialty pharma (including generics) companies has increased. According to Ernst & Young's Firepower Index, between 2006 and 2012 the firepower of big biotech has increased by 61% while specialty pharma's firepower is up 20%. As a result of these shifts, big pharma's share of the combined acquisition capacity of these three segments has fallen from 85% in 2006 to 75% in 2012.
Implications for 2013 and beyond
In addition to a more competitive and complex deal environment, the report identifies several key trends for transactions in the coming months and years.
"With fewer options for organic growth, pharma companies will need transactions and, more than ever, measures to build and conserve firepower are vital," said Jeffrey Greene, Ernst & Young's Global Life Sciences Transaction Advisory Leader. "Pharma companies addressing the growth gap through M&A will seek to increase and preserve their firepower by improving working capital management, divesting non-strategic assets, conducting more careful strategic diligence to ensure targets are valued appropriately in the face of stiffer competition, and employing novel deal structures to mitigate risk."
About Ernst & Young's Global Life Sciences Center
About Ernst & Young
Ernst & Young is a global leader in assurance, tax, transactions and advisory services. Worldwide, our 167,000 people are united by our shared values and an unwavering commitment to quality. We make a difference by helping our people, our clients and our wider communities achieve their potential.
Ernst & Young refers to the global organization of member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit www.ey.com.
This news release has been issued by EYGM Limited, a member of the global Ernst & Young organization that also does not provide any services to clients.
SOURCE Ernst & Young
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