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Industry 'Firepower Index' shows increased capacity for deal-making, but specialty pharma is pushing Big Pharma to the side
Unlike other industries that go through periodic periods of expansion or consolidation, the global biopharma industry seems to be a in a perpetual state of mergers and acquisitions; 2014 was a banner year for such activity, and 2015 is shaping up to be more of the same. That’s one of the conclusions of EY’s annual “Firepower” report, which analyzes M&A activity over the previous year, and how much capacity leading biopharmas have to do more deals.
EY’s report finds that roughly $220 billion was spent in M&A in 2014 and, after making a rough distinction between “Big Pharma,” “Big Biotech” and “Specialty Pharma/Generics” that the latter two dominated M&A activity, responsible for about $130 billion of the total. EY characterizes Big Pharma as relatively “absent” from M&A activity in 2013, so the return to it is significant, although several of the specialty transactions, notably Actavis/Forest Labs/Allergan, were “transformative.”
EY’s analysis calculates the capability of individual companies to do M&A—its firepower index—by summing up cash, debt, credit availability and market capitalization. The overall index reached an all-time high of $1.3 trillion; but Big Pharma’s index rose by 12%, Big Biotech’s grew by 42%, and specialty pharma/generics by 30%. That translates into lower relative portion of industry firepower, with Big Pharma representing 66% of firepower capacity, and continuing a four-year decline. All this more or less comes out of the continuing trend of newly commercialized biologics and specialties dominating the industry’s growth—so no surprises there. However, EY then calculates how much revenue growth is needed to keep pace with the global drug market, and finds a continuing $100-billion annual gap, continuing out to 2017, between what sales Big Pharma companies need to achieve to keep pace, and their prospective success in doing so.
Moreover, from the first, 2013, Firepower report to now, EY finds that while only two of 24 potential M&A targets had valuations that put them “beyond the reach” of Big Pharma, now, because of higher valuations and already-accomplished acquisitions, one-third of current acquisition targets are out of reach.
“Look for more divestitures and bolt-on acquisitions” is one of the conclusions EY draws for the 2015 environment. Companies will also seek to build out—or create—market-leading franchises in select therapy areas. “Given the current commercial climate, we expect ‘focus’ to remain the operative word in deal-making in 2015, as companies concentrate resources in core markets where they can achieve a sustainable competitive advantage,” said Jeffrey Greene, EY’s Global Life Sciences Transaction Advisory Services Leader, in a statement. “Any resulting gaps companies identify in their pipelines will likely have a significant impact on M&A activity in 2015 and beyond.”