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Watch for Washington tax policy reform to affect 2017 business
The annual EY Firepower report, which matches the growth imperatives of a select group of big-pharma, big-biotech and specialty or generics firms against their financial resources to carry out mergers and acquisitions, finds that Big Pharma will be best positioned to continue “inorganic growth” (EY’s term for growth from other than increased sales) this year. A key factor is the expectation that US tax policy will change with the incoming Trump Administration to allow for repatriation of overseas profits: That alone could add $100 billion to the industry’s coffers. However, the implication here is that if that repatriation (which allows overseas profits to be returned without additional US taxes) occurs, the added revenue will go into deal-making rather than expanded R&D or capital investment.
The dealmaking imperative comes from the need for pharma companies to grow by acquisition if organic growth is insufficient to meet the investment community’s expectations. M&A activity has been at an elevated level for three years now (see chart); EY expects this to carry into 2017. While the pace of dealmaking is of high interest to the investment banking community, the stuttering growth of industry sales is of more immediate concern to working pharma managers. EY finds that most investment analysts reduced industry revenue projections of “growth products” (presumably, those recently introduced, without biosimilar or other competition) from around 10%/year at the beginning of 2016 to 7% for the year and going forward; payer pressure is a leading cause of this reduction.
By comparing firepower to projected revenue growth through 2020, EY finds that two Big Pharma firms, Merck and Allergan, are well-positioned to carry out M&A, and one biotech firm, Actelion, has both strong projected growth and M&A firepower. Most other Big Pharma companies have seen their firepower decline while projected revenue growth is roughly in line with overall industry growth. J&J sits squarely in the middle: no decline in firepower, and in-line revenue growth. Conversely, an industry darling of the past few years, Gilead Sciences, is looking at a dramatic decline in firepower (down by 50% in the past year) and negative projected revenue growth (-5% CAGR). (There are other companies with quite high projected revenue growth, but their firepower has declined in the past year.)
“Over the next 12 months, biopharma dealmaking could reach unprecedented heights with big pharma possessing both the firepower and the growth imperative to take it there,” concludes Jeffrey Greene, leader of EY Global Life Sciences Transaction Advisory Services. “In this potentially frenetic deal environment, companies will need to be prepared to move quickly to make the right strategic acquisition on the right terms.” Those preparations include lining up debt facilities, analyzing future growth prospects closely and (for companies considering making themselves acquisition targets), looking more favorably on a sale now versus in the future, when buyers’ interest and resources might constrain valuations. Above all, companies are advised to anticipate the changing tax environment in US regulation. “US companies must now figure out how to best utilize offshore cash to fulfill their M&A aspirations,” says the report.
The full EY report is available here.