Industry establishes record total deal value of $300B for M&As

Print 25 January 2016
Peter Winter / BioWorld

SAN FRANCISCO – The number of completed mergers and acquisitions in the biopharma industry mushroomed in 2015, generating a total deal value of more than $300 billion, establishing a new record for the industry, according to EY's Firepower Index and Growth Gap Report 2016.

The total eclipsed the 2014 standing record amount of $200 billion, which was itself well over twice the average annual deal volume recorded in the last decade, according to EY's previous Firepower report. (SeeBioWorld Insight, Jan. 20, 2015.)

The EY Firepower Index measures the ability of biopharma companies to fund M&A transactions based on the strength of their balance sheets and their market capitalizations. For example, a company's firepower will increase when either its market capitalization or its cash and cash equivalents rise – or its debt falls.

In contrast to 2014 when specialty pharma firms opened their wallets big time to the tune of $130 billion in total M&A transactions, it was big pharma that topped the M&A transaction arena in large part due, the report notes, to a steep decline in firepower held by the specialty pharmaceutical segment since they had expended it.

Early in 2015, the report found, deal activity was driven by specialty pharma companies, with a majority of deals by total valuation in the specialty or generics sector. However, big pharma grabbed the spotlight later in the year while biotech was marked by more modest deal transactions.

SHOPPING SPREE

Specialty pharma's M&A shopping spree ratcheted up debt/equity (market capitalization) ratios to 34 percent, nearly three times greater than big pharma and big biotech. The report cites the example of Valeant Pharmaceuticals International Inc., which saw its market cap plummet dramatically in the second half of 2015, driving its debt/equity ratio over 100 percent.

As a result, specialty pharma's firepower as a whole dropped nearly 50 percent last year while big pharma's and biotech's firepower was essentially unchanged.

The M&A frenzy we saw in 2015 also reflected an industry in transition, with dealmaking being driven by companies attempting to make their businesses more focused and close persistent revenue "growth gaps," that have emerged as a result of big pharma companies seeing slower growth than the overall pharmaceutical market.

The report notes that the gap remained stuck at near $100 billion due in part to foreign exchange headwinds.

However, the finalizing of the $160 billion merger of Pfizer Inc. with Allergan plc, the largest in the history of the biopharma industry, would certainly help close Pfizer's growth gap and "represent the first meaningful reversal in trends for big pharma in the past four years." (See BioWorld Today, Nov. 24, 2015.)

Since target valuations continue to remain high, the Pfizer/Allergan-type megadeal may be out of reach save for just a few biopharmas. Therefore, EY suggests in its report that biopharma companies should pursue more targeted acquisitions while they still have the firepower to do so.

STORM CLOUDS

Storm clouds lurking on the horizon threaten to play havoc with existing growth gaps. Those come in the form of payer pressure intent on constraining costs for new and mature products that could affect the industry's revenue growth projections. Payers have themselves become larger, through consolidation and mergers, providing them with greater negotiating muscle.

Compound those factors with intense competition for therapeutic assets and you have all the driving forces necessary for the record year for M&A deal flow seen in 2015. Big pharmas could afford to pursue three or four smaller targets in the range of $5 billion to $10 billion to acquire additional depth in product areas where therapeutic expertise already exists.

Portfolio transformation via divestitures and bolt-ons is also a successful strategy, the report notes, because divesting companies have three times more firepower as their nondivesting counterparts. In actual terms, divestors have, on average, increased their firepower by about $10 billion more than those who did not. "That difference can, and has, been deployed into new M&A," EY said.

In addition, forward-thinking companies are shifting resources to those therapeutic areas where they can compete as top-tier players while continuing to prune elsewhere.

For example, the acquisition by Merck & Co. Inc., of Kenilworth, N.J., of Cubist Pharmaceuticals Inc. for $9.5 billion served to bolster its presence in acute care and came shortly after it divested its consumer health business to Bayer AG.

According to EY's findings, divestitures now account for about 25 percent of aggregate M&A value, and as portfolios continue to transform, divestitures should continue to account for a similar percentage of the total M&A's in 2016.

Going forward, the shift toward building strategic franchises across fewer disease areas should accelerate as companies identify gaps in their pipelines and product portfolios that will further accelerate M&A transactions, Glen Giovannetti, EY's global life sciences leader, told BioWorld Insight.

On the outlook for this year, EY is expecting payer pressure and competition for therapeutic assets to increase the likelihood that biotech company M&A transactions will exceed the total $25 billion that they spent in 2015. They are well placed to execute deals since big biotech's firepower reached record value and market share, supporting a robust deal outlook for them this year.

"The drivers of industry M&A in 2015, including payer consolidation, rising health care costs and the need for companies to maintain their growth, are certainly intensifying and will continue," Jeffrey Greene, EY's global life sciences advisory services leader, told BioWorld Insight. "These factors could contribute to a steady state of M&A deal flow totaling in the region of $200 billion for the foreseeable future."

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