New normal: US$200b+ M&A as big pharma leads way
By Andrew Forman,
Trends tell a clear story
What a difference the past five years have made. Emerging markets were hot. Now, they’re not. Big pharma’s patent cliff felt like a one-way bungee jump as US sales fell for three years, but then snapped back to double-digit growth over the past two years. Painful restructurings that included portfolio rationalization and better strategic focus, as well as major pipeline replenishments via R&D investments and thoughtful M&A, have helped big pharmas right their businesses. Most notable in this turnaround is the increase this past year in big pharma’s US sales mix from 44% to 47%, while emerging markets, peaking at 25% of big pharma sales a few years ago, have receded.
M&A’s new normal as the US and big pharma lead the way
As of September, M&A value for the year has already exceeded US$200b, catapulted by the Bayer-Monsanto transaction valued at approximately US$65b. It’s worth noting that even without this deal – the largest of the year, life sciences M&A is still on track to exceed $200b in 2016. That’s three years in a row above that threshold, suggesting this may be the new normal for the life sciences sector (compared with pre-2014 levels that averaged under US$100b).
And, where’s the focus for M&A? Through Q3 2016, 90% (by deal value) of targets have been domiciled in the US, up from 70% just a few years ago. However, given the trends — exceptional growth in the US, combined with declining emerging markets and sluggish European growth — this is hardly a surprise. And who’s leading the charge these days? No longer “missing in action,” big pharmas are finally seizing the M&A agenda with over half of total deal value for the first time in five years.
A surge in big pharma growth while specialty pharma recuperates
Big pharma saw its best growth in at least five years. Adjusting for currency fluctuations, sales were up 6% through mid-2016, as double-digit growth in the US was partially offset by weak international growth. Relative growth has also come into play as slowing growth in biotech and negative fundamentals in specialty pharma have made way for outperforming stocks and an increase in share of firepower for big pharma.
For specialty pharma, the four-year inversion-dominated M&A binge is over. Falling equity prices, debt-laden balance sheets (average debt-to-equity ratios mushroomed from about 25% in 2014 to nearly 60% through Q3 2016) and disappointing growth have sidelined this once-aggressive segment as their firepower essentially disappeared. What appeared to be an insatiable streak of M&A has now resulted in what will likely be a protracted period of forced portfolio purging. This could postpone any new, meaningful M&A for all but a select few for some time, leaving the road wide open for big pharma to potentially dominate the M&A agenda in 2017. Worth noting as well, big biotech’s M&A appetite also appears to be increasing as it faces slowing growth. But through Q3 2016, with only a few small deals to date, they have left their considerable firepower mostly untouched.
Outlook: pricing head winds drive M&A as more growth targets emerge
The continuing political pressure on pricing — with the EpiPen® at the center of the most recent controversy — plus the potential growth gaps arising from what we call “payer pushback” will take their toll on growth projections. The question is, how much? When we first addressed payer pushback in the EY Firepower Index and Growth Gap Report 2016, the intent was to illustrate what could happen if prices fell faster than expected for legacy drugs, as well as to show the implications on newer drugs and their revenue projections. While it may be too soon to quantify our 2020 projections with much accuracy, mounting pressure from payers, politicians and now consumers — thanks to the uprising from angry parents over the approximately 400% EpiPen® price increase — has increased the likelihood that our projected US$100b growth gap may actually materialize.
M&A can help fill growth gaps, and two recently announced US biotech acquisitions may provide clues to the M&A trends ahead. We found over 200 US biotech and specialty pharma companies with market valuations below Medivation’s (which Pfizer announced acquiring in late August) and above Tobira’s (which Allergan agreed to acquire in September). Given the significant premiums paid for Medivation and Tobira, and the ongoing quest for growth from both big pharma and biotech, the visibility of this “next wave” of over 200 biopharma targets is rising and worth examining. In aggregate, they are valued at over US$200b, with valuations ranging from US$100m to US$10b. Sales average approximately US$100m per company and aggregate sales are anticipated to reach US$20b by end of year. While this equates to less than 2% of global biopharma sales, their sales are projected to more than double by 2019 and could feasibly reach US$50b by 2020.
So, with a somewhat inconvenient growth gap looking more likely for many big biopharmas, identifying this convenient source of potentially US$50b in revenues could become vital, if not imperative. A few big biopharmas seem to have figured this out already. The rest likely will soon.
For more of our market analysis and insights on M&A trends for life sciences companies:
- EY Firepower Index and Growth Gap Report 2017: coming in January
- EY Firepower Index and Growth Gap Report 2016: Deal tectonics: at the fault line of growth goals and competitive pressures
- Blog: M&A outlook after the Pfizer-Allergan fallout: new normal or old normal?
Source: EY and Datamonitor.