Big pharma companies facing US$100bn shortfall in growth due to flat
7 February 2013
The largest pharmaceutical companies are facing a widening
growth gap that will increase pressure to drive growth through mergers
and acquisitions (M&A) to bridge the gap, according to a report by Ernst
& Young .
The report also says that 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
"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
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 three 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
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.
More bolt-on acquisitions: Only a handful of big pharma companies
now have the firepower to pursue M&A targets above US$60 billion.
However with big biotechs and specialty pharma having joined big
pharma in their capacity to engage in smaller deals, more bolt-on
acquisitions are anticipated.
More divestitures: As pharma companies look to boost firepower
and sharpen their strategic focus, it is likely they will consider
more divestures of non-strategic assets. Both corporate investors
and private equity are seen as likely acquirers.
More offshore deals and emerging markets deals: The need to
address the growth gap will drive pharma companies to look for
attractive acquisitions everywhere. For US buyers, high tax rates in
the US may increase the attractiveness of using offshore cash
reserves to buy non-US companies. With 2012 emerging market sales
growth rates for big pharma declining by about 50%, many companies
will need to close this gap through more deals in emerging markets.
"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
1. Ernst & Young. Closing the gap? Big pharma's growth
challenge and implications for deals. 2013. The report can be