The biotech mergers-and-acquisition (M&A) market will continue to hum through 2015, though growing demand among buyers and a shrinking number of attractive takeover targets will keep prices high and climbing, EY has concluded in a report released today.
EY’s Firepower Index and Growth Gap Report 2015: Firepower fireworks. Focus, Scale and Growth Drive Explosive M&A, said demand is being fueled by eagerness among big pharmas to close gaps in their growth, and a rising number of big biotechs and specialty pharmas with much more money available for deals—“firepower,” in the report’s parlance—due to new product launches and strong pipelines.
Companies increase their firepower when either their market capitalization or its cash and equivalents rise—or when their debt falls.
“We expect 2015 to be a year of robust and highly competitive M&A activity in the biopharma industry, marked by a continued rise in deal premiums,” Glen Giovannetti, EY’s Global Life Sciences Leader, said in a statement. “This will be challenging, especially for some big pharma firms still in need of acquisitions to meet market growth expectations.”
The report concluded that growing industry firepower, bolstered by company-specific divestitures and access to relatively cheap debt, should continue to fuel M&A momentum.
Specialty pharmas used virtually all of their $113 billion in available firepower for M&A in 2014, compared with 10% or $84 billion spent by big pharmas, according to EY. The specialty pharmas benefited from inversion mergers that sliced their tax costs by redomiciling outside the U.S.
Overall M&A deal volume in 2014 surged to more than $200 billion, well over twice the average annual deal volume seen in the last decade.
The report also found that biotech giants enjoyed revenue or “topline” growth of more than 30% through the third quarter of 2014. As a result, big bio’s firepower as a share of the total industry increased from 19% in November 2012 to 25% in October 2014.
That growth, EY added, will enable biotech giants to compete head-on with big pharmas for big deals. Yet biotech giants interested in using their firepower for more M&A will also see challenges in 2015, the report said:
- More interest in fast-growing therapeutic areas such as cancer immunotherapies and Hepatitis C creates will create more competition among would-be buyers, which will drive up premiums.
- A dearth of takeover targets capable of generating significant growth quickly
- The eventual entry to market of biosimilars. On January 7, the FDA's Oncologic Drugs Advisory Committee (ODAC) recommended agency approval of the investigational biosimilar filgrastim developed by Novartis’ Sandoz unit, for all indications included in the label of its reference product, Amgen’s Neupogen® (filgrastim).
- Patent expirations for several biotech blockbusters starting this year.
“It remains to be seen whether, and how, big biotechs will use M&A to reverse potential growth slowdowns,” the report stated.
The high premiums that attractive takeover targets can command may keep big pharma moving in another direction, EY said—by continuing to prune their portfolios of noncore areas while strengthening product/therapy focus in areas where they foresee significant growth through “bolt-on” acquisitions.
“Given current deal flow, we estimate that by 2017, prescription drugs will comprise 75% of big pharmas’ portfolios, up from 70% in 2012,” the report stated.
To achieve more smaller deals, EY adds, buyers will be looking as well to lower their upfront costs: “We could see even greater use of contingent deal structures that preserve capital while enabling companies to lock up rights to products at earlier—and on a risk-adjusted basis, more cost-effective—development stages.”
