DLW_blog_pillsGlobal M&A activity in the biopharmaceutical industry skyrocketed in 2014 and 2015, eclipsing US$200 billion in deal value each year and prompting EY to declare such elevated activity to be the “new normal” in the industry. After another strong year in 2016, big pharma companies now appear poised to carry this trend into 2017. In fact, according to EY’s M&A Outlook and Firepower Report 2017 (the Firepower Report), both the pressures on big pharmaceutical companies to pursue inorganic growth, and the ability of these companies to execute strategic acquisitions, are higher than they have been at any point over the past several years.

Findings in Firepower Report

The Firepower Report predicts that pricing pressure will be a key driver of M&A activity as payers around the world push for lower drug costs. This pressure, enhanced by the establishment of biosimilars in developed markets and overcrowding in increasingly competitive therapeutic fields, is steadily eroding the pricing power of big pharma companies and threatening to erode future revenue streams. As a result, analysts’ revenue forecasts for both legacy and new drugs have been trending downwards, creating a “growth gap” for many big pharma companies as compared to overall drug market sales. Efforts to counteract the effects of these dampened growth trajectories have focused on M&A activity in what EY calls a “race for inorganic growth”.

Fortunately, according to the Firepower Report, a convergence of political and industry factors has the potential to create favourable M&A conditions for big pharma in the coming year. First, EY has identified that there is significant unspent “firepower” among big pharma companies. “Firepower” is a metric derived from the strength of companies’ balance sheets that is used by EY to approximate a company’s ability to engage in M&A activity. While “firepower” is down overall among big pharma companies, EY reports that for the first time in several years, big pharma “firepower” is beginning to exceed target company valuations, putting larger growth targets within reach.

Relatedly, target company valuations have sharply declined, which could increase buyers’ appetites for M&A. In this regard, there is historical precedent: a similar decline in biopharmaceutical company valuations in 2008 was followed closely by a slew of “mega-deals” in 2009.

Impact of geopolitical developments on M&A

Finally, the past year’s geopolitical developments may also spur M&A activity. This is particularly true in the United States, where optimism about favourable future regulatory and tax environments, coupled with the possible repatriation of up to US$100B in cash into the target-rich country, could significantly drive dealmaking. EY further suggests that any anticipated benefits in the United States may induce companies in other jurisdictions to accelerate their own M&A agendas.

All considered, the biopharmaceutical industry seems poised to equal, or even eclipse, the elevated dealmaking levels achieved in the recent past. Indeed, in mid-October, 2016, 43% of executives in the life science industry said that they had five or more deals in the works. With big pharma in the driver’s seat, it appears likely that a big year is on the horizon.

The author would like to thank Geoff Mens, Articling Student, for his assistance in preparing this legal update.

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