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Biotech challenging big pharma for M&A deals

Purchasing power growth of 'big biotech' outpaces pharma sector

Ernst and Young growth report

This year the world's largest pharma companies will need to make more acquisitions if they are to grow, but could face greater competition for deals from larger biotech and speciality firms, according to a new report.

Consultancy firm Ernst & Young said that flat organic growth, due in part to stagnating traditional markets and a slowdown of growth in emerging markets, means companies will have to look to inorganic growth through the purchase of promising assets during 2013.

However, the ability of large pharma companies to make such acquisitions has diminished of late due to a lack of operating cash as a result of this same slower organic growth as well as increased borrowing.

By contrast, the buying power of other business in the life sciences industry has grown in recent years, with Ernst & Young reporting that, based on its 'firepower index', the purchasing power of big biotech increased by 61 per cent between 2006 and 2012, while speciality pharma's firepower grew by 20 per cent.

This compared to a decline of 23 per cent in the financial capacity of big pharma companies to conduct M&A deals.

With the purse strings pulled tighter, the report said it was likely there would be a change in pharma companies' overall financial strategy in order to fund extra acquisitions, while firms will also become more selective in their M&A targets.

"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 risk," said Jeffrey Greene, Ernst & Young's global life sciences transaction advisory leader.

This could include a larger number of offshore deals in order to avoid the higher tax rates imposed in such markets as the US, while M&A activity in emerging markets could become more common as companies look to overcome the slowdown in market growth.

Other analysts have also predicted an increase in pharma acquisitions during 2013, with the likes of Pfizer, Bristol-Myers Squibb and Merck & Co reportedly ready to make multi-billion dollar deals having spent the past few years building up cash reserves.

Henry Gosebruch, managing director of healthcare mergers and acquisitions at consultancy firm JPMorgan Chase & Co, told Bloomberg: “We're through many cost-cutting programmes, restructurings and portfolio arrangements.

“When you put that together with record levels of cash available and improving, but still moderate R&D productivity, we think there will be more big pharma M&A activity in 2013.”

8th January 2013

From: Research, Sales

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