Big Pharma’s big pinch: a $50 billion “growth gap” and fierce M&A competition

Graph from Ernst & Young

Diminished resources and fierce competition from growing biotech and specialty pharma companies will drive smaller and more selective M&A deals by Big Pharma companies in 2013 and beyond.

That’s the thesis that Ernst & Young’s life sciences team put forth in a new report called Closing the gap? Big pharma’s growth challenges and implications for deals (PDF). Until 2010, Big Pharmas — defined as the 16 largest U.S., European and Japanese companies — grew at the same pace as the global drug market. But in 2011, that changed.

Comparing IMS Health’s forecast for the global drug market to analysts’ estimates of Big Pharma sales over the next three years, E&Y estimates that a “growth gap” of about $50 billion exists today and will become as big as $100 billion by 2015. That is to say, Big Pharma would need to grow its revenue by $100 billion by 2015 to keep pace with overall drug market growth.


Continued flat sales in mature markets like U.S. and Europe have led Big Pharma to turn to emerging markets for growth. But for some of these companies, sales in emerging markets have been disappointing. To push revenue growth, then, M&A would be logical, the report proposes. Except for that whole slowed revenue growth thing.

Big Pharma’s efforts to fill the gap will be complicated by what E&Y calls a “firepower gap.” That is, Big Pharma’s capacity for doing M&A deals is dropping, while big biotech and specialty pharmaceuticals’ capacities for deals is rising.

It’s actually already happening, according to E&Y. From 2007 to 2009, deals by Big Pharma accounted for 86 percent of the value of all deals in the drug market; from 2010 to 2012, that number fell to 59 percent. While fewer Big Pharma companies today have the capacity to pursue deals worth more than $60 billion, the pool of companies that could spend up to $20 billion has swelled.

“Life science companies that are positioned appropriately should benefit from increased competition and see higher premiums,” according to E&Y’s Global Life Sciences leader Glen Giovannetti in a statement that accompanied the report. “However, the finite resources of many Big Pharma companies and the need to make prudent acquisition to address the immediate growth gap mean they will likely be even more selective about the targets they pursue.”

As a result, E&Y predicts Big Pharmas will focus on smaller deals to acquire products and companies that fit naturally within their existing structures. They’ll also sharpen their focus by divesting nonstrategic assets — as Pfizer and GSK did last year. And, they’ll make more deals in emerging markets.

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