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January 9, 2017

EY: Biopharma M&A Will Soar in 2017

  • Expectations of business-friendlier policies from the incoming Trump administration and continuing pressure by insurers to contain drug prices will drive this year's merger-and-acquisition (M&A) activity well past the $200 billion annual volume of deals seen last year, EY has concluded in a report released today.

    EY's M&A Outlook and Firepower Report 2017 found that the biopharma industry will continue pursuing M&A to make up for shortfalls in revenue projected as payers increasingly resist price hikes by drug developers, especially on older drugs, and push back against sky-high prices for new treatments.

    The road to M&A deals is expected to be smoothed out by tax cuts and other regulatory changes expected from President-elect Trump—notably his proposal to lower the corporate income taxes of U.S. companies that shift or "repatriate" profits from overseas back into the U.S.

    Biopharmas are expected to repatriate at least $100 billion, the report said—a small portion of the $2.5 trillion in overseas profits that economic research consultancy Capital Economics has estimated has been parked outside the U.S.

    Repatriation could reduce or eliminate the tax advantage long held by companies domiciled outside the U.S., especially those based in lower-tax nations like Ireland. The change will also likely shift the direction of M&A deals. After years in which U.S. companies pursued tax-slicing inversion mergers with overseas biopharmas, those ex-U.S. companies will seek to expand in the U.S. by combining with American partners.

    “You'll see more of the ex-U.S. companies doing deals early this year, and then as the year goes through, you'll see more of the U.S. companies doing the bigger deals,” Andrew Forman, principal author of the report and EY global transaction advisory services sector resident, life sciences, told GEN.

    Another likely driver of M&A deals, the report said, is the increasing difficulty of sustaining growth as several disease areas—such as diabetes, autoimmune disease, and oncology—become more crowded with competitors. EY found no fewer than 20 different PD-1 antibodies, including related targets such as PD-L1, in clinical development, citing clinicaltrials.gov.

    “Not only does this put a strain on clinical trial infrastructure, but there could be limited bandwidth for winners and eventual payer pressure,” the report stated.

    As a result, runners-up may respond by swapping assets or divesting non-core therapeutic areas and refocusing on areas where they can more aggressively and more realistically pursue leadership opportunities, EY added.

    According to the report, Big Pharma has the largest share of money available for deals, which the report calls “firepower”—69% or about $600 billion. However, Big Pharma’s firepower shrunk 17% during 2016, as all of Biopharma saw declines in firepower last year. The declines resulted from increased debt by many companies, in addition to reduced valuations for biopharma stocks touched off by investor fears of price curbs on prescription drugs.

    Big Pharma’s fall-off in firepower was less than the declines of 24% and 62% recorded, respectively, by Big Biotechs and “specialty” pharmas that have grown in recent years through numerous acquisitions, reducing their firepower.

    EY included among specialty pharmas Alkermes, Allergan, Endo International, Jazz Pharmaceuticals, Mylan, Perrigo, Shire, Teva Pharmaceutical Industries, UCB, and Valeant Pharmaceuiticals International. At least six of the 10 specialty pharmas have exhausted their firepower, EY said. It did not name the six, but said they did not include Allergan, the only specialty pharma that “could pursue substantial M&A” after completing the sale of its Actavis Generics business to Teva for nearly $39 billion.

    “Until specialty pharma can replenish its firepower, it is likely to remain on the sidelines for 2017,” the report stated.

    Companies increase their firepower when either their market capitalization or their cash and equivalents rise—or when their debt falls.

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