SAN FRANCISCO – Big pharma companies are poised to intensify their shopping spree this year as they continue their quest to acquire biotech products and other assets that will improve their inorganic growth and add to their bottom lines. The already heated mergers and acquisitions (M&A) environment saw the value of those transactions exceed $200 billion in 2016. According to the EY M&A Outlook and Firepower Report 2017, released last week at the start of the J.P. Morgan Healthcare conference, it is expected that the industry will handily beat that total as pharma companies have more than enough firepower to pull the trigger on both marquee and bolt-on deals. Helping catalyze deal volume will be favorable political and tax environments that are expected to follow from a new administration in the U.S.

The EY Firepower Index measures the ability of biopharma companies to fund M&A transactions based on the strength of their balance sheets and their market capitalizations. For example, a company's firepower will increase when either its market capitalization or its cash and cash equivalents rise – or its debt falls.

While there are many positive reasons to contemplate a deal, the industry also has to react and defend against negative forces impacting on business growth. According to the EY report, the industry's need to engage in M&A has become "amplified as payers continue to push back forcefully on price increases for older drugs while dampening the growth trajectory of newer drugs, especially in increasingly crowded disease areas, creating a potentially daunting payer-driven revenue growth gap." With the specter of revenue shortfalls across the global industry, "even companies with solid growth prospects may look to pursue M&A in 2017 as a defensive safeguard."

While the pressures mount on drug pricing, the industry appears to coming to terms with that state of affairs, Jeffrey Greene, EY Life Sciences' global transaction advisory services leader, told BioWorld Insight. Companies recognize that they will need to acquire assets to supplement their growth.

That is why EY analysts see transactional deal volumes above $200 billion as the "new normal," a term they introduced in last year's report. Although they predicted M&A deal flow averaging about $200 billion annually for the foreseeable future, they speculate that 2017 could be a banner year for dealmaking because of the changing environment.

Losing regional advantage

Also fueling the potential for M&A transactions is the fact that predicted U.S. tax policy reform and repatriation of offshore cash at favorable rates could diminish or erase completely the dealmaking advantages that companies with ex-U.S. tax domiciles have typically enjoyed, Greene said. That will increase the frothiness in the M&A market and it may spur global pharma companies seeking U.S. market growth to pull the trigger on a deal they have been considering, sooner rather than later.

With that in mind, EY expects dealmakers to return to the table in earnest with big pharma companies leading the way. Even though during the past three years, yearly M&A deal volumes have averaged around $200 billion, as a group, big pharma companies only spent an average of 10 percent of their available firepower each year. That is why they have plenty in reserve for dealmaking.

And that is fortunate because falling equity valuations in 2016, combined with debt financings raised to fuel previous years' M&A transactions have resulted, the report noted, in a roughly 20 percent industry-wide firepower decline. Half of that is attributable to a 62 percent decline in the firepower of specialty pharma firms and a 24 percent drop in big biotech players' firepower.

In contrast, big pharma's firepower dropped only 17 percent. Despite that, there are many big pharma and big biotech companies with the ability to make large and potentially transformative deals.

As a result, the land grab for valuable pipeline assets will be highly competitive, so finding growth in traditional strongholds is becoming increasingly difficult. Earlier breakthrough innovations in disease areas, such as autoimmune disease and oncology, have become "today's crowded therapeutic battlefields, forcing the industry to seek therapeutic 'white spaces' in underserved areas."

With the biopharmaceutical sector still relatively fragmented compared to other industries, there is still the potential for the emergence of megadeals this year, commented Greene.

However, EY reports that most large companies have stated preferences for bolt-on deals. Those would involve small-to-midcap biotech and specialty targets.

The prelude for a flurry of deals in the first quarter may have been established by Takeda Pharmaceutical Co. Ltd.'s $5.2 billion bid for Ariad Pharmaceuticals Inc., with the Japanese company agreeing to acquire the Cambridge, Mass.-based firm for $24 per share, representing a 79 percent premium to the closing price the day the deal was announced. (See BioWorld Today, Jan. 10, 2017.)

Ariad completed a rolling NDA for its ALK inhibitor, brigatinib, last year, seeking accelerated approval for treating patients with metastatic ALK-positive non-small-cell lung cancer who are resistant or intolerant to Pfizer Inc.'s Xalkori (crizotinib). The FDA accepted the application and granted priority review, setting a PDUFA date of April 29. (See BioWorld Today, Aug. 31, 2016.)

Looking ahead

The report has identified the U.S. political climate as likely to be a major M&A driver of deal flow in 2017 and beyond, due to the potential regulatory and tax reform promised by the incoming administration. Central to that would be the opportunity to repatriate to the U.S. approximately $100 billion in cash, which would certainly provide U.S. companies with considerable firepower to complete deals.

Completing a successful M&A deal going forward will not be easy and will require more rigorous industry pricing analysis given the prevailing pressures of drug cost containment.

"Payer pressures in the form of competitive rebating and formulary exclusions will continue, the report observed. "Some of those companies that have been saving their firepower for a rainy day may look out the windows and see storm clouds."

With a predicted frenetic deal environment, "companies will need to be prepared to move quickly to make the right strategic acquisition on the right terms," concluded Greene.