As seen in our recent report " Measuring the return on pharmaceutical innovation", the majority of big pharma's late stage pipeline value is driven by external sources: Acquisitions; joint ventures or in-licensing agreements. A trend that is likely to continue for the foreseeable future given the time, money and risks associated with bringing assets from discovery to launch, and the need for big pharma to keep pace with overall market growth. As quoted in our report M&A activity accounted for 22% of late stage pipeline value in 2013, looking ahead, what potential is there for big pharma to secure future R&D returns through M&A activity?

To start with, lets explore the general M&A environment. Analysis by Deloitte UK found overall M&A spend for FTSE 100 companies (excluding financial services companies) declined in 2013 after a revival of activity in 2012.  Our analysis identified two types of corporate attitude and behaviour regarding cash accumulation that linked to M&A activity. The first involved stockpiling cash reserves – in reaction to the financial crisis – and adopting conservative M&A strategies. The second involved maintaining smaller cash reserves and, rather unexpectedly, adopting more aggressive M&A strategies. The diverging attitudes towards cash accumulation and spending were found to impact on company success with small cash holding companies experiencing higher revenue growth – partly explained by their M&A activity. To see the full report on "The Cash Paradox" click here.

So, how does big pharma compare in terms of corporate attitude towards cash accumulation and what is the potential to secure future R&D returns through M&A activity?

Overall the drug market reported increased M&A activity in 2013, however, big pharma's contribution to this was an all-time low at just 18%. Whether this suggests a conservative, "large cash holding company" attitude or confidence in other sources of value to restore growth, it appears big pharma may be missing out on growth opportunities that smaller, M&A hungry companies, (big biotech and specialty pharma) are capitalising on. In doing so, these companies reported an impressive 50 per cent increase in market value last year compared to big pharma's 25 per cent increase.

The growth differential between big pharma and big biotech/ specialty pharma companies presents two main challenges for big pharma should they decide to get back into the deal making game: 

  • the pool of potential acquisition targets is decreasing as high levels of growth (in value and, in turn, buy-out expectations) push more and more companies out of the affordable bracket for big pharma
  • more competition as the ability of big biotech and specialty pharma companies to finance large M&A deals and compete on the same stage as big pharma increases

The net effect of both of these is a likely increase in the cost of M&A and yet further pressures on R&D returns. Throughout 2014 it will be interesting to see the extent to which big pharma re-enters the M&A game and how effectively this plays out. To keep pace with a growing market it's clear all avenues of driving R&D returns demand attention however, as the M&A stakes increase, a safer bet might be to focus on spreading risk through in-licensing and co-development agreements.

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