Why should pharmaceutical companies adopt a through-cycle approach to M&A deal making
- Haim Ratzabi
- Oct 16, 2022
- 2 min read
M&A is a core lever for value creation in pharmaceuticals and is a big part of pharmaceutical companies’ strategies.
Adopting a through-cycle approach to deal making in the wake of the COVID-19 pandemic can position pharmaceutical companies for greater success in the next normal.
Through-the-cycle (TTC) aim to evaluate the risk of a company by taking into account only permanent (static, slowly varying) characteristics.
Through-the-cycle ratings do not react to changes of the company's current economic situation only to changes of their "permanent" attributes.
Historically, pharmaceutical companies have been motivated to pursue M&A for three core reasons:
Innovation, Economies of scale, Portfolio realignment.
M&A from 2005 to 2019
Overall, the pharmaceuticals sector had more than doubled its global M&A from 2005 to 2019. There is no evidence yet that the economic fundamentals of the sector have changed in a way that would slow this trajectory. In fact, Mckinsey believe the sector is likely to resume its M&A activity sooner rather than later, given the following factors:
‘Dry powder.’ In general, companies with excess cash reserves tend to engage in M&A more often than peers. And right now, according to various sources, the top dozen global pharmaceutical companies have more than $170 billion in M&A dry powder (or excess reserves) on their balance sheets—$76 billion in excess cash and $94 billion in debt capacity.
Reallocation of capital. Mckinsey analysis shows that the pharmaceutical sector historically has returned up to one-third of available cash flow to shareholders through buybacks. For political, economic, and strategic reasons, this is unlikely to continue through the COVID-19 crisis. As a result, more capital may be available for investment in strategic or opportunistic acquisitions.
The top dozen global pharmaceutical companies have more than $170 billion in M&A dry powder (or excess reserves) on their balance sheets.
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