Look for an M&A scramble in 2014, with pharma chasing deals at ever-higher prices

Big Pharma has more money in its pocket for deals. And Big Pharma still needs more M&A for post-patent-cliff rebuilding. But Big Pharma's buyout targets want more money.

So concludes Ernst & Young, which released its annual analysis of the pharma M&A landscape. The upshot is that drugmakers have plenty of cash--and they may want to spend it ASAP, because prices are only going up.

Indeed, pharma's dealmaking firepower apparently is diminishing as we speak. Big biotech companies and specialty pharmas have their own shopping funds, so there's more competition for the deals out there. Combine that with higher prices, and Big Pharma's cash won't stretch so far.

"Big pharma companies need to allocate their limited resources carefully," said Jeffrey Greene, Ernst & Young's global life sciences transaction advisory leader, going on to say, "Amid elevated target prices and rigorous investor scrutiny, there is little room for error."

Of course, as an M&A adviser, Ernst & Young has a vested interest in pointing out the perils of 2014 dealmaking. But the firm's points are valid. Big pharma companies are still reeling from the generic onslaught. Major drugmakers didn't exactly hit the growth jackpot last year. Clawing their way back from patent-cliff losses, pharma companies also had to fight ongoing pricing pressures and slowing growth in emerging markets.

Some companies scored big R&D successes--Biogen Idec ($BIIB) with Tecfidera, Roche ($RHHBY) with Gazyva, and Gilead Sciences ($GILD) with Sovaldi, to name a few. But you'll notice that last year's new drug list is well populated with smaller companies rather than dominated by Big Pharma.

So the need for deals remains strong. JPMorgan agrees that prices are likely to be higher this year--and that deals will be made regardless. "We see M&A in the healthcare sector being up materially in 2014 at all size levels and across all subsectors," JPMorgan investment banking chief Jeff Stute told Bloomberg. "Buyers and sellers will get comfortable with the new reality of where assets are priced."

In fact, we already have our first potential bidding war, with Teva Pharmaceutical Industries' ($TEVA) offer for patchmaker NuPathe ($PATH), already pledged to Endo Health Solutions ($ENDP). We have our first multibillion-dollar deal in Forest Laboratories' ($FRX) $2.9 billion deal for specialty drugmaker Aptalis.

The question now is which companies will find themselves in Big Pharma's sights? Analysts have already tapped Jazz Pharmaceuticals ($JAZZ) as a likely target, partly because of its tax-friendly Irish domicile. Some say BioMarin Pharmaceuticals ($BMRN), which makes treatments for rare diseases, is a ripe possibility, with a potential new drug approval by the end of next month. And with the J.P. Morgan Healthcare Conference underway now in San Francisco, more buyout buzz could be on its way.

- read the release from Ernst & Young
- get more from Bloomberg

Special Reports: An ominous trend resurfaces as new drug approvals plunge in 2013 | Top Biopharma M&A Deals of 2012