Industry Analysis
The Real Constraint on Biopharma M&A
Forget about firepower
In November 2025, a biopharma company with $18 billion in annual R&D spend and $55 billion in balance sheet "firepower" went to Blackstone for $700 million in additional development funding.
Why would the largest R&D spender in pharma need outside capital to fund its pipeline?
Not because of a lack of cash. The deal was about "remaining disciplined towards maintaining an appropriate financial profile." Every dollar of incremental R&D flows through the income statement. It compresses operating margins. It reduces EPS. And Wall Street keeps the score quarterly.
The Firepower Fallacy
From analysts and the biotech media we frequently hear the same liturgy. M&A Firepower reports. Calculations of "comfortable" and "stretch" capacity of acquirer balance sheets. The numbers cited are reliably enormous: $1-2 trillion available for dealmaking.1
The commonly used firepower analysis is akin to the balance of a checking account. Firepower tells you what a company could wire on Day 1 of a deal. It says nothing about the capacity for clinical trials, CMC scale-up, regulatory submissions, and commercial launch that turn an acquired molecule into revenue. Each step generates R&D expense. R&D expense hits the income statement. The income statement determines EPS. EPS determines your multiple.
The R&D Ratio as EPS Governor
For every company, the ceiling on incremental R&D imposed by M&A is far lower than theoretical balance sheet firepower.
A non-intuitive finding that follows from this analysis: the companies with the most balance sheet firepower often have the least P&L headroom.
Across large pharma, management teams have guided to specific operating margins, R&D spending ranges, and EPS trajectories that leave little room for incremental pipeline absorption. Several of the largest companies are already running R&D ratios above 25% with compressing margins — any acquisition that adds meaningful development expense could negatively impact the numbers they've committed to publicly.
A company with a low R&D ratio, stable margin guidance, and a growing revenue base might have headroom on paper — but even then, organizational bandwidth consumed by integrations, cost programs, and looming patent cliffs tends to close the gap between theoretical capacity and practical willingness to absorb more pipeline.
Follow the Comp
Why would a company with tens of billions in balance sheet capacity pay a private capital partner to fund R&D it could easily finance itself? The proxy statement provides a helpful clue. Across large pharma, the long-term incentive program — the largest piece of executive pay — typically vests on some combination of cumulative EPS, relative total shareholder return, and revenue growth. Annual cash bonuses are funded by scorecards built on revenue and operating income. Every incremental dollar of R&D that hits the income statement compresses these metrics. Structuring a deal so an outside partner absorbs the expense doesn't just protect EPS guidance — it protects operating metrics tied to compensation.
Some proxy statements go further. At certain companies, acquired in-process R&D expenses are explicitly excluded from financial results used to calculate annual incentive compensation. The comp structure doesn't just passively discourage R&D absorption — it actively creates an asymmetry: buy a late-stage asset (IPR&D excluded from the bonus calc) rather than fund early-stage development (hits operating expenses, compresses the EPS metric, reduces the payout).
The pattern is consistent. Financial metrics that are directly compressed by incremental R&D — operating income, operating margin, EPS, free cash flow — typically account for 60-80% of incentive weighting across large pharma.
Revealed Preference
Economists have a useful concept: revealed preference. Ignore what people say they want; watch what they do.
Over the past decade, a pattern has emerged that is hard to explain without the P&L constraint: large pharma companies with investment-grade balance sheets are bringing in outside capital to fund clinical programs they already own and could easily finance themselves.
| Year | Company | Partner | Asset | Value |
|---|---|---|---|---|
| 2016 | Pfizer | Royalty Pharma | Ibrance (adjuvant breast cancer)Drug already generating ~$3B/yr in sales | Undisclosed |
| 2022 | Sanofi | Blackstone | Sarclisa SC (multiple myeloma)Subcutaneous formulation of drug Sanofi already sells | €300M |
| 2024 | Gilead | Abingworth / Carlyle | Trodelvy (lung cancer)Gilead had $8.4B cash on hand | Up to $210M |
| 2024 | Teva | Abingworth / Carlyle | TEV-248 (asthma inhaler) | Up to $150M |
| 2025 | Biogen | Royalty Pharma | Litifilimab (lupus)Phase 3; mid-single-digit royalties on worldwide sales | Up to $250M |
| 2025 | Merck | Blackstone | Sac-TMT (ADC, 6 tumor types)Merck is the largest R&D spender in pharma | $700M |
| 2026 | Teva | Royalty Pharma | TEV-408 (vitiligo)Teva's second royalty financing deal with RPRX | Up to $500M |
Representative deals only. In every case the pharma company retained full rights to the asset; the financing partner received royalties or fixed payments on future sales. Source: company press releases and SEC filings.
This is not a comprehensive list. Abingworth alone has completed 14 clinical co-development deals with pharma and biotech partners since pioneering the model in 2009. Royalty Pharma's direct R&D funding agreements now span multiple large pharma counterparties. The deals are accelerating — four of the seven above were announced in the last 18 months.
Companies with a ~5% cost of debt are paying financing partners ~15%+ to fund programs they already control. The rational explanation is that the off-P&L treatment is worth the premium. That's an expensive way to protect your income statement, and the fact that multiple large pharma are arriving at the same conclusion shows how powerful the P&L constraint is.
Pharma isn't the only industry making this trade. In tech, Meta, Microsoft, and Oracle have moved over $120 billion of AI data center spending off their balance sheets through SPVs funded by private credit — Blue Owl, Apollo, BlackRock — at spreads roughly double what these companies pay on their own corporate bonds. Meta alone did a $27 billion deal with Blue Owl for a single data center campus it will operate but not own. The logic is identical: companies with enormous balance sheets voluntarily paying a premium for outside capital because the alternative — putting the spending on their own financial statements — would compress the metrics that drive their equity valuations.
So What?
If the binding constraint to biotech M&A is the income statement rather than the balance sheet, the $1–2 trillion in "firepower" often cited is off by an order of magnitude. Run each company's R&D headroom through a 6-year development horizon and the industry's absorption capacity — what it can acquire and develop without destroying its equity story — is closer to $100–150 billion.
The conventional view ranks acquirers by balance sheet size. The better ranking is by P&L headroom: companies with low R&D ratios and growing revenue bases, where the denominator is expanding fast enough to absorb a rising numerator.
