Revenue growth rose 10 percent last year, excluding revenue from three large companies that were acquired, the first time top-line growth has reach double digits since the financial crisis hit the industry in 2009, according to a new report by accounting firm Ernst & Young.

"While this is still a far cry from the high double-digit growth rates the industry delivered through much of the last decade, companies are also operating in a new reality now, with more cautious regulators and increased pricing pressure from payers," the report noted.

Spending on research and development, an indicator of a company's financial health and confidence in the future, rose 9 percent, compared with 2 percent in 2010 and a decline of 21 percent in 2009.

Still, net income fell an adjusted 5 percent. Ernst & Young said the decline was a sign companies may have become more willing to loosen their purse strings after sharply cutting costs in 2009 and, to a lesser extent, in 2010.

"A decline in profitability may simply be a sign that things are indeed starting to return to normal," the report said.

Mergers and acquisition activity increased. The number of transactions increased to 57 from 49 in 2010. Total deal value rose to $25 billion from $20 billion, excluding some $30 billion from three large deals -- Sanofi SA's $20.1 billion acquisition of Genzyme; Teva Pharmaceutical Industries Ltd's $6.8 billion acquisition of Cephalon; and Grifols SA's $3.4 billion acquisition of Talecris Biotherapeutics.

Among the 57 transactions that took place or closed in 2011, only seven buyers were big pharmaceutical companies. The rest were big biotech firms such as Amgen Inc, specialty drugmakers such as Forest Laboratories Inc and Japanese pharmaceutical companies.

"We are unlikely to see many, if any, additional megadeals involving big pharma in the foreseeable future, as most companies have announced their intention to focus on smaller "tuck-in" deals" valued at below $5 billion," the report noted.

GROWTH SLOWED BY DEBT, PATENT EXPIRATIONS

Many drug companies have taken on more debt as a result of prior mergers. They are also seeing slowing revenue growth as many top-selling drugs lose patent protection.

At the same time, they are maintaining dividends and engaging in stock buybacks. All these actions have reduced the acquisition "firepower" of the pharmaceutical industry by as much as 30 percent, according to an Ernst & Young analysis.

Meanwhile, the market value of the top biotech companies -- Biogen Idec Inc, Celgene Corp and Gilead Sciences -- all top $30 billion, most likely placing them out of reach as acquisition targets.

Amgen's market value now tops $55 billion. It issued more than $10.5 billion in debt, repaid $2.5 billion, bought back $8.3 billion of its shares and paid its first dividend of $400 million.

Overall, the biotech industry raised $33.4 billion in funding in 2011, second only to 2000, the height of the biotech bubble.

However, much of the increase in 2011 came from debt, which rose to $17 billion, the highest in a decade. The biggest companies took advantage of low interest rates to raise debt to finance stock buybacks or acquisitions, the report said.

Unlike the United States, financing in Europe has not regained pre-crisis levels, reflecting the battle within Eurozone countries over the debt of some members.

(Reporting By Toni Clarke; Editing by Bob Burgdorfer)

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