Healthcare M&AWatchTM
2012
Quarterly trending and analysis of U.S. M&A activity Q2providers | payers | vendors | pharma/life sciences
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Table of Contents
1. Executive Summary ...... 1 2. Overview ...... 2 2.1. U.S. Healthcare M&A Deal Value Soars in Q2 2012 ...... 2 2.2. Vendors – Dominate Consistently ...... 3 2.3. Providers – Momentary Sluggishness ...... 4 2.4. Payers – Challenges Remain ...... 4 2.5. Pharmaceutical, Life Sciences and Biotechnology – Deal Value Swells ...... 4 2.6. Mixed Response from Financial Buyers in Q2 2012 ...... 4 2.7. Outlook ...... 5
3. Payers...... 6 3.1. Consolidation Continues Albeit at a Slower Rate ...... 6 3.2. ACOs Getting Popular ...... 7 3.3. Focus on Individual Consumers ...... 7 3.4. Dual Eligibility – A Growing Market Opportunity ...... 8 3.5. Outlook ...... 8
4. Providers ...... 9 4.1. Deal Value Leaps ...... 9 4.2. Changing Healthcare Environment ...... 10 4.3. Deal Volume Down for Nursing Homes/ Home Care/ Senior Care/ Rehabilitation Centers ...... 10 4.4. Acquisitions of Ancillary Healthcare Providers ...... 11 4.5. Outlook ...... 11
5. Vendors ...... 12 5.1. A Robust M&A Market ...... 12 5.2. Healthcare Equipment are at the Core of Vendors M&A ...... 13 5.3. Potential Impact of the Medical Device Tax Driving M&A ...... 14 5.4. High Level of Interest in Healthcare Information and Technology Solutions...... 14 5.5. Financial Investors Strongly Vying for Vendor Deals ...... 15 5.6. Outlook ...... 15
6. Pharmaceutical, Life Sciences and Biotechnology ...... 16 6.1. Deal Value Beats Volume ...... 16 6.2. Segment Analysis ...... 17 6.3. Smaller Innovative Firms under Spotlight ...... 17 6.4. Generic Deals Gain Momentum ...... 18 6.5. Venture Funding ...... 18 6.6. Outlook ...... 19
7. Regional Landscape ...... 20 7.1. M&A Deals by Region ...... 20 7.2 Acquirer and Target Concentration ...... 22 8. Appendix ...... 23
Healthcare M&A Watch – Q2 2012
1. Executive Summary
The recent ruling by the Supreme Court to uphold President Barack Obama’s healthcare reform law has cleared way for changes. The industry can look forward to both providers and payers bringing in structural reforms to cover the uninsured segment. Analysts will closely watch the upcoming presidential elections and budget negotiations that could bring in more industry changes.
The second quarter of 2012 witnessed 321 healthcare mergers and acquisitions transactions worth $50.6 billion. Despite decline in deal count, the disclosed deal value rose significantly during the quarter on the back of multibillion-dollar deals that included names such as Walgreen and Alliance Boots, Bristol-Myers Squibb and Amylin Pharmaceuticals, Watson Pharmaceuticals and Actavis Group, among others.
The vendors witnessed the maximum activity during Q2 2012, expanding their market share from 52.7% in Q1 2012 to 62.6% in Q2 2012, driven primarily by healthcare equipment and healthcare information system transactions. Vendors were the only segment to register an increase in deal count as compared to the corresponding quarter of the previous year.
The pharmaceutical, life sciences and biotechnology segment was witness to a strong surge in deal value as smaller firms with robust pipelines came under spotlight. Big pharmaceutical companies, such as Bristol-Myers Squib, Novartis, AstraZeneca, etc., were actively involved in the M&A activity during the quarter by either acquiring cost-saving generic drug-making companies or joining financial investors in ventures with innovative biotechnology companies.
Two notable trends to have emerged: Accountable Care Organizations and the growth of dual-eligible market. As both payers and providers look to address rising healthcare costs, ACOs are anticipated to improve patient care by introducing changes in the healthcare delivery system by moving away from a volume-based delivery system. The dual-eligible market represents a high growth area made up of Medicare enrollees who are eligible for both Medicare and Medicaid.
1 Healthcare M&A Watch – Q2 2012
2. Overview
2.1. U.S. Healthcare M&A Deal Value Soars in Q2 2012 M&A Deals by Transaction Value1
Despite being faced by challenges of slow growth, 450 50.3 55 uncertainties resulting from healthcare reform, and the 50.6 50 economy in general, the U.S. healthcare market’s M&A 400 45 40
activity surged in terms of value for Q2 2012 with some S billion 350 35 big-ticket deals. The number of deals during the quarter 401 30 ended June 2012 reached 321, with total disclosed 300 25 deal value crossing the coveted mark of $50 billion. 16.1 20 Number of of Deals Number 313 321 While the deal volume declined by 20% as compared 250 15 10 to Q1 2012, the disclosed deal value skyrocketed 200 5 registering an increase of 214.7% over the previous Q2 2011 Q1 2012 Q2 2012 quarter. On a year-over-year (y-o-y) basis, the deal Deal Count Deal Value volume as well as the disclosed deal value registered marginal increases of 2.6% and 0.5%, respectively, in Segment-wise M&A Deals Q2 2012. 450 11 The quarter witnessed many noteworthy multibillion 400 dollar deals spread across the pharmaceutical, life 350 81 7 9 300 sciences and biotechnology segment, vendor segment, 55 61 250 105 and provider segment. All of the 10 largest M&A deals 58 200 78 in Q2 2012 were valued at more than $1 billion—
150 together occupying 73.5% of the total disclosed value 100 204 201 during the quarter. However, in terms of volume, a 165 50 majority of the transactions were small-sized deals 0 (below $50 million), accounting for 67.3% of the total Q2 2011 Q1 2012 Q2 2012 168 M&A transactions with disclosed deal value in Q2 Payer Provider Pharmaceutical, Life Sciences and Biotechnology Vendor 2012.
M&A Deals by Transaction Value ($ million), 1 Q2 2012
5.9% 4.2%
5.9% Below 50 50 - 250
250 - 500 500 - 1000 67.3% 16.7% Above 1,000
1 Deal Value representative of publicly disclosed information. Source for above charts: Bloomberg, Factiva, and Press
2 Healthcare M&A Watch – Q2 2012
M&A Deals Split by Transaction Value1, Q2 2012 Pharmaceutical, Life ($ million) Payer Provider Vendor Total Sciences and Biotechnology Below $50 - 7 78 28 113 $50-$250 - 5 15 8 28 $250-$500 1 2 6 1 10 $500-$1,000 1 1 3 2 7 Above $1,000 - 3 3 4 10
10 Largest M&A Deals Announced1, Q2 2012 Announced Deal Value Acquirer Acquirer Industry Target Target Industry Date ($ million) 6/19/2012 Walgreen Provider Alliance Boots Provider $6,596 Pharmaceutical, Life Pharmaceutical, Amylin 6/29/2012 Bristol-Myers Squibb Sciences and Life Sciences and 6,486 Pharmaceuticals Biotechnology Biotechnology Pharmaceutical, Life Pharmaceutical, Watson 4/25/2012 Sciences and Actavis Group Life Sciences and 5,610 Pharmaceuticals Biotechnology Biotechnology HealthCare 5/21/2012 DaVita Provider Provider 4,459 Partners Holdings SXC Health Catalyst Health 4/18/2012 Provider Provider 4,167 Solutions Solutions 4/30/2012 Hologic Vendor Gen-Probe Vendor 3,757 Agilent 5/17/2012 Vendor Dako Vendor 2,200 Technologies Pharmaceutical, Life Pharmaceutical, Fougera 5/2/2012 Novartis Sciences and Life Sciences and 1,525 Pharmaceuticals Biotechnology Biotechnology Private Equity and Truven Health 4/23/2012 Veritas Capital Vendor 1,250 Venture Capital Analytics Pharmaceutical, Life Pharmaceutical, 4/23/2012 AstraZeneca Sciences and Ardea Biosciences Life Sciences and 1,123 Biotechnology Biotechnology
2.2. Vendors – Dominate Consistently Continuing its trend of robust deal-making within the healthcare segments, the vendors witnessed maximum activity in Q2 2012. Healthcare vendors registered 201 deals, accounting for 62.6% of the total U.S. healthcare M&A deal volume in Q2 2012, followed by pharmaceuticals, life sciences and biotechnology (18.1%), provider (17.1%) and payer (2.2%) segments.
The healthy vendor M&A activity was led by growth across all sub-segments, including healthcare equipment, healthcare information systems and medical services. However, the highlight of the quarter was the healthcare information systems sub-segment that posted an annual growth of 66.7% and 117.5% in terms of deal volume (55 deals) and value ($2.2 billion), respectively, driven by rapid adoption of IT solutions by healthcare providers and increased private equity and venture capital transactions. The healthcare information systems segment alone captured more than 44% of the total private equity and venture capital funding in terms of value during Q2 2012.
1 Deal Value representative of publicly disclosed information. Source for above tables: Bloomberg, Factiva, and Press 3 Healthcare M&A Watch – Q2 2012
Segment-wise M&A Deals, Q2 2011 Segment-wise M&A Deals, Q2 2012 Payer Payer 2.9% 2.2% Provider Provider 17.1% 19.5%
Vendor 52.7%
Pharmaceutical, Vendor Life Sciences and 62.6% Pharmaceutical, Biotechnology Life Sciences and 18.1% Biotechnology 24.9%
Source for above charts: Bloomberg, Factiva and Press
2.3. Providers – Momentary Sluggishness The provider segment faces a temporary blip as M&A deal activity dropped 32.1% quarter-over-quarter (q-o-q) in Q2 2012. Buyers appear to have become more selective as they go about consolidating their previous deals. With the Supreme Court upholding healthcare reform, an uptick in M&A activity is expected in the near future.
2.4. Payers – Challenges Remain The payer segment had only seven deals, reporting a downtrend of 22.2% y-o-y and 36.4% q-o-q during Q2 2012. With the passing of the Patient Protection and Affordable Care Act (PPACA), insurance companies will get the opportunity to expand their coverage. Service providers will need to reevaluate their pricing, product mix, geographical footprint and distribution channels to counter competition and protect their market share.
2.5. Pharmaceutical, Life Sciences and Biotechnology – Deal Value Swells The pharmaceutical, life sciences and biotechnology segment took a plunge with only 58 M&A transactions announced during Q2 2012. However, the decrease in volume was well compensated by a giant leap in consolidated disclosed deal value that stood at $18.1 billion. While both biotechnology and medical drug sub-segments accounted for 27 M&A deals each, the latter took the lead in deal value. Larger players in this group continued to acquire innovative companies to replenish their pipelines that are depleting due to patent losses. Generic and biologic drugmakers attracted majority of financial and strategic investment during the quarter. With biologic medicines riding high on novel mechanisms of action and a more targeted approach, the next few years will see the rise of the biotechnology industry and correspondingly M&A within the sub-segment.
2.6. Mixed Response from Financial Buyers in Q2 2012 While the number of financial investor deals—including private equity and venture capital transactions—fell to 117 in Q2 2012, a decline of 26.4% when compared to 159 deals in Q1 2012, the combined disclosed deal value climbed to $4.1 billion, 101.4% up from $2 billion in Q1 2012. In a y-o-y comparison, buyers followed the path of strategic investors and witnessed an increase of 8.3% and 3.2% in terms of deal volume and value, respectively.
Investors showed active interest in the vendors segment, accounting for 73.5% and 74% of the total financial investors’ deals in terms of volume and value, respectively, in Q2 2012. Deal-making continued in the vendor segment despite a decline in deal count witnessed by all other segments on either or both annual and quarterly bases.
4 Healthcare M&A Watch – Q2 2012
2.7. Outlook The healthcare market, viewed as a lucrative investment opportunity, will continue to attract strategic, financial investors during the second half of 2012. On one hand, the strategic market participants are consolidating in order to cut costs and improve efficiencies, while on the other financial investors are positioning themselves to capitalize on this industry in transition. According to consulting firm BDO USA’s annual Perspective Private Equity Study from January 2012, 21% of private equity professionals find that the healthcare industry will provide maximum opportunities for new investments during 2012.
5 Healthcare M&A Watch – Q2 2012
3. Payers
Key Highlights
The number of deals in the payer market declined 36.4% while the value of deals surged to $1.2 billion in Q2 2012, growing more than 4 times Health insurance companies are forming ACOs to improve quality of healthcare services and cut costs; there were 221 ACOs in 45 states, with California leading with 25 ACOs Dual eligibility is emerging as a lucrative market for payers; large insurance firms would target small managed-care organizations having wide presence at state or regional level to tap into the dual-eligible market
3.1. Consolidation Continues Albeit at a Slower Rate The payer market observed a mere seven deals Q-o-Q Deals for Payers being announced in Q2 2012 as the number of deals fell 36.4% q-o-q. However, in terms of value, 12 1.4
Q2 witnessed an upsurge in deal value from just 10 11 1.2 1.2
$200 million in Q1 2012 to $1.2 billion. Annually, 1.0 8 there was a decline of more than 50% in terms of $ billion 0.8 transaction value. Some of the prominent players, 6 7 such as Cigna and WellPoint, were involved in 0.6 4 M&A activity during Q2 2012. Small health Deals of Number 0.4 insurance companies continue to be on the radar 2 0.2 0.2 of major players as prevailing low interest rates 0 0.0 encourage insurance organizations to expand Q1 2012 Q2 2012 through M&A. Deal Count Deal Value
Y-o-Y Deals for Payers The recent decision on health insurance reform is 10 3.0 expected to expand customer base of those that will be insured, adding about 14 million more people in 2.5 2.5 8 2014 and an estimated 30 million by 2030. Payers will
2.0 billion $ be required to expand their existing service 9 6 7 infrastructure to manage the increase in number of 1.5 1.2 customers obtaining coverage. Industry experts 4 1.0 believe healthcare reform will mandate insurers to Number of Deals of Number improve benefits offered to customers as they 2 0.5 participate in insurance exchanges.
0 0.0 Q2 2011 Q2 2012 Deal Count Deal Value
Source for above charts: Bloomberg, Factiva and Press
6 Healthcare M&A Watch – Q2 2012
M&A Deals Announced, Q2 2012 Announced Target Target Sub- Deal Value Acquirer Target Target Segment Date Industry segment ($ million) Medicare Advantage Health 6/27/2012 Cigna Payer Insurance N/A Plans insurance Casualty Prime Health 6/11/2012 Management Payer Managed care HMO/ PPO N/A Services Network Healthcare Direct 6/4/2012 WellPoint 1-800 Contacts Vendor $900 equipment marketers Health Savings Health 6/1/2012 SelectAccount Payer Insurance N/A Account Business insurance Great American Health 5/10/2012 Cigna Supplemental Payer Insurance 295 insurance Benefits Vertical Vision Ancillary 5/4/2012 AmeriLife Group Vendor Medical services N/A Financial Marketing services McLaren Health CareSource 4/18/2012 Payer Managed care HMO/ PPO N/A Plan Michigan Source: Bloomberg, Factiva, and Press
3.2. ACOs Getting Popular ACOs are associations formed to offer affordable healthcare services to patients. They encompass physicians, hospitals, payers and vendors to address the needs of patients through quality care and cutting rising healthcare costs.
Payers such as Humana, United Healthcare and Cigna have all formed ACOs across their networks. As of March 2012, Cigna had eight ACO programs running, and the service provider is a participant to four multi-payer pilots. Cigna has been successful in lowering the annual average cost-per-patient by $336 in its ACO program running in Phoenix. The ACO model of care offers better coordinated care to patients, especially those suffering from multiple chronic conditions and receiving treatment from multiple physicians. With multiple entities being involved in the ACO model, more mergers, partnerships and alliances are expected to happen among payers and provider organizations.
In a research paper published by Leavitt Partners in June 2012, there were 221 ACOs among 45 states in the nation. California led with 25 ACOs, followed by Texas (16) and Massachusetts (13). Only five states (Delaware, Idaho, Rhode Island, South Dakota, and West Virginia) do not have an ACO-affiliated hospital within their boundaries.
3.3. Focus on Individual Consumers The growing individual health insurance market has resulted in payers focusing more on the individual market. According to an article in Health Plan Week from May 2012, health insurance companies spent $366.8 million on advertising during 2011, an increase of over 52% in 2010. Payers have been making changes to their advertising budgets and messages targeting the individual consumer market. The recent deal between WellPoint and 1-800 Contacts highlights the shift toward the individual consumer market. Post-acquisition, WellPoint stated that as a part of its long-term strategy the company looked to expand and gain larger market share in the individual consumer market. In the later part of 2011, Cigna announced a budget outlay of $25 million targeting the individual market. With individual insurance plan membership anticipated to grow, payers would need to invest in designing and implementing consumer- oriented marketing strategies. The payer market could also see investments directed toward acquiring technology, and analytics companies to support customer relationship management systems. As consumers look for health plans, the individual consumer market is forecasted to become critical for growth and profitability of the payer industry.
7 Healthcare M&A Watch – Q2 2012
3.4. Dual Eligibility – A Growing Market Opportunity The announcement of McLaren Health Plan acquiring CareSource Michigan in April 2012 highlighted the growing opportunity in the dual-eligible market (individuals covered under both Medicare and Medicaid). According to the Center for Medicare and Medicaid Services, as of 2012, an estimated 8.3 million individuals became part of this segment. Reports from the CMS suggest that the federal and state governments spend an estimated $300 billion annually on the dual-eligible population. With the aging population and increased life expectancy, the number of dual-eligible population is expected to rise. As the governments look to cut costs and improve the coverage network by shifting Medicaid patients to private managed care insurance companies, the dual-eligible market is anticipated to observe a rise in M&A transactions. Small managed care companies having wide presence at state or regional levels would serve as targets for large insurance companies seeking to expand into the large, untapped dual-eligible market. America's Health Insurance Plans forecasts of improved management and reduced spending could result in savings of $125 billion to the government.
3.5. Outlook The payer market is expected to benefit from reform laws, thus paving the way for a rise in membership across various types of health plans offered. Industry experts believe the sector will put up a mixed performance as rising healthcare costs, slowing economy and general elections could prevent any significant growth in the industry.
8 Healthcare M&A Watch – Q2 2012
4. Providers
Key Highlights
Despite a decline in deal volume, deal value in the healthcare provider market surged to $17 billion in Q2 2012 on the back of some big-ticket M&A activity Deal volume in nursing homes/ home care/ senior care/ rehabilitation centers segment dropped 50% in Q2 2012 Hospitals are expected to pitch for ancillary service providers such as post-acute care and home health to expand their service offerings
4.1. Deal Value Leaps The healthcare provider market, which includes Q-o-Q Deals for Providers hospitals, nursing homes, physician practice 90 18 management, pharmacy benefits management 80 17.0 16
and behavioral health services, witnessed a 70 81 14 $ billion $ surge in deal value during Q2 2012. Despite a 60 12 50 10 drop in deal volume, deal value shot up to $17 55 billion during the quarter from $1.8 billion 40 8 30 6 recorded in Q1 on the back of some big-ticket Deals of Number M&A involving service providers such as SXC 20 1.8 4 Health Solutions, DaVita and Walgreen. 10 2 0 0 Q1 2012 Q2 2012 Deal Count Deal Value
Y-o-Y Deals for Providers Compared to the last quarter, which observed only one transaction being announced at more than $1 70 18 billion, Q2 recorded three transactions at more than 17.0 16 60 $1 billion. Annually, deal value climbed by about $15 61 14 50 $ billion $ billion in Q2 2012. However, the segment observed a 55 12 drop in deal count both q-o-q (32.1%) and y-o-y 40 10 (9.8%) as many providers put their M&A activity on 30 8 hold until the Supreme Court ruling on healthcare 6 Number of Deals of Number 20 reform laws. Industry experts believe strategic factors 4 10 2.2 and financial needs will continue to push M&A activity 2 forward. 0 0 Q2 2011 Q2 2012 Deal Count Deal Value
Source for above charts: Bloomberg, Factiva and Press
9 Healthcare M&A Watch – Q2 2012
Five Largest M&A Deals Announced, Q2 2012 Announced Target Deal Value Acquirer Target Target Sub-segment Date Industry ($ million) Pharmacy Benefit 6/19/2012 Walgreen Alliance Boots Provider Management/ $6,595 Pharmacy Services HealthCare Partners Physician Practice 5/21/2012 DaVita Provider 4,459 Holdings Management Catalyst Health Physician Practice 4/18/2012 SXC Health Solutions Provider 4,167 Solutions Management Universal Health 6/4/2012 Ascend Health Provider Behavioral Healthcare 517 Services Harrison Street Real Bristal Portfolio of Nursing Homes/ Home 5/23/2012 Estate Capital, Engel Chartwell Seniors Provider Care/ Senior Care/ 290 Burman Group Housing REIT Rehabilitation Centers Source: Bloomberg, Factiva, and Press
4.2. Changing Healthcare Environment Although M&A activity among providers declined in Q2 2012, analysts consider it to be a short-term trend. Need to reduce costs and improve profitability while providing quality care will continue to drive many independent hospitals/ clinics and physician practice management firms to join hands with the larger service providers. An expected drop in reimbursements under the Medicare program due to financial impact of the PPACA and sluggish economy will accelerate hospital consolidation and an increase in costs. Need to counter increasing competition, reduce back-office costs and requirement to position themselves to complement the new payment models will be the main forces driving M&A in the provider segment.
Another trend that has picked up is of small providers becoming part of large hospitals. Small service providers consider access to research, technology, infrastructure and strong administrative support as critical factors driving toward M&A. They prefer being part of large hospitals that provide them with deeper financial resources and support. Also, the challenges related to changes in the healthcare payment system and need for economic stability among small physician groups has triggered the rise in mergers.
4.3. Deal Volume Down for Nursing Homes/ Home Care/ Senior Care/ Rehabilitation Centers Deal volume in the segment plunged 50% q-o-q from 30 in Q1 2012 to 15 deals in Q2 2012. Transactions remained tepid as y-o-y deal volume slipped 40% from 25 recorded in Q2 2011. Industry experts remain positive about the long-term trend and expect transactions to pick up. In the short-term, concerns related to regulations and payment reforms have put the sub-segment under pressure.
10 Healthcare M&A Watch – Q2 2012
Provider - Sub-segment-wise M&A Deals, Provider - Sub-segment-wise M&A Deals, Q2 2011 Q2 2012 3.3% Hospitals/ Clinics 3.6% 4.9% Hospitals/ Clinics 5.5% 3.3%
Nursing Homes/ Home 12.7% Nursing Homes/ Home Care/ Care/ Senior Care/ Senior Care/ Rehabilitation Rehabilitation Centres Centres Physician Practice 50.9% Physician Practice 47.5% Management Management
41.0% Pharmacy Benefit 27.3% Pharmacy Benefit Management/ Pharmacy Management/ Pharmacy Services Services Behavioral Healthcare Behavioral Healthcare
Source for above charts: Bloomberg, Factiva and Press
4.4. Acquisitions of Ancillary Healthcare Providers Hospitals are expected to pitch for ancillary healthcare providers such as post-acute care and home health to enhance their service portfolio. The need to focus on post-discharge services and lower readmission rates will lead hospitals on a lookout for strategic acquisitions. As the industry matures, increasing market share and revenue growth will be critical for providers; also, rising cost structures would constrain the development of new centers. With providers focusing on the quality of their services, ancillary healthcare providers are expected to gain importance. The recent ruling by the CMS for hospitals to lower readmission rates in order to receive Medicare and Medicaid reimbursements is also expected to spur transactions in this space.
4.5. Outlook The recent Supreme Court decision to uphold the PPACA paves a new direction for the healthcare industry. The majority of healthcare providers have embarked on introducing changes in the current delivery system to cater to consumer needs. Given the reimbursement cuts that hospitals face, providers are anticipated to improve their efficiency through new partnerships and geographic expansion.
11 Healthcare M&A Watch – Q2 2012
5. Vendors
Key Highlights
Vendor M&A activity occupies a dominant share of the total healthcare market with 201 deals worth $14.2 billion in Q2 2012 led by growth across all sub-segments, including healthcare equipment, healthcare information systems and medical services Impending impact of a medical devices tax to be implemented in 2013 will continue to drive restructuring and M&A in the healthcare equipment market Private equity and venture capital drive the deal value in healthcare information system transactions, funding 13 out of the largest 15 deals in the sub-segment in terms of disclosed deal value aggregating more than $1.8 billion
5.1. A Robust M&A Market Vendors continue to garner significant attention in Y-o-Y Deals for Vendors the M&A market as the industry searches to improve efficiencies and reduce the cost of care. 250 40 The segment recorded 201 deals worth $14.2 35 200 33.4 billion in Q2 2012, compared with 165 deals worth 201 30
$33.4 billion in Q2 2011, registering an annual 25 billion $ 150 165 growth of 21.8% in terms of total deal volume. The 20
total disclosed deal value in Q2 2012 declined by 100 15
57.4% y-o-y due to the $19.5 billion deal of Deals of Number 14.2 10 Johnson & Johnson and Synthes in Q2 2011, 50 5 excluding which, the disclosed deal value rose by 0 0 2.5% annually. Q2 2011 Q2 2012 Deal Count Deal Value
On a q-o-q basis, while the volume of M&A deals Q-o-Q Deals for Vendors remained almost consistent in Q2 as compared to 204 210 16 14.2 deals in Q1 2012, the disclosed deal value surged 200 14 204 201 sharply by 80% from $7.9 billion registered in the 190 12 previous quarter.
180 billion $ 10 170 For the quarter ended June 2012, healthcare vendors 7.9 8 160 (including healthcare equipment manufacturers and 6 150
Number of Deals of Number distributors, information system companies, and 4 140 medical services) were the most active segment 130 2 contributing 62.6% of the total U.S. healthcare M&A 120 0 deals in terms of volume. The consolidation in the Q1 2012 Q2 2012 sector was driven by the transactions in the healthcare Deal Count Deal Value equipment and information system companies on the Source for above charts: Bloomberg, Factiva and Press back of the industry's need to reduce overhead expenses, improve the operating efficiencies of electronic medical records, and improve patient outcomes.
12 Healthcare M&A Watch – Q2 2012
Based on disclosed deal value, the vendors comprised 28.1% of the total M&A activity. The increase in disclosed deal value was primarily driven by many multibillion-dollar deals in the vendor segment during the quarter ended June 2012 as compared to the previous quarter. Together, the disclosed deal value of the largest five deals comprised more than 60% of the total M&A deals in the vendor segment in Q2 2012. Five Largest M&A Deals Announced, Q2 2012 Announced Target Target Target Sub- Deal Value Acquirer Target Date Industry Segment segment ($ million) Healthcare Diagnostic 4/30/2012 Hologic Gen-Probe Vendor $3,758 equipment equipment/ kits Agilent Healthcare Diagnostic 5/17/2012 Dako Vendor 2,200 Technologies equipment equipment/ kits Healthcare Veritas Truven Health Specialized/ 4/23/2012 Vendor information 1,250 Capital* Analytics Other software systems Healthcare Diagnostic 4/10/2012 Corning Discovery Labware Vendor 730 equipment equipment/ kits Piramal Decision 5/16/2012 Vendor Medical services Ancillary services 635 Healthcare Resources Group *Private Equity and Venture Capital Source: Bloomberg, Factiva, and Press
5.2. Healthcare Equipment are at the Core of Vendors M&A Vendor M&A activity continues to be dominated by the healthcare equipment segment—including medical devices and products, diagnostics equipment and distributors—registering 95 deals with disclosed deal value of $9.4 billion during Q2 2012. The companies faced with challenges of market growth for cardiovascular and orthopedic devices and diagnostic imaging equipment, pushed for inorganic growth strategy. This is evident from leading deals within the segment as three of the five largest M&A deals in the vendor segment were in the medical devices and diagnostic equipment space.
Vendor - Sub-segment-wise M&A Deals, Q2 2011 Vendor - Sub-segment-wise M&A Deals, Q2 2012
Healthcare Information Healthcare Systems Information 20.0% Systems 27.3% Healthcare Healthcare Equipment Equipment 47.3% Medical Services 55.2% 24.8% Medical Services 25.4%
Source for above charts: Bloomberg, Factiva and Press Despite maintaining its leading position with 47.3% share in the total vendor M&A deals in Q2 2012, the healthcare equipment segment witnessed a significant decline from 55.2% share in Q2 2011 and 52.9% in Q1 2012. The comparative decline suggests that the deal activity picked up majorly in healthcare information system and medical services.
13 Healthcare M&A Watch – Q2 2012
5.3. Potential Impact of the Medical Device Tax Driving M&A The 2.3% excise tax on the revenues of the medical devices companies, to be implemented in January 2013 as a part of healthcare reform law, is expected to bring significant changes, forcing companies to rethink strategies and business models. The medical device tax, expected to raise $20 billion by 2019, has been strongly opposed by the industry. The House—mostly backed by the lawmakers from states with big medical device companies, including Massachusetts, Minnesota, Pennsylvania and Michigan—recently voted in favor of the bill aimed at removal of the medical device tax. This bill is expected to get vetoed in the Senate, upholding the medical device tax. The impending impact of this tax has led to a great deal of restructuring, including spinoffs, management changes and M&A within a lot of healthcare equipment companies. The segment saw 16 divestitures in Q2 2012, including some high value inbound and outbound transactions. As the majority of the companies will not be able to pass on the tax to hospitals or distributors, they have started implementing cost-cutting plans. An industry expert from Frost & Sullivan opined that healthcare equipment companies are re-evaluating their portfolios and divesting business units that are deemed slow growth and offer limited opportunities. Also, healthcare equipment manufacturers are making a move to establish themselves in growth markets. Acquisition of Dako by Agilent Technologies and Origio by Cooper Companies, both in Denmark; NTO IRE-Polus by IPG Photonics in Russia; and Gene Logic’s biorepository assets by Transgenomic in India, highlight this trend. Industry observers believe that with specific understanding of the tax and its potential impacts on a firm's income, buy-side dealmakers may be able to leverage that knowledge to drive attractive purchase multiples. Similarly, sellers can support higher valuations by demonstrating that the management has successfully implemented strategic initiatives to counteract the tax, resulting in minor impact or even improvement in operating efficiency.
5.4. High Level of Interest in Healthcare Information and Technology Solutions Healthcare information systems were on a high-growth trajectory during Q2 2012 within vendor M&A activity. The segment recorded its highest numbers of deals in terms of volume (55 deals) and value ($2.2 billion) in Q2 2012 than in the last six quarters. This led to the growth in healthcare information systems’ contribution to total vendor M&A deals, which increased from 20% in Q2 2011 to 27.4% in Q2 2012. The number of deals increased from 33 in Q2 2011 to 43 in Q1 2012 to 55 in Q2 2012, surging 66.7% y-o-y and 27.9% q-o-q. The market consolidation among the healthcare information system providers was driven by factors such as the rapid adoption of IT solutions by healthcare providers in order to meet government requirements, a considerable shift of focus to clinical outcomes, and pay-per-performance models.
Within the segment, active M&A participants were information management companies, revenue cycle management companies, electronic medical record companies, and some specialized players in cloud computing, telemedicine, etc. A total of 24 private equity and venture capital deals flooded the healthcare information system segment, amounting to a total disclosed deal value of $1.8 billion. While the number of private equity and venture capital deals in the sub-segment was up by 84.6% on q-o-q basis, the disclosed deal value increased due to big-ticket private equity and venture capital funding transactions. Of the largest 15 healthcare information systems deals in terms of disclosed deal value, 13 were private equity and venture capital funding, including key transactions such as Veritas Capital’s and Thomson Reuters’ Truven Health Analytics ($1.25 billion), Lightyear Capital and Fidelity National Information Services’ healthcare benefit solutions ($335 million), T. Rowe Price-Redmile Group and Castlight Health ($100 million), among others.
14 Healthcare M&A Watch – Q2 2012
5.5. Financial Investors Strongly Vying for Vendor Deals The financial investors consistently maintained their M&A Deals by Investor Type for Vendor deal-making momentum in the vendor segment. 250 While most of the sectors remained flat or witnessed decline in financial investors’ activity during Q2 2012 200 as compared to the corresponding quarter of the 87 150 86 previous year, vendors witnessed 86 deals 63 aggregating investments worth $3 billion in Q2 2012, 100
which grew 36.5% annually in terms of volume. Of Number of of Deals Number 117 the total financial investors’ activity for Q2, vendors 50 102 115 comprised 73.5% and 74% in terms of deal volume 0 and value, respectively. This reflects strong Q2 2011 Q1 2012 Q2 2012 confidence of the private equity and venture capital Financial Investor Strategic Investor funds in the medical devices and equipment sector, information technology companies, and ancillary Source: Bloomberg, Factiva and Press services.
5.6. Outlook Healthcare investors expect an increase in M&A activity in the remaining part of 2012. M&A in the vendors segment will be significantly driven by government reform initiatives. At the current rate, M&A deals involving healthcare information system companies are on track to far outpace the number of transactions in the previous year. The other important growth contributor will be the need for new products and technologies from medical device manufacturers and suppliers.
15 Healthcare M&A Watch – Q2 2012
6. Pharmaceutical, Life Sciences and Biotechnology
Key Highlights
In the pharmaceutical, life sciences and biotechnology segment, deal count reduced by 44.8% q-o-q, while consolidated disclosed deal value spiked to $18.1 billion during Q2 2012 M&A activity was majorly fueled by acquisitions of smaller innovation-focused companies by big players in the latter’s bid to replenish their product pipelines Generic and biologic drug companies attracted majority of strategic and financial investment
6.1. Deal Value Beats Volume M&A activity in the pharmaceutical, life sciences and biotechnology segment remained robust in Q2 2012, with four deals crossing the billion-dollar mark. Although the number of M&A deals during the period stood at 58, the consolidated deal value soared to $18.1 billion in Q2 2012, representing a staggering increase of 193.5% quarterly and 48.1% annually in total deal value. However, deal volume declined 44.8% q-o-q and 25.6% y-o-y in Q2 2012.
Q-o-Q Deals for Pharmaceutical, Life Sciences and Y-o-Y Deals for Pharmaceutical, Life Sciences and
110 Biotechnology 90 Biotechnology 18.1 19 19 80 18.1 100 105 17 17 70 78 15
90 15 60 $billion $ billion $ 58 13 13 50 12.2 80 40 11 11
70 30 9 Number of Deals of Number 9 Deals of Number 20 7 60 6.2 7 5 58 10 50 5 0 3 Q1 2012 Q2 2012 Q2 2011 Q2 2012 Deal Count Deal Value Deal Count Deal Value Source for above charts: Bloomberg, Factiva and Press
Five Largest Pharmaceutical M&A Deals Announced, Q2 2012 Announced Target Sub- Deal Value Acquirer Target Target Industry Date segment ($ million) Bristol-Myers Amylin Pharmaceutical, Life 6/29/2012 Medical drugs $6,486 Squibb Pharmaceuticals Sciences and Biotechnology Watson Pharmaceutical, Life 4/25/2012 Actavis Group Medical drugs 5,610 Pharmaceuticals Sciences and Biotechnology Fougera Pharmaceutical, Life 5/2/2012 Novartis Medical drugs 1,525 Pharmaceuticals Sciences and Biotechnology Ardea Pharmaceutical, Life 4/23/2012 AstraZeneca Medical drugs 1,123 Biosciences Sciences and Biotechnology Takeda Pharmaceutical, Life 4/11/2012 URL Pharma Medical drugs 800 Pharmaceutical U.S. Sciences and Biotechnology
16 Healthcare M&A Watch – Q2 2012
Five Largest Biotechnology M&A Deals Announced, Q2 2012 Announced Deal Value Acquirer Target Target Industry Date ($ million) Mustafa Nevzat Ilac Pharmaceutical, Life Sciences 4/25/2012 Amgen $669 Sanayi and Biotechnology Pharmaceutical, Life Sciences 4/10/2012 Amgen KAI Pharmaceuticals 315 and Biotechnology Pharmaceutical, Life Sciences 4/23/2012 Nabi Biopharmaceuticals Biota Holdings 166 and Biotechnology Pharmaceutical, Life Sciences 5/15/2012 Cornerstone Therapeutics EKR Therapeutics 125 and Biotechnology Pharmaceutical, Life Sciences 4/5/2012 Spectrum Pharmaceuticals Allos Therapeutics 76 and Biotechnology Source: Bloomberg, Factiva, and Press
6.2. Segment Analysis During Q2 2012, all 58 deals were primarily focused within the biotechnology products (biologics) and medical drugs (small molecules and generics) sub-segments. Both biotechnology and medical drugs sub-segments accounted for 27 deals each, together contributing a 93.1% share to the total deal volume in the quarter. However, M&A involving medical drug companies in Q2 2012 superseded biotechnology deals in terms of deal value—$16.4 billion versus $1.7 billion.
Pharmaceutical, Life Sciences and Pharmaceutical, Life Sciences and Biotechnology - Sub-segment-wise M&A Deals, Biotechnology - Sub-segment-wise M&A Deals, Q2 2011 Q2 2012 9.0% 1.7% 5.1% Medical Drugs Medical Drugs 6.4%
Biotechnology (Medical) Biotechnology (Medical)
53.8% 46.6% 30.8% Drug Delivery Systems 46.6% Drug Delivery Systems
Contract Research/ Clinical Contract Research/ Clinical Research Organizations Research Organizations
Source for above charts: Bloomberg, Factiva and Press
6.3. Smaller Innovative Firms under Spotlight Externalization of research and innovation was the highlight of strategic M&A activity within Q2 2012 for the pharmaceutical, life sciences and biotechnology market. As major players in this evolving industry exhaust their development pipelines in an effort to deliver blockbuster products amidst the imminent patent cliff, research and development efforts in start-ups and smaller companies have become hotspots for strategic investment. Bristol-Myers Squibb’s $6.5 billion acquisition of Amylin Pharmaceuticals and U.K.-based AstraZeneca’s $1.1 billion buyout of Californian drugmaker Ardea Biosciences in Q2 2012 proved such externalization of research and development.
Smaller companies, referred to as “biotech” enterprises, also prove to be easier acquisition targets for large pharmaceutical companies in terms of finance. The recent transactions involving Amgen’s purchase of KAI Pharmaceuticals, and increase in ownership in the clinical stage small-molecule company Theravance by U.K.-based GlaxoSmithKline highlighted the trend. As most of the pharmaceutical and biotechnology start-ups are highly specialized in their product platforms, they also offer innovative and breakthrough pipelines to their multispecialty acquirers.
17 Healthcare M&A Watch – Q2 2012
6.4. Generic Deals Gain Momentum Investment in the generic drug market by large pharmaceutical firms also stirred the M&A activity in Q2 2012. Deals such as Watson Pharmaceuticals’ $5.6 billion acquisition of Swiss generic player Actavis Group from Novator EHF and the purchase of dermatology company Fougera Pharmaceuticals by generic drugmaker Sandoz (a Novartis company) for $1.5 billion set the momentum for an increase in generic formulations. Specialty pharmaceutical companies have been foraying into the generic market in their bid to diversify and look for alternative sources for revenue once their patents expire. For instance, Indiana-based pharmaceutical giant Eli Lilly expanded a strategic partnership with Chinese manufacturer Novast in Q2 to supply Lilly-branded generic medicines in the region by increasing equity position by $20 million. Another important deal indicating this growing inclination toward generics was Amgen’s acquisition of Turkish group Mustafa Nevzat Ilac Sanayi, an injectable generic drugmaker, for $669 million.
6.5. Venture Funding Private equity and venture capital funding in the M&A Deals by Investor Type for Pharmaceutical, Life Sciences and Biotechnology pharmaceutical, life sciences and biotechnology space 120 dwindled in Q2 2012. Beneficiary companies in the 100 sector raised a total of $315.8 million from 23 private 80 equity and venture capital financing deals. While such 61 financial investment was reflected in 58.1% 60 37 pharmaceutical, life sciences and biotechnology M&A in 23 40
Q1 2012, private equity and venture capital participation of Deals Number 44 receded to 39.7% deals in Q2 2012. In Q2 2011, 47.4% 20 41 35 of all the M&A transactions in this segment were funded 0 by private equity and venture capital. Q2 2011 Q1 2012 Q2 2012
Financial Investor Strategic Investor
Companies engaged in the development of biologics Source: Bloomberg, Factiva and Press attracted the majority of financial investment in Q2 2012. As many as 15 biotechnology companies received funding from private investors during the period, representing 65.2% of the total 23 private equity and venture capital deals in Q2. The growing interest of venture capitalists in research-phase biologic manufacturers is a part of their long-term investment into the biotechnology industry that holds a great promise over the traditional small-molecule drug market in developing next- generation therapeutics. Also, as proprietary medical drug business is slowing down on account of major drug expirations in 2012-13, clinical-stage biologic companies developing more targeted therapies provide a better investment for private equities and venture capitalists. Furthermore, the PPACA allows 12 years of exclusive use of biologic drugs by their originators before their generic version can be developed, making such biotechnology companies all the more favorable for financial investment.
As a result, even large pharmaceutical companies have started investing in smaller biotechnology companies through their purposely built venture arms. In Q2 2012, Amgen Ventures (Amgen’s corporate venture capital fund) along with several other investors pumped $20 million into Colorado-based preclinical company miRagen Therapeutics. In another deal during the period, Lilly Ventures (venture arm of Eli Lilly) and Amgen Ventures, along with other venture capitalists, contributed to the $16.5 million financing of California-based Sutro Biopharma. Pfizer, Novartis and Johnson & Johnson, through their respective venture funds, along with other venture capitalists, collectively invested $10 million in biotechnology start-up Celladon. Other major international pharmaceutical players that were active in financing small, innovative experimental-stage biotechnology firms through their venture units included Novo Nordisk and Lundbeck.
18 Healthcare M&A Watch – Q2 2012
Three Largest Private Equity and Venture Capital M&A Deals Announced, Q2 2012 Announced Target Sub- Deal Value Acquirer Target Target Industry Date segment ($ million) Novo Ventures, TPG Pharmaceutical, Capital, Sevin Rosen Alder Biotechnology 4/19/2012 Life Sciences and $38 Funds, Ventures West Biopharmaceuticals (Medical) Biotechnology Capital, Delphi Ventures Private Investor, Bessemer Venture Pharmaceutical, Biotechnology 4/4/2012 Partners, RA Capital OvaScience Life Sciences and 37 (Medical) Advisors, General Biotechnology Catalyst Partner OrbiMed Advisors, 5AM Pharmaceutical, Biotechnology 6/12/2012 Ventures, Third Rock Igenica Life Sciences and 33 (Medical) Ventures, Column Group Biotechnology Source: Bloomberg, Factiva, and Press
6.6. Outlook M&A activity in the pharmaceutical, life sciences and biotechnology segment is expected to increase during the remaining part of 2012 and in 2013 as more and more companies might continue to look for acquisition targets as alternative revenue sources amidst patent losses. Generic and biologic drug players would remain top choices for strategic as well as financial investments. Moreover, due to their more targeted approach, innovation and specific disease focus, biologics is expected to be on the rise for the next few years.
19 Healthcare M&A Watch – Q2 2012
7. Regional Landscape
7.1. M&A Deals by Region
M&A Deals by Region, Q2 2012
100 18
90 16
80 20 14
70 1 billion $ 12 60 7 10 50 7 3 1 8 40
Number of DealsNumber 63 11 6 30 2 30 37 3 4 20 7 26 17 2 1 2 10 12 16 12 8 8 6 8 0 2 3 4 4 0
Pharmaceutical, Life Sciences and Biotechnology Payer Vendor Provider Deal Value
Source: Bloomberg, Factiva, and Press
The Western region continued to lead in M&A activity with 92 deals, accounting for approximately 28.7% of the Source: Bloomberg, Factiva, and Press total deal volume
The Western region was the most active region in the vendor segment, accounting for 63 deals; California accounted for 79.4% (50 deals) of such transactions
The provider segment was the most active by deal volume in the Southeast and Midwest regions
Maximum deals in the pharmaceutical, life sciences and biotechnology segment were recorded in the Western region, followed by New England
Biotechnology-related deals signed in Q2 2012 were highest in the Western region
The New York-New Jersey region continues to dominate the regional M&A landscape; in Q2 2012, the region accounted for 32.7% of the total disclosed deals by value, though deal volume fell nearly 49% q-o-q
Pharmaceutical, life sciences and biotechnology segment from New York-New Jersey region contributed 27% to the total disclosed deal value in Q2 2012; providers from Midwest trailed with 21.5%
Deal value continued to be the lowest in the Southwest region, accounting for only 0.2% of the total disclosed value
The Southwest region observed a steep fall of 51.7% in quarterly deal volume, from 29 in Q1 2012 to 14 in Q2 2012
20 Healthcare M&A Watch – Q2 2012
M&A Deals by Region (continued)
M&A Deals by Region, Q2 2012
100 18
90 16
80 20 14
70 1 billion $ 12 60 7 10 50 7 3 1 8 40
Number of DealsNumber 63 11 6 30 2 30 37 3 4 20 7 26 17 2 1 2 10 12 16 12 8 8 6 8 0 2 3 4 4 0
Pharmaceutical, Life Sciences and Biotechnology Payer Vendor Provider Deal Value
Source: Bloomberg, Factiva, and Press
The Mountain-Plains region continues to remain sluggish with only 13 deals in Q2 2012
The Mid-Atlantic, which was one of the most active regions in pharmaceutical, life sciences and biotechnology segment in Q1 2012 with 19 deals, had only three deals announced in the segment in Q2 2012
Of the 39 total private equity and venture capital deals in the Western region, 31 were in the vendor segment, out of which 74.2% (23 deals) were in healthcare equipment
In Q2 2012, 49 cross-border deals were signed; transactions involving Europe accounted for 67.3% of the cross-border activity
U.S.-based companies invested close to $16.5 billion in outbound deals and attracted nearly $4 billion in inbound deals (based on deals with publicly disclosed value) in Q2 2012
The vendor segment remained the most active healthcare segment in cross-border deals, followed by pharmaceutical, life sciences and biotechnology
21 Healthcare M&A Watch – Q2 2012
7.2 Acquirer and Target Concentration
Acquirer and Target Concentration, Q2 2012
90 79 80 70 60 51 48 50 46 38 40 35 34
of Deals Number 30 27 25 17 18 20 14 14 10 12 10 7 0
Acquirer Target Source: Bloomberg, Factiva, and Press
A total of 117 private equity and venture capital deals were registered in Q2 2012, with 33.3% in the Western region; Midwest followed at a distant second with a 17.1% share
The majority of target companies and buyers were based in the Western region, followed by Midwest and Southeast regions, respectively
For 79.3% of the deals, deal concentration was highest in California within the Western region; of the total deals in the Mid-Atlantic region, Pennsylvania accounted for 73.1% of the deals during Q2 2012
In Q2 2012, the total number of healthcare M&A deals in the U.S. as well as in individual regions decreased or remained flat with an exception of the Midwest region that registered an 18% quarterly growth
Walgreen and Alliance Boots signed the highest (disclosed) value deal for $6.6 billion in Q2 2012. It was a cross-border deal involving an acquirer from the Midwest region
In Q2 2012, the Southeast region-based providers, such as Mednax and Home Health International, were involved in four and three acquisitions, respectively
22 Healthcare M&A Watch – Q2 2012
8. Appendix
Data Source
This report was researched and compiled by contributing data and analytics partner WNS Global Services (www.wns.com). Additional source references questions can be addressed by contacting Modern Healthcare’s Research Department at 312-649-5459 or [email protected].
Industry Segmentation Group Segment Sub-segment Hospitals/ Clinics Nursing Homes/ Home Care/ Senior Care/ Rehabilitation Centers Provider Healthcare Provider Behavioral Healthcare Physician Practice Management Pharmacy Benefit Management/ Pharmacy Services Medical Devices and Products Diagnostic Equipment/ Kits Healthcare Equipment Direct Marketers Distributors Medical Information Systems Healthcare Information Electronic Medical Records Vendor Systems Enterprise Information Systems Specialized/ Other Software Diagnostics/ Testing Labs Healthcare REITs Medical Services Ancillary Services (includes healthcare consulting, staffing, marketing, logistics, allied services etc.) Insurance Health Insurance Payer Managed Care HMO/ PPO Medical Drugs (including generics) Drug Delivery Systems Pharmaceutical, Pharmaceutical Medical – Wholesale Drug Distribution Life Sciences and Therapeutics Biotechnology Contract Research/ Clinical Research Organizations Biotechnology Biotechnology (Medical)
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