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Grant Thornton - Healthcare M&A Snapshot 2012
1. Health care
M&A snapshot
Grant Thornton Corporate Finance July 2012
Reviewing the 2011
health care industry
A dynamic climate The other major ruling partially upheld the Medicaid
The past year has been exciting for health care M&A, with expansion under the PPACA. However, the penalty clause that
approximately 1,250 transactions reported during 2011 in a allowed the federal government to withhold all Medicaid funds
nearly 10% increase from 2010, making it one of the most active from states refusing to comply with the expansion was struck
deal markets in history. Issues such as health care reform, rising down. Compliance with the new Medicaid eligibility standards
costs of care, expiring patents and the move toward digital will now be decided on a state-by-state basis.
health records are fueling a lively deal market and have powered While some of the significant provisions in the PPACA do
significant M&A activity. The aging of the U.S. population is not take effect until 2014, the act has certainly influenced the
another issue with widespread implications, though its impact M&A markets. Compliance cost concerns have driven many small
tends to be a secondary factor in M&A trends. In the next few organizations to consider selling to larger rivals, and we expect
pages, we will delve into some of these issues, highlighting their this trend to continue. As the ultimate impact of the legislation
impact on the deal market and commenting on how future unfolds, M&A will play a key role as businesses take advantage
M&A trends might be affected. of new opportunities and attempt to mitigate new risk factors.
continued >
The Patient Protection and Affordable Care Act
The Patient Protection and Affordable Care Act (PPACA),
signed into law on March 23, 2010, requires major changes to
current health care legislation. The Supreme Court held the
individual mandate, one of the most controversial aspects of the
law and one of the major areas under consideration by the
court, valid under the taxing power of the U.S. Congress.
2. Widespread cost pressure One other notable recent development is the FTC’s recent
Softening revenues and rising costs throughout the health care ruling that ProMedica Health System’s August 2010 acquisition
industry have put many smaller or less well-capitalized providers of rival St. Luke’s Hospital was likely to substantially lessen
under significant financial stress. Many of these facilities face competition and increase prices for general acute care and
the stark choice of either joining a larger organization or risking obstetric inpatient hospital services sold to commercial health
financial distress on their own. In some cases, facilities that chose plans in the Toledo, Ohio, area. The ruling calls for ProMedica
to weather the storm ended up in bankruptcy, with either a sale to unwind the transaction by selling St. Luke’s Hospital and
or closure as the ultimate outcome. supporting the transition to a new qualified owner. Whether
this ruling signals a trend in FTC action or a one-time event,
Health care facility M&A/bankruptcy operators on either side of an M&A transaction need to be
Hospitals and other health care entities have felt significant aware of the competitive environment and take steps to address
effects from both increased costs and decreased revenues due to potential FTC concerns proactively.
a combination of reimbursement rate pressure and collections Further, in a somewhat less well publicized decision, the
issues. In response, health care facility M&A activity has risen Supreme Court agreed to hear a case involving the acquisition
markedly as providers seek to take advantage of economies of of Palmyra Medical Center (PMC) by the Hospital Authority
scale by acquiring smaller or less well-capitalized organizations. of Albany-Dougherty County (Georgia). As a state-run entity,
The number of health care facility M&A transactions acquisitions by the Authority are currently immune to FTC
increased 32% in 2011, as hospitals, clinics and other medical oversight. By agreeing to hear the case, the Supreme Court will
facilities combined in order to address financial and strategic set law on whether the FTC can intervene when a state-created
concerns. Deal value declined by 11% from $15 billion to entity is involved, potentially leading to expanded oversight
$13.3 billion as a result of two sizable deals in 2011: Ventas’ authority for the agency.
acquisition of Atria Senior Living for $3.1 billion and Universal
Health Services’ purchase of Psychiatric Solutions for more than Insurers quietly buying medical practices
$3 billion. Excluding the impact of these two transactions, deal Insurers have a vested interest in controlling costs, and some
value increased 52% in 2011. carriers are experimenting with acquiring physician groups in an
Going forward, health care facility M&A activity is likely attempt to align doctors’ incentives with their own. The concept
to remain active. Despite the slight uptick in the U.S. economy, is straightforward: A private physician group is financially
cost pressure will continue to affect health care facilities and fuel motivated to maximize billings by performing large numbers
M&A transactions. While the PPACA is intended to address of medically justified tests and procedures, while a group owned
some of these issues, its ultimate effects are still in question. by an insurer can have an incentive structure that is focused
on minimizing the use of diagnostic tests, albeit in a medically
Health care facility M&A activity responsible way. Many people believe there is a gap between
what patients actually need in terms of tests and what doctors
Number of transactions
Deal value ($B) often order. They believe bringing patient care under the same
Deal value ($B)* corporate umbrella as insurance can help close that gap and
stem rising health care costs. Further, certain provisions of the
Number of Deal value
transactions ($B) PPACA have invigorated this trend and will likely continue to
400 $30 fuel M&A in this area.
Recent examples of insurers buying physician practices and
$25 hospitals include the following:
300 • UnitedHealth Group (NYSE: UNH), a health insurance
$20 company, acquired Monarch, an association of physicians in
private practice in California, during 2011.
200 $15
• In August 2011, WellPoint (NYSE: WLP), a $60 billion
health benefits company, closed on its acquisition of
$10
100
CareMore Health Group, a senior medical group and
$5 health plan provider.
continued >
2007 2008 2009 2010 2011
* Discounts two transactions that transpired in 2010
Sources: GTCF research; certain financial information provided by S&P Capital IQ
2 Health care M&A snapshot June 2012
3. In what is perhaps an even bolder move, an east coast-
based, independent licensee of the Blue Cross and Blue Shield
Association, announced its intent in 2011 to purchase a large
regional hospital system comprised of a financially distressed
operator of five hospitals.
There are factors that might reverse this trend, however.
The prospect of changing the incentive structure for physicians
raises legitimate concerns about the quality of care. Patients
don’t want cost to their insurer to be a factor in determining
their treatment. If insurers can convince consumers that the
current standards of care will be preserved and the expected
cost savings actually materialize, the acquisition trend might
continue; however, if patients resist these practices or costs do
not decline as expected, insurers may abandon this strategy.
Cost pressure on insurers, care providers and other entities
in the health care space is an ongoing issue that is exacerbated
by the aging of the U.S. population (although the additional
care associated with the aging of the boomers presents revenue
opportunities). This is also a political hot-button issue, with 2011, recently acquired King Pharmaceuticals, a specialty
widespread disagreement as to both causes and potential pharmaceutical discovery and clinical development company, for
solutions. In the near term, it appears that costs will continue to $3.6 billion in cash. Pfizer believes the acquisition diversifies its
increase, contributing to, among other things, strong incentives product revenue and expands its presence in pain management.
for companies to seek efficiencies and strategic partnerships Another example is the Sanofi-Aventis acquisition of U.S.
through M&A activity. biotechnology company Genzyme for almost $20 billion. The
deal is intended to help Sanofi rebuild its pipeline given its loss of
The patent cliff patent protection on Lovenox in 2010 and its loss of protection
Pharmaceutical companies also face substantial strategic and on Plavix in 2012.
financial challenges in the current market. For example, nine of While this patent cliff is a somewhat extraordinary event, the
the top 10 best-selling drugs have lost or are scheduled to lose motivation for M&A in the pharmaceutical sector remains strong
patent protection in the next five to six years — a time period because of the tremendous investment in R&D needed to bring
often referred to as the patent cliff. In response, pharmaceutical a single drug to market. If they are acquired, smaller R&D firms
companies have stepped up R&D and implemented cost- with promising drugs can often recoup some of their investment
efficiency programs. Further, many companies are embracing and better the chances that their drug will make it through the
M&A as a way to supplement R&D during their quest for the onerous approval process. Likewise, larger companies with the
next lucrative drug. capital to pursue acquisitions invest heavily in their courtship of
For example, Pfizer, which lost exclusivity on the underlying up-and-coming firms. Given today’s economic pressures,
formula for Lipitor in the United States during November we expect this trend to continue.
continued >
Top 10 drugs for 2010 by U.S. sales
2010 U.S. product
Rank Drug Treatments Marketers U.S. patent expiry
sales ($MM)
1 Plavix Blood clots Bristol-Myers Squibb + Sanofi $6,154 2012
2 Lipitor Cholesterol Pfizer $5,329 2011
3 Seretide/Advair Asthma GlaxoSmithKline $4,026 2016
4 Seroquel Mental disorders AstraZeneca $3,747 2012
5 Epogen/Procrit Anemia Amgen + Johnson & Johnson $3,594 2013
6 Actos Diabetes Takeda $3,582 2012
7 Abilify Mental disorders Otsuka + Bristol-Myers Squibb $3,348 2015
8 Enbrel Arthritis/ psoriasis Amgen + Pfizer $3,304 2028*
9 Singulair Asthma/allergies Merck & Co. $3,219 2012
10 Remicade Arthritis/ psoriasis Johnson & Johnson $3,088 2018
* Enbrel was originally set to expire in 2012 in the U.S., but it has been extended for another 16 years.
Source: EvaluatePharma
3 Health care M&A snapshot June 2012
4. Electronic health records
U.S. target announced health care information technology M&A
Digitization of health records has been accelerating for a number
of years as providers throughout the health care sector have Number of transactions
Deal value ($B)
sought ways to offer more efficient and effective care while
maximizing the benefits to the patient and minimizing risk Number of Deal value
transactions ($B)
associated with incomplete medical records. In response, the
health information technology (HIT) industry is expanding 125 $7
significantly as competitors vie to provide new applications $6
within the lucrative and growing health care market. M&A 100
activity has been a natural mode of competition, allowing $5
companies to secure new technologies and capture additional 75
$4
market share.
Further, the American Recovery and Reinvestment Act 50
$3
of 2009, commonly known as the stimulus bill, includes
$2
approximately $27 billion in incentives for eligible institutions
25
(including hospitals) that install and “meaningfully use” $1
electronic health records (EHR). These federal subsidy payments
commenced in 2011 and diminish in each subsequent year until 2007 2008 2009 2010 2011
2015, when providers start facing penalties for noncompliance.
Sources: GTCF research; certain financial information provided by S&P Capital IQ
While the inclusion of funds was in response to underlying care
and economic factors, the stimulus money is driving increased
growth in the HIT sector and fueling expanded M&A activity.
As depicted in the chart to the right, the number of
U.S.-based HIT M&A transactions rose by almost 7% in 2011,
while deal value increased 72%. The dramatic rise in value
was partially due to the acquisition of Emdeon by private U.S. target announced health care M&A activity
equity firms Blackstone Capital and Hellman & Friedman for
Number of transactions
nearly $3.5 billion. Emdeon offers payment cycle and revenue
Disclosed deal value ($B)
management solutions to thousands of providers and payers Disclosed deal value ($B)*
within the U.S. health care system.
Number of Deal value
Continued M&A activity is expected in this market as
transactions ($B)
technology quickly evolves to provide better, faster access to
1400 $250
patient records across a broader spectrum of care providers.
1200
$200
Trends in the metrics
1000
M&A activity
The number of U.S.-based health care M&A transactions rose $150
800
nearly 10% — from 1,141 transactions in 2010 to 1,248 in
600
2011 — which is not surprising given the improved economic $100
outlook and credit markets. Deal value increased more 400
significantly, rising almost 43% from $118 billion in 2010 to $50
$170 billion in 2011; this amount exceeded 16% of total M&A 200
value in the United States for the year. Taking a closer look at
deals from an industry subsegment perspective, we see a sharp 2005 2006 2007 2008 2009 2010 2011
uptick in the number of health care facility transactions over the * Excludes two mega deals: Pfizer’s acquisition of Wyeth and Merck’s purchase of Schering-Plough
past two years. Sources: GTCF research; certain financial information provided by S&P Capital IQ
continued >
4 Health care M&A snapshot June 2012
5. U.S. target announced health care M&A activity by segment (Number of U.S. transactions)
2009 2010 2011
Pharmaceuticals/
biotechnologies
Health care facilities/
providers
Health care information
technology
Health care
intermediaries
Health insurance
companies
0 100 200 300 400 500 600
Sources: GTCF research; certain financial information provided by S&P Capital IQ
Notable transactions announced in 2011 include • In April 2011, Johnson & Johnson (NYSE: JNJ) announced
the following: its intent to acquire Synthes Inc. (SWX: SYST.VX),
• Express Scripts Holding Company (Nasdaq: ESRX) a medical device company, for approximately $20 billion.
acquired Medco Health Solutions for $33 billion. This deal The combined company would have greater product
closed despite months of lobbying by pharmacy benefit development capabilities and a stronger global reach.
managers who believed the merger would create a monopoly. Moreover, Johnson & Johnson would gain a significant share
The deal was ultimately approved because representatives of the trauma device market. The deal closed on June 14, 2012.
from both sides of the deal convinced the FTC that the
merger would create efficiencies, allowing the combined Public company performance
company to drive down consumer costs. This deal closed The Grant Thornton Corporate Finance LLC (GTCF)
in April 2012. Health Care Index reflects data from health care participants
that are broadly categorized as pharmaceuticals/biotechnologies;
Grant Thornton Corporate Finance health care index facilities; HIT; intermediaries (e.g., distributors, equipment and
supply manufacturers, service providers); and health insurance
Pharmaceuticals/biotechnologies Health insurance companies
Health care intermediaries Heath care information technology companies. Reviewing the relative performance of these
Health care facilities/providers S&P companies against a benchmark, such as the S&P 500, can provide
insight into how the industry is perceived by well-informed
200%
investors and what is expected in terms of future performance.
175% The public market information indicates that all indices
have generally increased since March 2009, with the HIT index
150%
growing at the strongest pace. The only index that has consistently
125% underperformed the S&P 500 is the insurance sector. However, as
100% shown at left, it has recently started to perform on par with (and
even outperform) the broader market. Going forward, this sector
75%
will likely gain momentum. Corporate Research Group estimates
50% steady profit growth of 8% for the insurance sector over the next
25% year in its Outlook for Managed Care 2012 report. Managed
care is an important driver of the overall health insurance market
Dec–07 Dec–08 Dec–09 Dec–10 Dec–11 because a majority of people with private health insurance are
covered by a preferred provider organization (PPO) or health
Sources: Public company filings; certain financial information provided by S&P Capital IQ maintenance organization (HMO) plan.
Note: The GTCF health care index reflects the average stock price for all companies in each
category relative to 12/31/07. continued >
5 Health care M&A snapshot June 2012
