Health Deals Pick Up As US Overhaul, Credit Worries Easehttp://online.wsj.com/article/BT-CO-20100517-714063.html?mod=WSJ_Deals_LEFTLatestHeadlines
With a pair of health-care transactions this weekend, the health sector is showing signs of deal activity as the credit crisis and uncertainties surrounding the U.S. coverage overhaul recede.
Sunday, drug maker Astellas Pharma Inc. (4503.TO) clinched a $4 billion deal for cancer-drug maker OSI Pharmaceuticals Inc. (OSIP); meanwhile, on Monday, hospital operator Universal Health Services Inc. (UHS) agreed to acquire mental-health inpatient clinic operator Psychiatric Solutions Inc. (PSYS) for about $2 billion, plus the assumption of $1.1 billion in debt.
Merger-and-acquisition professionals, based on discussions they're having with clients, expect more deals this year involving hospitals, pharmacy benefit managers, medical-device makers and drug distributors, as well as follow-on and initial public offerings. For example, the nation's largest hospital chain, HCA Inc., recently announced plans to go public again, although the offer hasn't priced yet.
As for M&A, the health-care sector has announced more than $27.4 billion in deals so far this year, with pharmaceuticals transactions accounting for more than $9.7 billion and instrument deals some $9 billion, according to Dealogic. More than $179.4 billion in health M&A transactions were announced in 2009, with drug mergers accounting for more than $144 billion of that figure and instrument deals $11 billion.
The size of hospital M&A deals announced so far this year--$1.3 billion--already has exceeded the dollar figure for all of 2009, and that doesn't include the Universal Health deal, which Dealogic placed in another category.
With much of the uncertainty surrounding the health-care overhaul resolved, and with credit markets more open, companies that have been constrained in the past year or more are looking to make acquisitions or raise capital.
While the pharmaceutical industry continued to engage in major acquisitions in the past two years, activity in other health-care subsectors slowed. That appears to be changing, based on increased activity seen in investment banking and related legal practices.
"The markets are selectively hot," said Marc Cabrera, managing director and head of health-care investment banking at Morgan Joseph & Co., a middle-market investment bank.
Big health-care-sector companies with in-house M&A operations "are actively scouring the landscape for acquisition opportunities," especially among private companies, said Cabrera, who represents companies that might be acquired.
"I think there are better investment opportunities in the private sector," Cabrera said, adding that public valuations are pretty rich.
Pharmacy chains and drug distributors are among those looking to consolidate or make niche acquisitions, he said. Meanwhile, according to investment bankers, medical-device companies are looking at smaller, emerging technology companies to help drive growth.
Adam Berger, head of the M&A group at health-care investment bank Leerink Swann, said biotech and pharmaceutical companies, which maintained a heated merger pace the past few years, have been less active in recent months. He expects activity in those subsectors to remain strong, although perhaps not as frenzied as in the past few years.
Astellas's deal for OSI represented the rationale found in other pharmaceutical deals, namely the acquirer buying a company to help ease increasing generic competition and renew its research pipeline.
As for health services, it's "a very different story" for companies like hospitals, pharmacy benefit managers and nurse-staffing companies, Berger said.
Health services, more sensitive to tight credit markets, saw a "significant drop in M&A activity in 2008, 2009," Berger said. Now pressures that have weighed down the market are easing, stock prices are up, credit markets are opening and the health-care law is more certain, which should lead to more deals, he said.
Toby Singer, a Jones Day law-firm partner who works on health-care mergers, said she is busier these days than she has been in a long time.
"Not-for-profit health systems are increasing their M&A activity substantially," Singer said. "They're thinking that aligning with other health-care providers is going to put them in a better position to deal with health-care reform."
Singer doesn't see for-profit health insurers doing much now in terms of M&A.
On the financing side, "the markets are very much open for capital raising, which is a sea change," Leerink's Berger said.
He sees markets opening for equity capital-raising through initial or follow-on offerings for biotech, specialty pharmaceutical and pharmaceutical companies in particular, and also for health-care information technology.