Thanks to advances in science and healthcare, people are living longer than ever. As they age, demand for healthcare products and services increases. One of the most significant demographic trends impacting healthcare is the aging baby boomer generation. As about 75 million American baby boomers grow older, demand for healthcare continue to will increase rapidly.

Today, companies are taking note of these market changes and using acquisitions to quickly capitalize on this opportunity for growth.

Just this week eyeglass giants Luxottica and Essilor announced a merger in order to take advantage of ideal market conditions. The acquisition will allow the company to benefit from strong demand in the eyeglass market that is only expected to grow.

In the heart disease sector, medical device companies are also acquiring in order to meet the growing needs of patients. Medtronic acquired HeartWare International for $1.1 billion, Teleflex acquired Vascular Solutions for $1 billion and Edwards Lifesciences acquired Valtech Cardio for $690 million. In this sector there is “huge unmet needs” according to Edwards Lifesciences CEO Michael Mussallem.

The primary driver of these acquisitions is swiftly meeting demand. Rather than waiting to build their own solutions, with acquisitions companies can rapidly take advantage of market conditions today and position themselves for future growth.

The ability to meet future demand is key to the success of any company. Take a look at your own industry and market. Where is demand going?

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Pfizer and Allergan have announced that they are abandoning their $160 billion merger.

This resulted from a political storm around tax inversions, a technique whereby US companies relocate abroad to avoid the high US corporate tax rates. The Treasury department took action to insert new rules that effectively killed the financial benefits of the deal.

According to their agreement with Allergan, Pfizer will pay a breakup fee of $150 million.

Politics aside, this is just a small reminder of why acquisitions that are not carefully planned can prove to be costly errors. Could Pfizer have anticipated the government’s intervention? That’s hard to know, but in principle buyers need to be looking ahead at potential roadblocks that could jeopardize a deal.

Transactions unfold in stages, and each stage can present its own challenged. In particular, a signed letter of agreement (LOI), although an important milestone, does not ensure that the deal is done. There’s a lot of that can happen between LOI signing and the final acquisition agreement. It’s essential to make your plans with that in mind.

Assuming yours is a middle market company, you may not experience the same type of regulatory scrutiny that publicly traded companies do. However, there’s no shortage of other issues that may show up, such as owner hesitancy, problems uncovered by due diligence, cultural collisions and many more.

And the story doesn’t end when you finally ink the acquisition contract. You may “successfully” acquire a company only to see things fall apart during integration.

With every M&A transaction, there are many moving parts. It’s the task of your acquisition team, including both your own staff and your outside advisors, to consider them all. To name a few, you must consider regulations, taxes, legal challenges, due diligence, valuation, cultural integration and—never to be forgotten—your overall strategic purpose.

With any business initiative worth taking, it’s impossible to eliminate risk—but you can and should minimize it. In M&A, the best way to do this is to follow a system that’s been proven in prior acquisitions. I call this the “Roadmap to Acquisitions” and I consider it the single most decisive factor in M&A success. Take a holistic view of the acquisition process from the start to finish, and be both proactive and strategic. In other words, know your end result as best you can, and anticipate all the hurdles you may have to overcome to reach it.

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As we near the end of the fourth quarter, everyone is wondering what will happen in 2016. Will the frenzied M&A activity of 2015 continue into the new year?

There seem to be mixed reviews on what activity will look like next year. The Intralinks deal flow predictor indicates a 7% increase in global M&A in Q1 2016, but Mergers & Acquisitions Magazine has been citing a downward trend in the middle market for the past few months.

On the other hand, on a recent Deal Webcast “2016 Middle Market Outlook,” dealmakers were a bit more hopeful, expecting to see activity continue due to the high levels of dry powder and capital on the sidelines, while they did admit there may be a slight downturn.

The lending environment will be similar in 2016 to what it was in 2015 and in the middle market private equity will continue to be highly competitive, according to Michael Fanelli of RSM.

Healthcare and Technology Will Dominate

The Affordable Care Act brought about widespread changes to the healthcare industry, spurring a wave of mega-mergers by massive pharmaceutical companies. Despite this wave of mega-deals, for the most part much of the uncertainty surrounding ACA seems to have worked its way out of the middle-market companies. Tim Alexander of Harris Williams says that by and large, healthcare has become less of a due diligence item for dealmakers, especially those in the upper middle market.

On the other hand, in the lower middle market, the ACA may still raise some red flags, especially for businesses with part-time employees or ones that don’t have healthcare plans at all. While some sellers may have thought about the impacts of ACA, many are waiting to begin talks with a buyer before engaging professionals to deal with these issues, according to Fanelli.

The focus on healthcare is not only due to changes brought about from the Affordable Care Act, but is also indicative of a larger health and wellness trend we’re seeing in the U.S. Expect shakeups in the consumer and food and beverage spaces as people focus on healthier, organic specialty products.

As for technology, there’s plenty of disruption that will continue over the next one to two years, with a constant flow of innovative startups. This continuing trend will have its own impact on the middle market.

The U.S. Middle Market Remains Strong

For the most part, all three dealmakers agreed that middle market M&A is much stronger in the U.S. than it is cross-border or internationally. Most investors see the U.S. as the locale where they can expect their highest returns. This regional focus is not unique to the middle market: In the first 9 months of 2015, the U.S. accounted for 47% of global M&A transactions ($1.5 trillion).

Engaging with Sellers Remains Critical

When it comes to deal-making, building a connection with the owner and sharing your strategic vision remain the critical starting points. There are numerous reasons why an owner may decide to go with a financial buyer over a strategic buyer, even though technically strategic buyers should have an advantage from a cash perspective. In our experience, the same has been true (less money for strategic acquisition vs. financial). What it comes down to is really understanding the owner’s priorities and what he or she wants out of an acquisition. Hint: It’s not always more money.

As Marc Utay of Clarion Capital Partners said, echoing one of our key principles: “Price is important, but not the most important thing. It [the company] is like a child to them.”

 

The pharmaceutical and healthcare industry shows no sign of slowing down in terms of M&A and consolidation. There have already been $427 billion in transactions according to Dealogic data.

Last week Pfizer and Allergan announced that they are currently in merger talks to form one of the largest pharmaceutical companies in the world. Certainly one motivation for the deal is to capitalize on lower tax rates outside the U.S. Allergan is based in Ireland and is  expected to enjoy a tax rate of just 15% this year compared with U.S.-based Pfizer’s rate of 25.5% last year. Of course, this wouldn’t be the first tax-incentivized merger we’ve seen in healthcare.

Meanwhile, Walgreens and Rite Aid plan to combine in a $9.4 billion acquisition — another mega-deal to fuel the fires of M&A activity in 2015. If the acquisition moves forward the new company would own 128,000 drugstores, consolidating two of the three largest drugstores in the U.S.

Big Healthcare Gets Bigger

These large mergers and acquisitions illustrate a phenomenon that I’ve been talking about for quite some time: what I call the “dumbbell” effect. At one end of the dumbbell, large corporations continue to size up, and at the other end small mom and pops and startups are flourishing. In between, middle-market businesses are getting squeezed.   The dearth of smaller, middle-market companies is easy to identify in the retail space, where it’s visibly more challenging for independent outfits to survive.

For example, in the restaurant industry, it’s increasingly hard for independent players to afford the costs of commercial leasing as chain restaurants exploit the economies of scale and their sheer purchasing power.. In some ways it’s similar for the healthcare industry, where the flurry of deal activity is about consolidation, purchasing power, retail leases, and the most favorable contracts with retailers and insurers. Smaller companies are also under enormous pressure to deal with the cost of complying with regulations.

The big pharmacy mergers are mostly about grabbing market share on both the West and East coasts. Walgreens and Rite Aid both have a strong presence in California and New York and Massachusetts, while CVS’s acquisition of Target Pharmacy strengthens its presence in the Pacific Northeast.

Whatever the appearances, Walgreens is using its acquisition of Rite Aid to ensure the company is large enough to compete in terms of distribution, channels, and customers. When compared to CVS, Walgreens isn’t huge ($76.4 billion in 2014 revenues vs. $139.4 billion 2014 revenues). Even at that scale, it’s becoming more difficult to be the smaller player simply because of the burden and cost of regulatory compliance and ensuring that you have the right healthcare plans, contracts and exchanges to remain competitive.

Advice to Middle Market Companies

In the current climate, my advice for middle-market companies is this: Figure out how to continue growth by whatever means necessary. You’ll probably have to do something different than simply grabbing market share because you don’t have the resources of a a huge publically traded company. A strategic use of acquisitions can be a smart way around this dilemma. What’s certain is that if you don’t take action you risk becoming a “me too” player, or simply obsolete.

Wherever there is a challenge, there is also an opportunity to think outside the box and differentiate yourself – whether it’s in terms of service, technology or something else unique to your business. Middle-market companies have one key advantage: the freedom to be agile and offer new, insightful solutions for their customers in ways that large corporations can’t. Keep your growth strategy top of mind as you think about your company’s plans for 2016 and beyond.

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Last week alone, there were three major consolidations in the pharmaceutical space:

  1. Teva will acquire the generic business of Allergan
  2. Hikma pharmaceuticals will acquire Roxane, Boehringer Ingelheim’s generic drug business
  3. Mylan will acquire Perrigo

These three deals in just a few days reflect the trend of pharmaceutical consolidation as companies seek new products in order to fill their pipelines and gain scale.  Consolidation is not limited to pharmaceuticals, but is rampant throughout the healthcare industry. Global healthcare M&A reached $398.5 billion as of July 23 (an 80% increase from one year ago), according to Reuters data. The Supreme Court’s ruling to uphold the Affordable Care Act will likely drive more activity.

Earlier, we saw major health care insurers Aetna and Humana announce a merger and Anthem and Cigna agree to an acquisition.  We can expect more robust mergers and acquisitions activity, including consolidation, in 2015.

Here’s what you need to know about this most recent wave of pharmaceutical deals:

Teva to acquire Allergan’s generic drug business

Teva will pay $40.5 billion in cash and stock for Allergan’s generic business, making it the largest deal in Teva’s history. The acquisition solidifies the Israeli drug company’s position as the No. 1 maker of generic drugs. Last year Teva had $20.3 billion in revenue. The deal will allow for stronger economies of scale, which is extremely important for low-margin generics.

Teva, on the prowl for acquisitions, was caught up earlier this year in a battle with Mylan Pharma. Its unsolicited offers were rejected on numerous occasions while Mylan simultaneously pursued an acquisition with Perrigo. (At the time, Perrigo had also rejected Mylan’s numerous offers).

Reports say this new acquisition with Allergan allows for a “graceful exit” from its bid for Mylan.  Teva executives cited a better cultural fit with Allergan, which it had approached a year ago. Ultimately, a willingness to get the deal done is probably what made the transaction most attractive.

Allergan has been busy acquiring and divesting as well.

Allergan became the third largest drugmaker after being acquired by Actavis in March 2015. Allergan plans to use the revenue from the generics sale to fund a large acquisition; it wants to accelerate its growth into a “branded growth pharma leader.” Allergan acquired Naurex (depression drug developer) on July 26 for $560 million.

Mylan to Acquire Perrigo

As noted above, Mylan was caught up in an unsolicited offer from Teva while also pursuing Perrigo in April of this year. Fast forwarding three months, Mylan has received approval from the European regulators clearing the way forward for its $28.9 billion acquisition of Perrigo. The combined company will be the world’s top seller of low-price medications, with more than $15 billion in annual revenues.

Hikma to acquire Roxane

Hikma will pay $2.65 billion in cash and stock for Roxane. Like Teva, Hikma is interested in building its generic drug business, especially in the US market. The acquisition will bolster Hikma’s position in the U.S.  and “significantly expand” its manufacturing and technological capabilities.

Based in Amman, Jordan, Hikma develops, manufactures and markets branded and nonbranded generic and licensed products in Europe, the Middle East, North Africa and the United States. It had revenues of $1.49 billion in 2014 and its generics business generated $216 million in revenue.

Roxane Laboratories, founded in 1885 in Columbus, Ohio, was acquired by German drugmaker Boehringer Ingelheim in 1978. Hikma previously acquired other Boehringer Ingelheim companies including Bedford Laboratories, an injectable business in the U.S., in 2014. Hikma expects the acquisition to generate revenues of $725 million to $775 million by 2017.

Healthcare M&A Trends to Watch

Below are some trends we’re seeing in the market today:

  • Even more consolidation throughout the industry. Look to insurers as the next wave.
  • Buyers feeling pressure to execute deals now since many in the industry are consolidating.
  • Pharmaceutical companies looking to increase margins either by gaining economies of scale (like Teva and Hikma) or through acquiring expensive, high-margin, brand-name drugs.

 

 

On May 18, Endo announced it would acquire Par Pharmaceutical for $6.5 billion cash and $1.5 billion stock. The acquisition is the latest consolidation in a robust M&A market, especially in the healthcare sector. Endo has stated multiple reasons for the deal, including building its generic drug platform as well as significant operational and tax savings.

The transaction will save the company $175 million in tax and operational synergies the first 12 months. While these savings are an important part of the picture, they are not the primary driver for the deal.

Adding more products to build out Endo’s generic drug business is where real growth lies. The Wall Street Journal describes it this way: “Tax benefits are widely seen as juicing an otherwise hot deals market, particularly for health-care M&A over the past year and a half.”

Once the acquisition is completed, the expanded generic drug pipeline will be a gift that keeps on giving, unlike cost saving benefits, which can only be reaped once. New generic drugs will help Endo grow now, over the next few year, and for many years to come.

The acquisition will:

  • Create a generic drug business that is one of the top five as measured by U.S. sales.
  • Create one of the fastest-growing generic drug divisions in the industry
  • Add 100 products to Endo’s portfolio, some of which are more expensive, injectable medicines
  • Double revenue for the generic division

By acquiring Par, Endo is fulfilling one specific need – growing its generic drug business. This approach is what we call having only one reason for acquisition, which allows you to remain focused on your strategy for growth and increases your chance for success. Rather than trying to fulfill multiple needs with one acquisition, which can lead to a diluted and unfocused strategy, have only one reason for acquisition so that you have a clear path for moving forward.

If you do have multiple needs, you can always take a second bite of the apple, which is what Endo has done as a serial acquirer throughout the years. By acquiring multiple companies, Endo has grown considerably. Since 2013, the market value of the company has quadrupled.

Endo’s recent deals include:

  • Auxilium Pharmaceuticals, a Pennsylvania-based biopharmaceutical company, for $2.6 billion
  • Natesto (testoternoe nasal gel) for $25 million from Trimel BioPharam SRL
  • Generic pharmaceuticals company DAVA Pharmaceuticals for $575 million
  • Expanding in Latin America with Grupo Farmaceutico Somar, a privately owned pharmaceutical business based in Mexico City
  • The rights to Sumavel DosePro, a needle-free delivery system for subcutaneous use, from Zogenix Inc. for $85 million
  • Paladin Labs for $2.7 billion, which allowed the business to reincorporate in Ireland
  • Specialty generics company Boca Pharmacal for $225 million

There was a different strategic reason for each deal. For example, the Auxilium Pharmaceuticals transaction specifically focused on men’s health and urology while the acquisition of Grupo Famaceutico Somar focused on growing in key emerging markets in Latin America. Often frequent, smaller, strategic deals can help a company grow more effectively than a single large, transformative deal.

The Affordable Care Act still is impacting the healthcare industry, affecting players of all sizes from doctors’ offices, hospitals and medical device companies to large pharmaceuticals.

Mergers and acquisitions in the healthcare sector have doubled over the same period in 2014. According to Reuters data through April 24, a wave of mergers produced $193.9 billion in announced deals as drug manufacturers looked to restock their pipelines with generic pharmaceuticals.

According to the KPMG 2015 M&A Outlook, 84 percent of executives surveyed expect the Affordable Care Act to drive “significant” activity in healthcare, pharmaceuticals, and life sciences.

In the middle market, dealmakers are also expecting healthcare to skyrocket over the next 12 months. Executives cited consumer confidence, uptick in actionable leads, and urgency to close deals before a potential rise in interest rates.

Despite the wave of activity, not all of the announced deals are being executed.  Mylan has strongly rejected Teva’s $40 billion takeover bid, while Perrigo has rejected Mylan’s increased takeover mid of $33 billion.

The excitement is not limited to M&A deal-making alone. Investors also see opportunities in the industry. According to Pitchbook data, venture capital invested in the healthcare industry rose from $8.6 billion in 2010 to $13.1 billion in 2014.

Will Healthcare M&A Affect Me?

The short answer is yes.

Whether your business is directly involved in the industry or serves an adjacent market, the current wave of transactions is transforming the healthcare sector. These changes present new opportunities and challenges. We’ve found some of our clients in this space are growing at astonishing rates while others have hit roadblocks as they navigate the new regulatory and political environment.

Regardless of your situation you cannot expect to go about business as usual. If you’re involved in this space, be aware of market moves and take a close look at your business’s strategic plan.

What Should You Do?

Remain proactive and seek out opportunities for growth – either organically or externally. When thinking about your strategic plan, here are some pointers:

  • Consider future demand – What will your customers want in one, two, and/or five years? How will you fulfill this need? You may anticipate a demand in the next five years and begin internally developing a new product or service. Or you may acquire a new technology to rapidly fulfill a need. Perhaps you will pursue both strategies.
  • Adapt to changing market dynamics – How will the regulatory changes and political developments affect you? Where are new opportunities and how can you take advantage of them? What new challenges do you now face and how will you overcome them?
  • Pay attention to M&A activity – Whether or not you plan to acquire you cannot afford to ignore what is happening in healthcare M&A. What effect will consolidation or other deals by competitors or suppliers have on your business? Are you prepared for these changes?
  • Move quickly! – Develop a strategic plan and be prepared to move swiftly to execute it. Don’t act impulsively, but don’t wait around too long or the opportunity may be gone.

While it is impossible to predict the exact effect of the Affordable Care Act and robust healthcare M&A on your business, you do have the ability to study your options and remain proactive. Now is an exciting time in the industry; there are many opportunities for growth. Pursue them!

Explore your options for growth with the following tool. Download your free copy of the tool today. 

Finding Opportunities for Growth: The Opportunity Matrix

 

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Yesterday, Salix Pharmaecuticals accepted Valeant’s raised takeover offer of $10.96 billion in cash, ending the bidding war between Endo and Valeant for the gastrointestinal drug maker. Valeant’s new offer of $173 per share is about a 10% increase over its original offer of $158 per share. Valeant also paid $296 million for assets of bankrupt Dendreon, the maker of Provenge, an immunotherapy treatment for prostate cancer earlier this year.

Valeant’s acquisition of Salix is the latest in a wave of pharmaceutical acquisitions. Pharmaceutical M&A has nearly doubled in the first quarter of 2015 when compared to the same period in 2014. According to Reuters data, nearly $70 billion of deals in biotechnology and pharma have been announced this year. This trend will likely continue as big drug companies compete to build their pipelines.

Below I’ve outlined some interesting pharmaceutical deals from 2015:

Pfizer to buy Hospira $16 billion.

The acquisition will allow Pfizer to be a leading player in “biosimilar” drugs. “Biosimilar” drugs are lower-cost biotech drugs that compete with traditional biotech pharmaceuticals much like generic drugs. Biotech drugs are traditionally hard to copy, but biosimilar drugs are lowering the barrier. With the FDA approval of the first biosimilar drug, the market could expand to $20 billion by 2020.

Shire buys Meritage Pharma for at least $70 million.

Shire could pay an additional $175 million if certain milestones are met in this transaction. “Shire’s pipeline and strategic focus on rare diseases is further strengthened with the acquisition of Meritage, which also complements our strong GI capabilities,” said Shire’s Head of Research and Development, Philip J. Vickers.  Earlier this year, Shire also acquired NPS Pharmaceuticals to boost its rare disease drug pipeline.

Boston Scientific to buy Endo’s men’s health unit for $1.65 billion.

This is the first major acquisition for Boston Scientific since 2006, when it acquired Guidant Corp for $27 billion. Endo is shedding its’ men’s health business unit in order to refocus on its core pharmaceutical business. Boston Scientific will add the acquisition to its urology and women’s health department, creating a business worth $1 billion in sales.

Johnson and Johnson to Sell Cordis Unit for $2 billion to Cardinal Health.

Johnson and Johnson has been “strategically pruning” its portfolio to refocus on its core products and strategy. Last year, Johnson and Johnson sold its Ortho-Clinical Diagnostic unit to the Carlyle Group for $4 billion.

Using divestiture is a common way to refocus on core business units that are lucrative and in light with the company’s overall strategy. “This initiative is part of our ongoing disciplined portfolio management approach to focus on our most promising opportunities to help patients and drive growth,” said Gary Pruden, chairman of J.&J.’s global surgery group.

Abbvie to acquire cancer drug maker Pharmacyclics for $21 billion.

Pharmacyclics is the maker of Imbruvica, a blood cancer drug expected to reach $5.8 billion in sales by 2020. The acquisition will bolster Abbvie’s oncology unity and diversify its portfolio. Expanding the pipeline is essential to Abbvie’s success because the patent for its best-selling arthritis drug, Humira, expires in 2016. Once the patent expires, Humira sales will likely decrease as cheaper generic alternatives become available.

With all the deals announced, it’s probably safe to say that the pharmaceutical industry will remain active throughout 2015.

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Shire is buying NPS Pharmaceuticals for $5.2 billion in the first major deal of 2015. You may recall Shire received a lot of press last year for its planned inversion with AbbVie.

U.S.-based Abbvie planned to acquire Shire primarily for tax reasons, however the deal fell apart and as a result Shire received a breakup fee of $1.6 billion from Abbvie.

After Abbvie abandoned the deal in October last year, Shire had a fair amount of cash and was still in a vulnerable situation. At the same time the company was looking for ways to expand its growth so this transaction doesn’t come as too much of a surprise.

It is interesting, however, to note the premium Shire is willing to pay for NPS, which only earned $157.4 million in the first nine months of 2014. Shire is hoping through the acquisition to get more products, in particular rare disease drugs that have a higher value add and hopefully better reimbursements.

In 2015 you’ll be seeing more healthcare deals and companies continue to consolidate. Pharmaceuticals are struggling to fill their pipeline, especially as they come off a patent. While others in the healthcare space are still figuring out the how changes in reimbursements will affect their business. This is the first of many more healthcare deals.

Mergers and acquisitions for healthcare services were “extraordinarily strong” in the second quarter of 2014, according to analysis conducted by Scott-Macon.

The Affordable Care Act has changed the healthcare industry dramatically, spurring re-alignments across multiple sectors. A wide range of businesses conducted acquisitions in 2Q 2014, including hospitals, private equity, software solution providers and consulting firms.

Although large, transformative healthcare deals such as Valeant’s hostile takeover bid for Allergan and the Abbvie-Shire tax inversion make the news, it’s important to remember than many deals are smaller, privately held transactions. These smaller transactions can be advantageous by allowing companies to execute a growth strategy without exposing their plans to their competition.

For the remainder of the year, we can expect continued robust activity as healthcare stocks rise and U.S. companies look to increase scale as they adjust to the ACA.

Healthcare Services Mergers 2Q 2014

Valeant Pharmaceuticals International is determined to grow through acquisitions.  Already actively pursuing a deal with Allergan, the maker of Botox, Valeant is reportedly seeking another contact lens company. CEO Michael Pearson said the company “will not be content to remain the No. 4 global player in the contact lens industry.”

Valeant has a history of acquisitions, and its present structure resulted from the merger of Biovail Corporation and Valeant Pharmaceuticals in 2010.

Over the past year, Valeant has made a number of acquisitions in pharmaceuticals, medical devices, and related fields.

Here are its most recently reported deals:

Valeant Pharmaceutical's recent acquisitions include Bausch & Lomb

Some of Valeant’s more recent acquisitions

Valeant makes about 25 deals each year. Some of them are large, although the majority are too small for financial reporting. This strategy is what I call “taking frequent small bites of the apple,” — in other words, making multiple, smaller acquisitions rather than pursuing only large transformative ones.

With smaller deals you can be more focused in the purpose of your acquisition, which generates results and minimizes risk. Smaller acquisitions can also be easier to integrate once the deal closes.

Once you’ve completed the first acquisition, you can take some time to adjust to your newly merged company. When you’re ready, you can pursue another deal to drive growth.

 

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Here’s a quick thought about the Abbvie – Shire transaction that’s received so much recent attention because of the decision to reincorporate in Ireland once the deal is completed. Tax inversions are in vogue and a hot topic in the media. While the tax benefits of an inversion certainly are important in this acquisition, that’s only half the story. The other side is more strategic.

AbbVie’s top product is Humira, an arthritis drug that will lose its patent in two years. That makes Shire’s portfolio of products very attractive, including its rare disease drugs. The acquisition decreases AbbVie’s reliance on Humira and bolsters its pipeline for future growth.

Pharmaceutical companies are using acquisition to become “pointy,” or more focused.

Two recent examples are Bayer and Merck.  Bayer is focusing on over the counter medications by acquiring Merck’s consumer care business for $14.2 billion. On the other hand, Merck has become more streamlined through divestment.

As I’ve mentioned before, although divestment means becoming smaller, it can be pathway to growth. By trimming and pruning your company, you return to your core competencies and can more effectively focus on long-term strategic growth.

Not only are pharmaceuticals becoming pointier, they are also becoming bigger through consolidation. According to Bloomberg, there were $118 billion in healthcare deals announced in April 2014 compared with $175 billion in deals executed in 2013. By acquiring scale pharmaceutical companies can sell more products and have better leverage for negotiating with customers.

 

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Pfizer looks to AstraZeneca acquisition to bolster its drug pipeline and reap tax savings.

Pfizer’s $119 billion bid for AstraZenca indicates a change in strategy for the company. According to the Wall Street Journal  “A big deal, potentially worth $100 billion, would mean Pfizer is shifting from its steady diet of cost-cutting and reorganizations over the past few years.”

Pfizer, like much of corporate America, has focused on becoming “leaner” and more efficient by cutting costs such as R&D, which dropped from $9,074 million in 2011 to $6,554 million in 2013. The company also divested of noncore businesses like Capsugel, its nutritional business, and its animal health unit to realigned its strategy around profitable core categories like cancer, immune disorders like rheumatoid arthritis, and emerging markets.

While becoming “lean” increases margins and adds to the bottom line, there are only so many businesses to shed or costs that can be cut. When growth stall, businesses must re-evaluate their current strategy and consider more creative options to find growth. Often businesses turn to acquisition to achieve this growth quickly. By acquiring AstraZeneca, Pfizer hopes to add $45 billion in annual sales by 2023 to its pipeline. Pfizer had $44.3 billion in sales in 2013.

Another significant driver for this deal is the tax savings. Last month I wrote about the rise in corporate tax inversions with companies like Chiquita, Perrigo, Actavis, and Applied Materials reincorporating overseas to obtain significant tax advantages. If the deal is completed, New York-based Pfizer would benefit from $ 1 billion or more in tax savings a year.  The company would also be able to use some of its $70 billion of overseas cash. Pfizer and other companies have been keeping significant amounts of cash overseas to avoid paying U.S. taxes; for example Apple has about $150 billion overseas. These financial engineering trends have caught the attention of lawmakers and Congress has proposed revisions to tax laws to make inversions more difficult.

Before the deal can be completed, Pfizer must face regulators and convince them the deal is driven by strategy – not tax advantages.

“Investing in the U.K. is attractive to Pfizer for a variety of reasons, including the strong skills base of researchers, clinicians and technicians and the strong track record of innovative research, and thriving biomedical environment that encourages connectivity between academics, industry, investors, clinicians and the government,” Pfizer said.

Whether or not regulators will agree with Pfizer’s statement has yet to be decided.

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Strong healthcare M&A activity is predicted for 2014 as the industry faces market and regulatory changes.  Click on the infographic for a closer look at 2013 trends and 2014 predictions.

Healthcare Trends 2013 Outlook 2014

Welcome back and Happy New Year! 2014 is looking to be an exciting year for M&A. I was recently able to share my predictions and insights for the coming year on First Business News.

In case you missed the segment, you can view the full interview below.

What will 2014 look like for mergers and acquisitions? While no one knows what the future holds, I see these three trends continuing:

1. Increased middle-market M&A

Middle-market companies are the primary driver of economic activity in the U.S.  With favorable market conditions, expect an uptick next year. A survey by Mergers & Acquisitions  showed a positive outlook for 2014; 71% of respondents expect a better year for mid-market M&A than 2013. They identified healthcare, technology, energy, and manufacturing as the top sectors for growth.

Increased M&A activity, especially in the middle-market, is an indicator of an improving economy. Executives are more likely to make deals when they are confident in the economy and the markets.

2. Healthcare consolidation

The Affordable Care Act has massive implications for the healthcare industry, but no one can say for certain what those implications are. Amidst all the uncertainty, the healthcare industry is seeing a significant amount of reshuffling, led by two big hospital consolidations this summer. We’ve also seen the rise of new products and services like private health exchanges. Look for this trend to continue in 2014 resulting from healthcare regulations.

3. “Acqui-hiring”

“Acqui-hiring” refers to recruiting a team of employees by buying a company. This is often the easiest way to attract top talent. For example, under CEO Marissa Mayer’s leadership, Yahoo! has acquired 30 companies for their technology as well as for their talented engineers. With their latest acquisition of PeerCDN, Yahoo brought on three new engineers. Other recent acquired companies like EvntLive and Ptch will be shut down, with the employees joining Yahoo’s team.

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Healthcare is a hot industry for both PE and strategic buyers as they navigate new regulatory issues posed by the Affordable Care Act. According to Reuters, healthcare was the second largest industry in the U.S. by deal value for the third quarter of 2013.

The New York Times reports the number of private exchanges has risen. Employees at such companies as Walgreens and Sears are enrolling. Accenture estimates one million people will enroll in private exchanges in 2013 and expects the number to increase to 40 million in 2014.

Although private exchanges are relatively new, we have already seen some consolidation in the industry. Earlier this month, Towers Watson acquired Liazon for $215 million to expand private benefits exchanges for active employees.

Honestly, I’m not surprised to see consolidation in this new product category. With all the changes in the healthcare industry it makes sense for companies in healthcare to “scale up.” As I mentioned a couple of months ago, healthcare regulations have prompted hospitals and  suppliers to combine for increased efficiency as they try to find cost synergies through economies of scale.

In fact, it’s natural to think the entire healthcare industry will shift toward consolidation. In this changing landscape, more companies will pursue creative solutions for maximizing value. It seems like private exchanges have already caught on to the trend.

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Two major hospital acquisitions announced this summer will result in huge hospital networks and likely create pressure for other hospital deals.  Tenet will buy Vanguard Health for $1.73 billion and Community Health will buy HMA for $3.6 billion.

Combined with Vanguard Health, Tenet will become No. 1 or 2 in 19 key markets, including San Antonio and South Texas, Reuters reports. The new company will have a total of 79 hospitals and 157 outpatient centers.

The Community Health-HMA deal will result in a network of 206 hospitals across 29 states.

With healthcare regulations changing under the Affordable Care Act, hospitals are moving toward centralized decision-making to increase efficiency. Consolidation will provide cost synergies for hospitals through economies of scale. More patients and added healthcare services will balance some of the financial squeeze hospitals will feel from lower reimbursements. Hospitals will become gatekeepers on costs – delivering more solutions but also carefully managing costs.

Bigger hospitals mean bigger healthcare suppliers. Companies that provide services like after-patient care and products ranging from IT, software, uniforms, surgical instruments, and medical equipment will be affected.  As hospitals grow and either bring services in-house or demand price concessions from their suppliers, suppliers will turn to acquisition to meet growing demand.

In short, we’ll be seeing increased M&A activity in the healthcare space.

 

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