Gregg Lemkau, co-head of global mergers and acquisitions in the Investment Banking Division of Goldman Sachs said, “We have seen twice as many mergers & acquisitions (M&A) activity by July 2014 as we saw for the same period of 2013.
I think the biggest driver of the recovery (in M&A) is the return of the strategic acquirer. There haven’t been this many M&As (70 percent) since 2007.”
What is driving the increase in M&As?
Very low interest rates
Large cash balances (balance sheet)
Abundant capital available
Low inorganic opportunities
Increase in equity markets
Let me hit on a few industries, so this doesn’t turn into a term paper. Drug makers, health insurers and biotechnology companies in the S&P’s 500 Index returned 12 percent in 2013, including reinvested dividends. That’s the first time in 15 years that the industry has led during the first 79 days into a new year. (Bloomberg, March 22, 2013)
The last time healthcare companies led the S&P during the first three months of the year was 1998 when the industry surged 42 percent in the third-biggest gain on record. (According to data compiled by Bloomberg.) The US equity benchmark posted an annual gain of 27 percent.
PHARMACEUTIAL
The pharmaceutical industry seemed designed on all sides, with declining R&D productivity, expiring patents on blockbuster products and relentless downward pricing pressure that forced companies to look closely at the bottom line. One effect of this onslaught has been an upsurge in the level of M&A activity as players within the industry consolidate to cut costs, expand research pipelines and lengthen geographic outreach.
Novartis and GlaxoSmithKline agreed to swap a series of assets in a multibillion-dollar deal that will reshape two of the world’s biggest drug makers. For Novartis, the “transformational” deal would strengthen the company’s position in the high-value but fiercely competitive area of cancer drugs, where it is number two to Swiss rival Roche.
“Diversity is still important but this will allow us to focus on businesses where we are holding a leading position,” said Joe Jimenez, CEO of Novartis to Financial Times, referring to the group’s three remaining core units: pharmaceuticals, eye care and generic drugs.
In addition to acquiring GSK’s existing cancer treatments, which had sales of $1.6 billion last year – Klavartis will have opt-in rights for new oncology products emerging from the UK group’s research and development pipeline. (Financial Times, April 2014.)
The complex transaction adds to a flurry of merger and acquisition activity among the pharma groups. Activist investor Bill Ackman and Valent have teamed up to launch a bid worth more than $50 billion for Allergan, the maker of Botox ( Financial Times)
Now more than ever, life sciences companies are conducting clinical research outside the U.S. ( ACE )
Pfizer has rallied 31 percent in the past year after the U.S. Food and Drug Administration approved its arthritis and blood thinner drugs and the company divested its infant nutrition and animal health business. ( Financial Times)
In the wake of Pfizer’s $68 billion mega-merger with Wyeth in 2009 the company laid down plans to trim its manufacturing and shut down eight sites in 2010 and further earmarked six to close by 2015, affecting over 6,000 workers.
Similarly, Merck & Co. has continued to cut back following its $41 billion merger with Schering-Plough in 2009 and then announced in November a further ten sites would be closed.
Fresh off Pfizer’s acquisition of Hospira for $17 billion, Ian Read, CEO, at this year’s BIO CEO Conference, said discussions are still in the works, though it still needs to iron out details, of whether its innovative and established products businesses are “sustainable if they’re independent.” Ultimately, he said the decision will be made to create maximum shareholder value.
At the same conference, Read said that Pfizer has had discussions with several partners looking at portfolio / geographic swaps, adding that the industry has to consolidate.
And as far as acquisitions moving, Read said the “problem is that when we look at opportunities other companies are willing to pay more because of their tax situation or to fill in or pipeline.”
INSURANCE
The stock price of United HealthGroup Inc., America’s largest healthcare company is up 263 percent since the ACA was signed into law just over four years ago. Over the 10-year period prior to the ACA, UnitedHealth stock (UNH) was down by 10 percent. United Health is the 17th largest company in Fortune Magazine’s top 500 U.S. companies.
Through subsidiaries in 50 states and Puerto Rico, United Health provided 70 million Americans with health insurance – about 22 percent of the nation. The message shareholders are learning is that a decade of competitively providing healthcare is grim, but for years of partnership with ACS – PARTY TIME.
There would have been no ACA in 2010 if the White House had not given into demands from the giant profit-making health insurance groups. Had he not done so, Obama’s healthcare bill – his priority promise made during the 2008 presidential campaign – would not have passed.
Morgan Stanley’s Andrew Schenker estimates health insurers will get $90 billion in revenues.
With the price of insurance stocks now spiked by elimination of competition, all the major health insurance stocks were Dow Jones’ top performers in 2013. United Health stock was up 33 percent; WellPoint rose by 50 percent, Aetna ticked up by 46 percent and Cigna jumped by 60 percent.
Other points to note:
Profits have risen so impressively even though ACA had language that specifically was supposed to limit the profits earned to 20 percent of the revenues.
The healthcare industry is exempt from the Federal Anti-Trust Law, but there are opportunities for collusion. They are even better at threatening physicians, hospitals and other providers to take or leave it.
This is bloody scandalous and should be a cause for concern for both Republicans and Democrats.
Bill Appling, FACMPE, ACHE, is founder and president of J William Appling, LLC. He is a national speaker, presenter and a published author. He serves as an adjunct professor at the University of Memphis and is on the boards of Hope House and Life Blood. For more information contact Bill at j.william.appling@outlook.com.