Article
Tim van Biesen
Partner, Bain & Company
What are the major drivers of healthcare M&A today?
Despite the broad-based economic slowdown and restricted access to credit, healthcare M&A has actually been an active part of the market. We’ve seen Roche, Genentech, Pfizer, Wyeth, Merck and Schering-Plough in the early part of 2009 actually contribute to a thawing of the credit landscape to the point where TPG’s acquisition of IMS for $5 billion turned out to be the biggest private leveraged buyout of the year.
There are two main drivers to healthcare M&A in this market:
• One is the ability to leverage costs across a larger organization. So this is a simple scale play, where building a commercial infrastructure across multiple markets with a broader product portfolio and an ability to fund late-stage large-scale clinical trials is a significant driver.
• The second driver of healthcare M&A is a stopgap measure to fill innovation gaps that exists across the manufacturer pipelines, both in pharmaceuticals and medtech. In pharma, that’s taken the form of larger-scale acquisitions to combine two portfolios. In medtech, that’s more often taken the form of smaller acquisitions to flesh out existing portfolios and skill up to more premium products in the market.
What are the success factors for corporate M&A?
Our analysis shows that when the economy is soft, as it was in 2001 to 2003, annual excess returns of acquirers in that market are 17%. Whereas in strong markets, they’re as low as 4% to 6%.
We are today in an even weaker market, and the opportunity for making acquisitions for financially healthy companies is better than ever.
Bain analysis shows that it is smart to buy small and buy often. Annual excess returns for frequent acquirers is as high as 5%. Whereas, infrequent acquirers—even those that are doing larger deals—have 0% to 1% excess returns. It’s a substantial difference.
Does M&A activity and rationale vary by sector?
We expect that, for the pharmaceutical sector, M&A will continue to be driven primarily by the need to build commercial and portfolio scale on a global basis. In parallel, they’ll continue to do smaller acquisitions as they get access to new products and new technology platforms, but the format or structure of those deals is going to change substantially, such that they’ll be placing more option bets and looking for first rights of refusal rather than doing outright acquisitions and asset strips as they’ve done in the past.
The medtech sector is less focused on building scale than it is on sourcing innovation from the outside. It has done this well, actually, for many years already, and will continue to do so as it continues to skill up its portfolio in search of increasingly premium segments.
Which investors will benefit?
Strategic investors—particularly those who are very financially healthy—in a down market have an opportunity to pick up assets at valuations that they might not otherwise have seen.
A good example of this, in 2009, Johnson & Johnson picked up Omrix, Mentor and Acclarent. Three different companies, three different markets, that allow Johnson & Johnson to skill up its medical technology portfolio with a set of innovative products that it didn’t have access to before.
Financial investors like private equity firms really have an opportunity in this market to go after assets where there are fewer strategic acquirers. In 2008, it was Apex and Trizetto; in 2009, TPG acquiring IMS. And with the foreign credit markets, that level of activity is likely to increase in 2010 substantially.
Published in May 2011