Grant Thornton - Healthcare M&A Snapshot 2012Document Transcript
Health careM&A snapshotGrant Thornton Corporate Finance July 2012Reviewing the 2011health care industryA dynamic climate The other major ruling partially upheld the MedicaidThe past year has been exciting for health care M&A, with expansion under the PPACA. However, the penalty clause thatapproximately 1,250 transactions reported during 2011 in a allowed the federal government to withhold all Medicaid fundsnearly 10% increase from 2010, making it one of the most active from states refusing to comply with the expansion was struckdeal markets in history. Issues such as health care reform, rising down. Compliance with the new Medicaid eligibility standardscosts 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 dosignificant M&A activity. The aging of the U.S. population is not take effect until 2014, the act has certainly influenced theanother issue with widespread implications, though its impact M&A markets. Compliance cost concerns have driven many smalltends to be a secondary factor in M&A trends. In the next few organizations to consider selling to larger rivals, and we expectpages, we will delve into some of these issues, highlighting their this trend to continue. As the ultimate impact of the legislationimpact on the deal market and commenting on how future unfolds, M&A will play a key role as businesses take advantageM&A trends might be affected. of new opportunities and attempt to mitigate new risk factors. continued >The Patient Protection and Affordable Care ActThe Patient Protection and Affordable Care Act (PPACA),signed into law on March 23, 2010, requires major changes tocurrent health care legislation. The Supreme Court held theindividual mandate, one of the most controversial aspects of thelaw and one of the major areas under consideration by thecourt, valid under the taxing power of the U.S. Congress.
Widespread cost pressure One other notable recent development is the FTC’s recentSoftening revenues and rising costs throughout the health care ruling that ProMedica Health System’s August 2010 acquisitionindustry have put many smaller or less well-capitalized providers of rival St. Luke’s Hospital was likely to substantially lessenunder significant financial stress. Many of these facilities face competition and increase prices for general acute care andthe stark choice of either joining a larger organization or risking obstetric inpatient hospital services sold to commercial healthfinancial distress on their own. In some cases, facilities that chose plans in the Toledo, Ohio, area. The ruling calls for ProMedicato weather the storm ended up in bankruptcy, with either a sale to unwind the transaction by selling St. Luke’s Hospital andor 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 beHospitals and other health care entities have felt significant aware of the competitive environment and take steps to addresseffects 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, theissues. In response, health care facility M&A activity has risen Supreme Court agreed to hear a case involving the acquisitionmarkedly as providers seek to take advantage of economies of of Palmyra Medical Center (PMC) by the Hospital Authorityscale 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 FTCincreased 32% in 2011, as hospitals, clinics and other medical oversight. By agreeing to hear the case, the Supreme Court willfacilities combined in order to address financial and strategic set law on whether the FTC can intervene when a state-createdconcerns. 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 UniversalHealth Services’ purchase of Psychiatric Solutions for more than Insurers quietly buying medical practices$3 billion. Excluding the impact of these two transactions, deal Insurers have a vested interest in controlling costs, and somevalue increased 52% in 2011. carriers are experimenting with acquiring physician groups in an Going forward, health care facility M&A activity is likely attempt to align doctors’ incentives with their own. The conceptto remain active. Despite the slight uptick in the U.S. economy, is straightforward: A private physician group is financiallycost pressure will continue to affect health care facilities and fuel motivated to maximize billings by performing large numbersM&A transactions. While the PPACA is intended to address of medically justified tests and procedures, while a group ownedsome of these issues, its ultimate effects are still in question. by an insurer can have an incentive structure that is focused on minimizing the use of diagnostic tests, albeit in a medicallyHealth care facility M&A activity responsible way. Many people believe there is a gap between what patients actually need in terms of tests and what doctors Number of transactions Deal value ($B) often order. They believe bringing patient care under the same Deal value ($B)* corporate umbrella as insurance can help close that gap and stem rising health care costs. Further, certain provisions of theNumber of Deal valuetransactions ($B) PPACA have invigorated this trend and will likely continue to400 $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 $10100 CareMore Health Group, a senior medical group and $5 health plan provider. continued > 2007 2008 2009 2010 2011* Discounts two transactions that transpired in 2010Sources: GTCF research; certain financial information provided by S&P Capital IQ2 Health care M&A snapshot June 2012
In what is perhaps an even bolder move, an east coast-based, independent licensee of the Blue Cross and Blue ShieldAssociation, announced its intent in 2011 to purchase a largeregional hospital system comprised of a financially distressedoperator of five hospitals. There are factors that might reverse this trend, however.The prospect of changing the incentive structure for physiciansraises legitimate concerns about the quality of care. Patientsdon’t want cost to their insurer to be a factor in determiningtheir treatment. If insurers can convince consumers that thecurrent standards of care will be preserved and the expectedcost savings actually materialize, the acquisition trend mightcontinue; however, if patients resist these practices or costs donot decline as expected, insurers may abandon this strategy. Cost pressure on insurers, care providers and other entitiesin the health care space is an ongoing issue that is exacerbatedby the aging of the U.S. population (although the additionalcare associated with the aging of the boomers presents revenueopportunities). This is also a political hot-button issue, with 2011, recently acquired King Pharmaceuticals, a specialtywidespread disagreement as to both causes and potential pharmaceutical discovery and clinical development company, forsolutions. In the near term, it appears that costs will continue to $3.6 billion in cash. Pfizer believes the acquisition diversifies itsincrease, 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 $20 billion. The deal is intended to help Sanofi rebuild its pipeline given its loss ofThe patent cliff patent protection on Lovenox in 2010 and its loss of protectionPharmaceutical companies also face substantial strategic and on Plavix in 2012.financial challenges in the current market. For example, nine of While this patent cliff is a somewhat extraordinary event, thethe top 10 best-selling drugs have lost or are scheduled to lose motivation for M&A in the pharmaceutical sector remains strongpatent protection in the next five to six years — a time period because of the tremendous investment in R&D needed to bringoften referred to as the patent cliff. In response, pharmaceutical a single drug to market. If they are acquired, smaller R&D firmscompanies have stepped up R&D and implemented cost- with promising drugs can often recoup some of their investmentefficiency programs. Further, many companies are embracing and better the chances that their drug will make it through theM&A as a way to supplement R&D during their quest for the onerous approval process. Likewise, larger companies with thenext lucrative drug. capital to pursue acquisitions invest heavily in their courtship of For example, Pfizer, which lost exclusivity on the underlying up-and-coming firms. Given today’s economic pressures,formula for Lipitor in the United States during November we expect this trend to continue. continued >Top 10 drugs for 2010 by U.S. sales 2010 U.S. product Rank Drug Treatments Marketers U.S. patent expiry sales ($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 $3,088 2018* Enbrel was originally set to expire in 2012 in the U.S., but it has been extended for another 16 years.Source: EvaluatePharma3 Health care M&A snapshot June 2012
Electronic health records U.S. target announced health care information technology M&ADigitization of health records has been accelerating for a numberof years as providers throughout the health care sector have Number of transactions Deal value ($B)sought ways to offer more efficient and effective care whilemaximizing the benefits to the patient and minimizing risk Number of Deal value transactions ($B)associated with incomplete medical records. In response, thehealth information technology (HIT) industry is expanding 125 $7significantly as competitors vie to provide new applications $6within the lucrative and growing health care market. M&A 100activity has been a natural mode of competition, allowing $5companies to secure new technologies and capture additional 75 $4market share. Further, the American Recovery and Reinvestment Act 50 $3of 2009, commonly known as the stimulus bill, includes $2approximately $27 billion in incentives for eligible institutions 25(including hospitals) that install and “meaningfully use” $1electronic health records (EHR). These federal subsidy paymentscommenced in 2011 and diminish in each subsequent year until 2007 2008 2009 2010 20112015, when providers start facing penalties for noncompliance. Sources: GTCF research; certain financial information provided by S&P Capital IQWhile the inclusion of funds was in response to underlying careand economic factors, the stimulus money is driving increasedgrowth in the HIT sector and fueling expanded M&A activity. As depicted in the chart to the right, the number ofU.S.-based HIT M&A transactions rose by almost 7% in 2011,while deal value increased 72%. The dramatic rise in valuewas partially due to the acquisition of Emdeon by private U.S. target announced health care M&A activityequity firms Blackstone Capital and Hellman & Friedman for Number of transactionsnearly $3.5 billion. Emdeon offers payment cycle and revenue Disclosed deal value ($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 $250patient records across a broader spectrum of care providers. 1200 $200Trends in the metrics 1000M&A activityThe number of U.S.-based health care M&A transactions rose $150 800nearly 10% — from 1,141 transactions in 2010 to 1,248 in 6002011 — which is not surprising given the improved economic $100outlook and credit markets. Deal value increased more 400significantly, rising almost 43% from $118 billion in 2010 to $50$170 billion in 2011; this amount exceeded 16% of total M&A 200value in the United States for the year. Taking a closer look atdeals from an industry subsegment perspective, we see a sharp 2005 2006 2007 2008 2009 2010 2011uptick 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-Ploughpast two years. Sources: GTCF research; certain financial information provided by S&P Capital IQ continued >4 Health care M&A snapshot June 2012
U.S. target announced health care M&A activity by segment (Number of U.S. transactions) 2009 2010 2011Pharmaceuticals/biotechnologiesHealth care facilities/providersHealth care informationtechnologyHealth careintermediariesHealth insurancecompanies 0 100 200 300 400 500 600Sources: GTCF research; certain financial information provided by S&P Capital IQ Notable transactions announced in 2011 include • In April 2011, Johnson & Johnson (NYSE: JNJ) announcedthe 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-informed200% 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 index150% growing at the strongest pace. The only index that has consistently125% underperformed the S&P 500 is the insurance sector. However, as100% 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 healthSources: 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 eachcategory relative to 12/31/07. continued >5 Health care M&A snapshot June 2012