The Health Care M&A Monthly: Health Care M&A Results for The Third Quarter of 2002

With the stock market’s worst quarterly performance in 70 years, we might expect M&A activity to have taken a nose dive as well. And in fact, the overall market did suffer from a decreased deal count and smaller amounts of capital committed to deals. Even so, the health care industry has weathered the storm better than any other sector of the economy.
A total of 207 mergers and acquisitions were announced in the health care industry during the third quarter of 2002, down 14% from the 240 transactions announced in the prior quarter, but up 14% from the 181 deals announced in the year-ago quarter, Q3:01.
Out of the 207 transactions, the four sectors of the health care technology segment (Biotechnology, e-Health, Medical Devices and Pharmaceuticals) accounted for 101 deals, or nearly one-half (49%) of the total. This number represents a modest gain against the second quarter’s results, when the technology segment accounted for 43% of all deals announced.
The chart on p. 1 breaks out the deal volume of 13 sectors of the health care industry and compares it with the M&A volume in the prior and year-ago quarters. The combined deal count of the top three sectors, Medical Devices, Pharmaceuticals and Hospitals, with 95 deals, accounted for 46% of all activity. All three posted gains against both the prior and the year-ago quarters.
By contrast, five sectors, Behavioral Health, e-Health, Home Health, Managed Care and Rehabilitation, brought in fewer than 10 deals apiece. No real surprise here except for the Managed Care sector, which has recently busied itself more with trying to sell premium increases to regulators and consumers than chasing deals.
Health Care Leads the M&A Market
The real story of the third quarter lies in the value of these deals. The dollar amount committed to making Q3:02’s 207 transactions achieved its highest level in five quarters (see the table above), reaching a combined total of $68 billion to fund these 207 deals. The amount that each sector contributed to that $68 billion total is presented in the graph on the top of the opposite page.
In terms of deal value, the health care industry ranks first among all sectors of the M&A market for the first three quarters of 2002 with $92 billion spent to finance nearly 660 transactions. The banking and finance industry, during the same period, comes in second with approximately $25 billion to fund nearly 200 transactions.
The $68 billion figure is three times the $16.6 billion spent in Q2:02 and seven times the $8.4 billion spent in Q3:01. Clearly, just one deal, Pfizer’s (NYSE: PFE) proposed $60 billion acquisition of Pharmacia Corp. (NYSE: PHA), made the quarterly amount skyrocket. This one transaction, in fact, represents nearly two-thirds of the approximately $92 billion committed so far this year to fund nearly 660 deals.
A similar distortion occurred in Q4:01 when the Biotechnology sector accounted for 67% of the $24 billion spent. This was due, in turn, to Amgen’s (NASDAQ: AMGN) $11.1 billion acquisition of Immunex.
So, even without the Pfizer-Pharmacia deal, the remaining $8 billion spent in Q3:02 would have been well in line with the $7.1 billion in Q1:02 and the $8.4 billion in Q3:01, indicating relatively steady levels of activity over the year. The graph on the bottom of the opposite page eliminates the distortion of the Pfizer-Pharmacia deal and reveals what each sector would otherwise have contributed to the remaining $8 billion amount expended on the other 206 transactions. This "normalized" graph shows that the Medical Devices sector would ordinarily have accounted for both the greatest number of deals (43) and the greatest amount of funding committed ($3.62 billion). But, of course, the Pfizer-Pharmacia deal is very much part of the mix.
The weak economy, if it persists, would most certainly have a chilling effect on M&A activity in health care as well as other sectors of the economy. But since consumers tend to value health care services and products and would dispense with a new washer, a new car or a new house more readily than with health care or medicines, money will continue to flow into the industry. And where the money flows, investors and dealmakers cannot be far behind. At current levels of activity, then, we predict that 2002 will end with approximately $100 billion funding nearly 850 deals in the health care industry.