The Health Care M&A Monthly: Health Care M&A Results for The Second Quarter of 2004

Based on preliminary results, 230 mergers and acquisitions were announced in the 13 sectors of the health care industry during the second quarter of 2004. This activity represents an 11% gain over the 207 deals announced in the previous quarter, and is level with the 230 deals in the year-ago quarter, Q2:03.
In a marked departure from recent trends, the health care services segment witnessed growth in all but two sectors, as noted in the table below. Overall mergers and acquisitions in this segment surged 26% ahead of the previous quarter’s level and 21% ahead of the level in the year-ago quarter. Particularly notable were increases in the Hospital (+157%) and Behavioral Health (+100%) sectors. Changes to the Medicare law implemented last December, which has increased reimbursement to these sectors, is already translating into greater M&A activity.
Still, the health care technology segment barely nosed out the services segment, with 52% of all deals announced in Q2:04. Pharmaceuticals, in particular, grew 15% and 10% over the previous and year-ago quarters, respectively.
What They Paid
According to revealed prices, a total of $25.3 billion was spent to finance the 230 deals in Q2:04. While this represents a 73% drop from the $93 billion committed to fund health care M&A activity in the first quarter, by removing the skewing effect of the $65.5 billion merger between Sanofi-Synthelabo (NYSE: SNY) and Aventis (NYSE: AVE), the quarter-to-quarter decline would be only 8% from the remaining $27.5 billion. Compared with the year-ago quarter, the $25.3 billion in Q2:04 represents a 31% increase over the $19.3 billion posted in Q2:03.
Of the $25.3 billion spent in Q2:04, $13.5 billion, or 53% of the total, went to the health care services segment. This reverses a dominant trend in recent quarters when the technology segment could capture as much as 80% of all dollars committed to the M&A market. In fact, during the previous quarter, the technology segment did account for 80% of all dollars spent without the Sanofi-Aventis deal (adding it back in would raise the figure to 94%). And in the year-ago quarter, Q2:03, technology came away with 73% of the total amount spent on health care M&A.
As the chart below shows, Managed Care garnered the largest piece of the acquisition pie in Q2:04, taking 21.3% of all dollars committed in Q2:04. Medical Devices and Biotechnology followed with 17.4% and 15.8%, respectively. Poor Rehabilitation, with no deals announced at all during the quarter, has been left off the chart.
The Billion-Dollar Club
Seven billion-dollar deals worth a combined $15.65 billion, or 62% of the quarter’s total, were announced in Q2:04. This percentage closely resembles its counterpart in the previous quarter when—again, omitting the skewing effect of the Sanofi-Aventis deal—seven deals were announced, representing a total of $18.3 billion, or 67% of the $27.5 billion remaining.
The Q2:04 billion-dollar deals were in the Managed Care ($4.9 billion), Biotechnology ($2.7 billion), Specialty Pharmacy ($2.15 billion), Medical Devices ($2.0 billion), Institutional Pharmacy ($1.5 billion), Hospitals ($1.4 billion) and Long-Term Care ($1.0 billion) sectors. Note that within this cohort, the technology segment accounted for just two deals and only 30% of the dollars. In the interests of full disclosure, however, we should note that Omnicare’s (NYSE: OCR) $1.5 billion play for rival NeighborCare (NASDAQ: NCRX) is a hostile bid whose outcome at this juncture is far from certain.
Outlook for the Rest of the Year
The first half of 2004 has thus witnessed nearly $120 billion being spent on approximately 440 deals in the health care M&A market. If economic growth remains healthy without overheating, this year may very well end with an estimated 900 deals at a combined price of more than $150 billion, which while not a record, would come close. And a 50% jump over 2003’s level of spending would make a convincing demonstration that M&A activity has left the recession behind.

The Health Care M&A Market Q2:04 Deal Volume By Sector  
Sector
Q2:04
Deals*
Q1:04
Deals
%Change
Q2:03
Deals
%Change
Services:

 

 

Hospitals
18
7
+157%
4
+350%
Long-Term Care
18
12
+50%
26
-31%
Physician Medical Groups
12
10
+20%
7
+71%
Laboratories, MRI, Dialysis
11
6
+83%
7
+57%
Managed Care
9
8
+13%
6
+50%
Behavioral Health
8
4
+100%
4
+100%
Home Health
8
6
+33%
4
+100%
Rehabilitation
0
6
NM
6
NM
Other
26
28
-7%
27
-4%
Services Subtotal
110
87
+26%
91
+21%

Technology:

 

 

Pharmaceuticals
45
39
+15%
41
+10%
Medical Devices
37
37
0%
45
-18%
Biotechnology
30
29
+3%
37
-19%
e-Health
8
15
-47%
16
-50%
Technology Subtotal
120
120
0%
139
-14%

 

 


Grand Total
230
207
+11%
230
0%
*Preliminary figures