The Health Care M&A Monthly: 2009 Posts $231.4 Billion In Deals
Rivals Second-Largest Year Ever In M&A
Based on preliminary results, a total of 924 transactions were announced in the 2009 health care merger and acquisition market. As the table indicates, this figure represents an 8% drop from the 1,001 deals recorded in 2008. For a lower level of deal volume, we have to reach back to 2004 when just 875 deals were posted.
The Biotechnology sector posted the highest deal volume of any single sector during 2009 with 189 transactions, followed by Medical Devices with 173 and Pharmaceuticals with 139. Among the busiest services sectors were Long-Term Care with 76 deals, Hospitals with 53 and Home Health Care with 42. Behavioral Health Caer and Rehabilitation brought up the rear with 11 deals apiece.
Despite the relatively low level of deal volume, dollar volume for 2009 reached $231.4 billion, placing it in a virtual dead heat with 2007 for the second largest amount ever committed to health care M&A in a single year. As we have come to expect, the technology segment garnered the lion’s share of M&A dollars, capturing $218.3 billion, or 94% of the year’s total. By itself, the Pharmaceutical sector attracted $147.1 billion, or 64% of the year’s total. The bulk of that may be directly attributed to two blockbuster deals announced in the first quarter, when all the market indices were heading south: Pfizer’s (NYSE: PFE) $68.0 billion acquisition of Wyeth and Merck & Co.’s (NYSE: MRK) $41.1 billion purchase of Schering-Plough Corp. Both mega-deals closed in the fourth quarter with acquisition multiples below 3.0x revenue, a pricing that ordinary pharma companies would have commanded in more ordinary times. Of course, there was nothing in Q1:09 that remotely hinted at the ordinary; the buyers saw their opportunities, and pursued them rationally.
In terms of dollars committed to M&A, Pharmaceuticals was followed by Biotechnology with $46.1 billion, Medical Devices with $13.7 billion and e-Health with $11.3 billion. While much of the activity in the Pharma sector was focused on companies buying their way into new markets or diversifying revenue sources, much of the activity in the Biotech sector was propelled by the desire to secure the next blockbuster drug, one presumably on the verge of coming to market and with the prospect of long years of patent (and revenue) protection. True, there were many distressed sales of assets in the Biotech sector in 2009, as companies burned through their cash and the promise of many a miracle cure failed to pan out, but such deals did not contribute significantly to the overall dollar volume of the M&A market. Renewed investor interest in the broader technology industry helped buoy M&A activity in the Medical Devices and e-Health sectors.
Within the individual services sectors, only Long-Term Care and Hospitals broke the billion-dollar ceiling, posting $4.3 billion and $1.7 billion, respectively. Rehabilitation straggled at the rear of the pack with just $22.1 million in revealed prices. Lack of credit contributed to this slowdown in dealmaking, as did Congressional dithering over general health care reform and its inevitable corollary, reform of government reimbursement protocols. The one factor made the price of capital too high for many to pursue deals while the other made it nigh impossible to project future cash flows and therefore to assign a reasonable valuation to potential targets. We hope that both trends, which can only depress acquisition activity in the services sector, will moderate during 2010.
The year 2009 produced a total of 28 billion-dollar deals, or a little more than one every other week. This rate is certainly down from the breathless pace of 2007, when 51 deals were announced. However, the 2009 deals had a combined valued of $166.8 billion, while those in 2007 had a combined value of $156.2 billion. Fewer participants were making individually larger deals.
From a psychological perspective, no one we’ve talked to regrets seeing 2009 pass into history. Both the business and investment communities had their tolerance for risk and uncertainty stretched much tauter than anyone would have imagined possible. Still, as the numbers show, most hunkered down and found ways to do business in one of the most challenging environments in memory. We trust that with the coming of Spring, dealmakers’ outlooks will turn more positive and match the fundamentals of a strong M&A market that the numbers reveal.