The Health Care M&A Monthly: Third Quarter 2007 M&A Results

A Total Of 245 Deals Posted Worth $48.0 Billion

Based on preliminary figures, a total of 245 mergers and acquisitions were announced in the health care industry during the third quarter of 2007. This figure represents a tiny 1% increase over the 242 transactions announced in the previous quarter, Q2:07, and a negligible 3% decrease from the 252 deals announced in the year-ago quarter, Q3:06.

The four sectors of the health care technology segment, including Biotechnology, e-Health, Medical Devices and Pharmaceuticals, posted a combined total of 128 deals, or 52% of the quarter’s total amount. This number is in line with the previous quarter’s 54% figure, but a departure from the year-ago quarter when the technology segment captured just 40% of total deal volume. The nine sectors of the health care services segment generated the remaining 117 mergers and acquisitions during the third quarter of 2007. The contribution of each sector to the quarter’s deal volume, along with comparisons to the previous and year-ago quarters, appears in the table on page 4 of the October issue of The Health Care M&A Monthly.

Among the individual sectors, Pharmaceuticals posted 51 transactions during Q3:07, followed by Medical Devices with 41 and Long-Term Care with 28. These three sectors combined accounted for 49% of all M&A activity in the health care industry. At the other end of the scale, Rehabilitation produced just four deals and Behavioral Health Care posted just three.

According to prices revealed to date, a total of $48.0 billion was committed in Q3:07 to fund the quarter’s health care M&A activity. This represents a 21% decrease from the $60.6 billion committed in Q2:07 and a 35% decrease from the $74.2 billion spent in Q3:06.
The technology segment posted $32.2 billion (67% of the total); the services segment, $15.8 billion (33%). Medical Devices made the largest contribution of any individual sector with $16.8 billion, followed by Pharmaceuticals with $11.3 billion and Long-Term Care with $8.9 billion. The percentage contribution of each sector to the $48.0 billion total appears in the chart on page 3 of this month's issue. Due to the low level of their figures, the results of four sectors were aggregated: Behavioral Health Care, e-Health, Physician Medical Groups and Rehabilitation.

The third quarter produced 12 billion-dollar deals worth a combined total of $31.0 billion, or 65% of the total amount for Q3:07.

Year-To-Date

During the first three quarters of 2007, a total of 722 deals were announced in the health care industry worth a combined total of $173.0 billion. From where we stand, it now seems unlikely that this year’s dollar amount will surpass the record-breaking $267.1 billion reached in 2006, but then as a matter of common sense not every year can be a record-breaker. As noted in September’s issue, 2007 is already the second-largest year ever recorded in terms of dollar volume. And we expect the fourth quarter unfolding before us to contribute more to the overall total.

What we do not expect to happen is for the health care M&A market to seize up or go under. Datatracker Dealogic has observed that May produced the highest amount of M&A activity in 2007, 765 deals in all sectors of the economy, as compared with just 446 in September. Our figures for the health care industry show that 67 deals were posted in May 2007, and 70 in September 2007. Health care, then, appears to be holding its own and accounting for a proportionately higher share of the total M&A market, rising from 9% of the overall market in May to 17% in September. The reasons are not hard to see. Health care is still growing as a percentage of GDP and is not as susceptible to issues of cyclicity as other sectors of the economy. The demand for health care services and products from an aging population continues to rise. And the industry remains fragmented, inviting further consolidation to gain market share and operating efficiencies.

What we are not currently seeing, though, are the spectacular private equity deals that had occupied so many headlines during the first half of the year. Still, private equity was not altogether absent from the third quarter’s activity: seven deals, worth a combined total of $7.4 billion, had private equity groups as their buyers, three in July, three in August and one in September. We believe that the large players, the Goldman Sachs of the world and the like, will now look to the middle market as a source of deals more avidly than in the past. They will also likely pursue many middle-size deals rather than make one grand gesture. And they may content themselves with buying an interest in a company rather than its entirety. But as the dust settles, it must be recalled that the great majority of buyers in the health care M&A market have been strategic, not financial, and that they remain well motivated to make deals.

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