The Health Care M&A Monthly: First Quarter 2009 M&A Results--
Nearly 200 Deals Posted Worth A Record $127.4 Billion
Over the past few quarters, we have been living out the ancient Chinese curse, "May you live in interesting times." But it wasn’t until the most recent quarter that we saw how deeply the credit crunch and recession had penetrated the health care M&A market. One important reason we didn’t see the depths of the downturn is that the actual figures have done a pretty good job at masking it. So the first quarter results present us with some good news and some bad news.
The good news is that the results from Q1:09 are, on the face of it, encouraging. Based on preliminary figures, the health care merger and acquisition market produced a total of 199 deals during the first quarter of 2009. M&A activity is thus down nearly 13% from the 228 deals announced in the previous quarter, Q4:08, and from the 230 deals in the year-ago quarter, Q1:08. But the extent of this decline is far less steep than the decline in, say, the stock market from Q1:08 through Q1:09.
The contribution of each sector to the quarter’s total deal volume appears in the table on page 4 of the April issue of The Health Care M&A Monthly, along with comparisons to the previous and year-ago quarters. The first sign that the M&A market has succumbed to the problems of the larger economy is evidenced by the relative drop in deal volume among the services sectors. The percentage split between the services and technology segments rarely strays outside the extremes of 45% versus 55%. However, in Q1:09, services captured just 37% of total deal volume. Six of the nine services sectors declined against both the previous and the year-ago quarters. By contrast, the technology sectors generally posted equal or increased levels of deal volume, with the exception of e-Health, the least active of the technology sectors we cover.
Based on purchase prices revealed to date, a total of $127.4 billion was spent to fund the first quarter’s M&A activity. We should take some time to let a figure of this magnitude sink in. It represents a nearly fivefold increase over the $22.0 billion spent in Q1:08 and a three-and-a-half times increase over the $28.9 billion spent in Q4:08. We should stress that the first quarter’s figure includes four billion-dollar deals, but excludes the $46.8 billion offer for Roche Holding (VX: ROG) to buy the remainder of Genentech (NYSE: DNA). Under our methodology, that transaction was included in the results for Q3:08, when it was originally announced, not in the most recent quarter, when it finally closed.
The $127.4 billion figure is the largest quarterly amount ever recorded in the health care M&A market. So where is the bad news? Well, except for Pharmaceuticals and Biotechnology, most sectors of the health care industry did not share in the first quarter’s spectacular good fortunes. The results are sharply skewed by Pfizer’s (NYSE: PFE) $68.0 billion acquisition of Wyeth (NYSE: WYE) as well as Merck’s $41.1 billion offer for Schering-Plough. While these two mega-deals contributed mightily to the $112.8 billion spent on Pharmaceutical M&A during the first quarter, we saw little capital flow into the other sectors of the health care industry. As can be seen from the chart on page 20 of the April issue of The Health Care M&A Monthly, Pharmaceuticals accounts for 88.6% of all health care dollars spent in Q1:09 while Biotechnology comes in a distant second at 8%. And woe to the six services sectors that, combined, were able to eke out a paltry 0.02% of the M&A dollars.
Some of the macroeconomic reasons for these results come up in our interview with Turner Bredrup beginning on page 9. In general, the health care M&A market appears to have lagged the overall M&A market in reacting to the lack of liquidity for deal making. The scarcity of capital and its increased cost, when available, appear to have finally caught up with the health care M&A market during the first quarter. Even so, big pharma has been able to forge ahead, in large part, because this cohort still has the internal resources, cash flow and, apparently, credit lines with banks to undertake the big deals.
In comparative terms, however, the health care M&A market remains a strong one, and is attracting more attention from relatively new entrants into the field. For example, the life sciences bankers at Boston’s Leerink Swann & Co. plan to boost their ranks this year, adding up to 45 M&A personnel, as they move away from handling IPOs and follow-on financings to more mergers and acquisitions.
Despite the ambiguity of the first quarter results, we believe that M&A activity in the health care industry will recover as funds flow from the stimulus package into the economy and as banks begin lending again. Depending on how acute peoples’ memories are, it will take some time before we reach the record results of the bubble of 2006-2007 (and if recent history is anything to go by, that could be as soon as four years). But if we are content with living in uninteresting times, we will see plenty of robust M&A action long before old records are shattered.