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August 2005 issue
The Drug Days of Summer - Biggest Deals,
Most Dollars in Health Care M&A Tied to Pharmaceuticals Sign up for a trial subscription and get the current issue! Read more about Healthcare Corporate Finance News Read the past headlines.
Companies Mentioned in this issue: August
2005 |
The Drug Days of Summer - Biggest Deals, Most Dollars in Health Care M&A Tied to PharmaceuticalsPharmaceutical manufacturers, developers and the companies that serve them continued to dominate the health care merger and acquisition market during the second half of July. Pharmaceuticals and pharmaceuticals-related companies accounted for nearly 85% of all capital committed to health care M&A in those two weeks. The combined dollar total of the five Pharmaceutical sector acquisitions, plus the one deal in which a pharma is acquiring a biotech and the three deals involving companies that service the industry is $10.5 billion. In all the health care sectors, a total of nearly $12.4 billion was committed to finance 20 mergers and acquisitions during the two weeks ended July 31, 2005, based on deals with revealed prices. Even strictly speaking, the Pharmaceutical sector accounted for 73% of the dollar total—plus the single largest deal, and the second largest number of deals announced in one sector for those two weeks. Companies classified as Other posted more health care mergers and acquisitions than any other single sector, including the second largest deal, which involved a pharmacy benefit manager and a specialty pharma. In the most impressive transaction of the past two weeks, Teva Pharmaceuticals (NASDAQ: TEVA) is acquiring IVAX Corporation (AMEX: IVX) for nearly $8 billion, including assumed debt. Each common share of IVAX’s stock may be converted into $26.00 cash or 0.8471 shares of TEVA’s American Depository Receipts, at the option of the holders. This transaction unites the two generic pharmaceutical companies with a triangular merger structure that causes IVAX to become a subsidiary of TEVA, effectively creating the largest generic drug company we know of in the industry. The resulting entity will operate directly in over 50 countries and is expected to generate sales of over $7 billion, offering a wide range of generic and branded pharmaceuticals to consumers, customers and health care providers. In the only other deal to pass the billion-dollar mark during the past two weeks, Express Scripts, Inc. is acquiring Priority Healthcare Corporation (NASDAQ: PHCC) for $1.3 billion in cash, or $28.00 per share. The resulting entity is combining Priority Healthcare with Express Scripts’ specialty pharmaceuticals unit, CuraScript, which will now be one of the largest specialty pharmacy and distribution companies in the United States, and is expected to generate more than $3 billion in annual revenues. CuraScript offers a spectrum of specialty injectable medications to individuals with chronic illnesses, and combined with the assets of Priority Healthcare, the company now provides biopharmaceuticals and complex therapies, plus related disease treatment programs and services, to patients, payors, physicians and pharmaceutical manufacturers. Treatment areas include endocrinology, gastroenterology, hematology, infectious disease, nephrology, neurology, oncology, ophthalmology, pulmonology, reproductive endocrinology and rheumatology. The third-largest deal of the month is rather unusual, with The Carlyle Group acquiring a portfolio of Long Term Acute Care hospitals (LTACs) for approximately $555 million. Deals so rarely get done in this subsector that the most recent, most comparable transaction was announced late last year, when Select Medical Corporation purchased SemperCare, which operated 17 LTACs in nine states with $147.5 million of revenue, for $100 million, or 0.68x revenues. The Carlyle Group is purchasing 21 LTACs with more than 1,000 beds in nine states, collectively known as LifeCare Holdings, from GTCR Golder Rauner LLC for more than $550,000 per bed. LifeCare’s revenues for the 12 months ended March 31, 2005 were about $335 million, and based on industry margins, we assume that EBITDA for that period would be close to $75 million, yielding a cash flow multiple of 7.4x. LifeCare Holdings is the third-largest LTAC provider in the United States, with facilities in Colorado, Michigan, Pennsylvania, Ohio and five other states. Interestingly, less than 50% of LifeCare’s LTACs are freestanding, which means that most of the purchase price is related to the LTAC business, and not any associated real estate. The health care group, and not the real estate group, of Carlyle made this investment. Although the LifeCare deal implies a huge per-bed value for the entire enterprise, it doesn’t look like Carlyle was buying it for the real estate, especially since very little real estate seems to have been part of that deal. |
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