Health Care Services M&A Volume Surges In Second Quarter

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July 2004 issue Health Care Services M&A Volume Surges In Second Quarter For the health care merger and acquisition market, the second quarter results mark a shift that favors the services segment. Especially in the hospital sector, deal volume is up. ... Public Equity Market Health care IPOs are still getting priced quite conservatively, but some stellar performers dot the charts and some secondary offerings have been completed by companies that were successful in their IPOs. See page 4 ... Venture Capital Market For the fifth month in a row, a total of more than $500 million has been committed to venture capital financings in health care companies. See page 11 ... Private Equity Market In this issue we report that a total of more than $360 million was committed to fund 24 private placements in the health care segments. See page 11 ... Departments M&A Deal Chart - 3 IPO Chart - 4 Private Placement Charts - 5, 6, 7 Stock Chart - 8,9 Venture Capital Charts 12, 13, 14 Notes & Briefs 16 Sign up for a trial subscription and get the current issue! Read the past headlines.	Health Care Services M&A Volume Surges In Second Quarter Back in the mid-1990s, led by hospitals, physician medical groups (PMGs) and home health care, the volume of health care services mergers and acquisitions was enough to keep many an investment banker employed and over-paid. In 1997, the peak year when there were more than 1,200 services deals, the number of hospital acquisitions in just one quarter was more than the volume occurring in an entire year today. Similar statistics hold true for the home health and physician markets as well, and while home health could still make a comeback, the PMG market currently has the volume it deserves. No one is saying that we are returning to the heady days of the 1990s, but recent activity in the health care services M&A market is pointing to a renewed vigor that should last at least through the rest of the year. Based on our preliminary statistics, in the second quarter this year there were 110 health care services transactions, up 26% from the previous quarter and up 21% from the year-ago quarter. The number will most likely increase as more deals are revealed in 10-Q filings for the quarter, topping the high of the past six quarters set in the third quarter last year. The surge was led by hospital transactions, up 157% and 350% from the previous and year-ago quarters, respectively; labs/MRI/dialysis deals, up 83% and 57%, respectively; and long-term care, up 50% from the previous quarter but down 31% from the year-ago quarter. Even the behavioral health market has seen a jump in activity, with double the number of deals in the second quarter compared with both the previous and year-ago quarters, although we are still talking about a relatively small market. The sharp increase in hospital acquisitions looks unusual, but when put in perspective, the 18 announced transactions in the second quarter are more typical of the individual quarters between 2000 and the second half of 2003. For a variety of reasons, including the regulatory problems of Tenet Healthcare (NYSE: THC), the hospital market came to a virtual standstill in early 2003, but also as a result of Tenet’s problems, the activity has jumped because of several dozen divestitures announced by THC. Now, with the managed care industry going through a few major mergers, some analysts believe that a new wave of hospital consolidation will result as hospitals try to bolster their negotiating power with a shrinking group of payers. Even though the long-term care segment jumped by 50% to 18 deals compared with the previous quarter, activity was still far below the 25 deals per quarter average of 2003. We have heard from market participants that the slow start in 2004 (12 announced deals in the first quarter) may have been the result of needing time to digest the large increase in deal flow during the previous year. We have also heard that there will be a mini-surge in deals announced (and closed) during late July and into August, so we are looking for an even larger number of transactions in the third quarter. In the overall health care M&A market, including the technology segment, the number of transactions in the second quarter (230) was almost identical to each of the quarters in 2003, but represented an 11% increase compared with the first quarter this year, all of which came from the services sector. There were a total of 120 health care technology transactions announced in the second quarter, the same as in the previous quarter but down 14% from the year-ago quarter. Of that total, more than one-third (45) was in the pharmaceutical sector, a double-digit increase from both the previous and year-ago quarters. The three other sectors¾medical devices, biotechnology and e-health¾all experienced declines in activity from 18% to 50% from the year-ago quarter. A total of $25.3 billion was committed to finance the second quarter’s transactions, significantly less then the previous quarter’s $93.0 billion, most of which came from the $65.5 billion acquisition of Aventis, SA (NYSE: AVE), which has still not closed. Excluding that deal, the first quarter was just $27.5 billion, or slightly above the second quarter’s dollar volume. In the second quarter there were six deals with price tags of at least $1.0 billion each, with four in health care services and two in health care technology. Given the current pace of deals, the market is on track to complete $150 billion of deals this year which, while not a record, is close to it. In the past four-week period the volume king was again the pharmaceutical sector, with 20 announced deals, most of which involve rights to individual drugs so that the acquirers can replenish their drug pipelines as many of their blockbusters go off patent. The largest transaction in this segment was Pfizer’s (NYSE: PFE) acquisition of a drug used in the treatment of colorectal cancer with $321 million of sales from Aventis for $620 million. The largest deal in the most recent period was Charles River Laboratories’ (NYSE: CRL) acquisition of Inveresk Research Group (NASDAQ: IRGI) for $1.5 billion, or 5.1x revenue and 23x EBITDA. The cash and stock deal offers IRGI a 25% premium to the prior-day price of IRGI, and will get CRL close to the $1.0 billion revenue mark. Last month we mentioned that we caught wind of a potential acquisition of Mariner Health Care (OTCBB: MHCA) by the same group that purchased Integrated Health Services out of bankruptcy 10 months ago. At the end of June the deal was finally announced, with a new entity, National Senior Care, created to make the offer of $30 per share in cash that, including the assumption of $385 million of debt, yields a price of about $1.0 billion, with a 49% premium to the prior-day stock price. The sizable premium was surprising since news of the buyer’s intention appeared in all of our publications a few weeks before the actual announcement. There remains some doubt in the arb market, however, about the ability of the buyer to get the deal financed. Subsequent to the announcement, Mariner’s shares have been trading at a 10% discount to the offer price, and since the deal is expected to close in October, investors could obtain a 40% annualized return by buying the shares today. That is a return that is hard to turn down, but investors are still nervous, despite the $40 million that the buyer will forfeit if it can’t raise the necessary financing. The battle for NeighborCare (NASDAQ: NCRX) continues, but on July 13 Omnicare (NYSE: OCR) received a request from the FTC for additional information relating to OCR’s Hart-Scott-Rodino antitrust filing. Given the peculiarities of the institutional pharmacy business, even though the combined companies would control more than 50% of the long-term care market, our guess is that the FTC will eventually take a pass. NeighborCare’s shareholders, meanwhile, are waiting for a higher offer.
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