Merger and acquisition activity in the health care industry was brisk in 2003. We estimate the year will close with 875 deals which, based on prices revealed to date, are collectively worth $90 billion.  These figures receded somewhat from last year’s levels. The year 2002 posted a total of 945 deals worth a combined $101.4 billion. However, 2003’s levels were still higher than 2001, when 818 deals worth a combined total of $74.5 billion were announced.
Our readers will recall that the spike in 2002’s figures was caused in large part by one mega-deal, Pfizer’s (NYSE: PFE) $60 billion acquisition of Pharmacia Corp. If that one transaction were subtracted from the total, the remaining amount spent on health care M&A in 2002 would have been just $41.4 billion.
By contrast, if 2003’s single largest deal, Anthem’s (NYSE: ATH) $16.4 billion purchase of WellPoint Health Networks (NYSE: WLP), were omitted from the year’s tally, $73.6 billion would remain to fund the year’s M&A activity. Similarly, if 2001’s largest deal, Johnson & Johnson’s (NYSE: JNJ) $12.3 billion acquisition of Alza Corp. were removed, $61.1 billion would have remained.
A total of 12 billion-dollar deals were announced in 2003, at the rate of one per month, up from the eight announced in the previous year, but level with the 12 deals in 2001. See the table on page 3 for a listing and comparison of the transactions in these three years.
Taken together, the 12 transactions in 2003 account for $55.67 billion, or 62% of the year’s total expenditure on health care M&A. By contrast, 2002’s eight deals accounted for $72.2 billion, or 71%, of that year’s total commitment. Subtracting the skewing effect of the Pfizer-Pharmacia deal, the seven remaining billion-dollar deals in 2002 accounted for 29% of the total amount spent on M&A activity. Here again, 2003 shows greater resemblance to 2001. The 12 billion-dollar deals in 2001, amounting to $47.67 billion, account for 64% of the total amount committed to fund M&A activity that year.
In 2003, the four transactions in the services sector, or one-third of the 12 billion-dollar deals, accounted for 49% of the total $55.67 billion spent. In 2002, the four deals in the services sector, or half of that year’s billion-dollar deals, accounted for just 10% of the $72.2 billion spent. But if we remove the distorting effect of the Pfizer-Pharmacia deal, services accounted for 60% of the remaining seven deals.
In 2001, however, the two transactions in the services sector, one-sixth of that year’s billion-dollar deals, accounted for just 10% of the $47.67 billion spent to finance those 12 transactions.
The average purchase price in 2003 was $167,260,000, the median was $14,913,000, up from their respective figures $162,268,000 and $11,100,000 in 2002 and $138,750,000 and $14,200,000 in 2001.
Based on revealed prices, the average price to revenue multiple for a health care acquisition in 2003 was 2.3x while the median was 1.15x. Again, both figures represent a slight increase over the corresponding 2002 figures, 2.24x and 1.01x, respectively. The comparable figures for 2001 are an average of 2.66x and a median of 1.09x. Comparison of 2001 with 2002 indicates that 2002 pricing declined, due in large part to the stock market meltdown and recession. However, buyers in 2003 seem to have recovered if not their former irrational exuberance then some of their former confidence, and were willing to pay more than they had in 2002 to acquire a health care company.

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