Third-Largest Year Ever In The Health Care Industry
Based on figures revealed to date, the health care industry posted a total of 973 mergers and acquisitions in 2008. This is the third-largest amount in the five-year period from 2004 through 2008 (see page 20 of the January issue of The Health Care M&A Monthly). The year’s 973 deals represent a 9% drop in deal volume from the 1,074 posted in 2007, which was the peak in the 2004-2008 period.

Of 2008’s total transaction volume, 523, or 54% of the year’s total, occurred in the four sectors of the health care technology segment; the remaining 450 were spread over the nine sectors of the health care services segment. Interestingly, the 54-46 split between the technology and services segments is the same as occurred in 2007.
The top three individual sectors, in terms of deal volume, were Medical Devices, Biotechnology and Pharmaceuticals with 166, 150 and 140 deals, respectively. Among the corresponding services sectors, Long-Term Care led with 94 deals, followed by Physician Medical Groups and Hospitals, with 50 and 49 deals, respectively. Not surprisingly, the laggards of the health care industry were Rehabilitation, Managed Care and Behavioral Health, with 27, 16 and 13 deals, respectively. The contribution of each sector to the 2008 health care M&A market appear in the table on page 3 of the January issue of The Health Care M&A Monthly.
What They Paid
Based on prices revealed to date, a total of $223.1 billion was committed to fund the 973 deals of 2008. As a result, 2008 stands out as the third-largest year in health care M&A in terms of dollars spent, not too shabby for a year we just learned last month was in a recession. This represents a 4% decline from the $231.8 billion spent in 2007, which was the second-highest level ever recorded in health care M&A. Comparison with the figure for 2005, which had virtually the same deal volume as 2008, shows that the dollars spent in 2008 were 37% higher.
Interestingly, the amount spent on health care technology rose 17% from 2007 to 2008 while the corresponding amount committed to health care services plunged by 51% in the same time frame. In 2008, the technology sectors garnered $205.1 billion, or 92% of all health care dollars spent during the year, with the service segments accounting for a meager 8%. The percentage contribution of each sector is given in the chart on page 2 of the January issue of The Health Care M&A Monthly.
The Biotechnology sector stood out in 2008, attracting $93.7 billion, or 42% of all M&A dollars. This represents a 116% increase from the $43.4 billion spent on biotech M&A in 2007. Conversely, the $40.8 billion spent on Pharmaceuticals in 2008 represents a 43% drop from the $71.6 billion spent in 2007. But many of the dollars that once went to Pharmaceuticals are now going to Biotechnology, particularly as the big pharma firms scour the biotech industry in search of the next blockbuster drug to replace drugs facing generic competition in the near term.
Although the credit crunch and evaporation of capital from the markets has obviously constrained the ability of buyers, particularly private equity groups, to make big deals, 2008 still posted a total of 30 billion-dollar deals worth a combined total of $166.1 billion. This is the second-highest level in the past five years, behind 2006 when 36 billion-dollar deals were announced worth $206.4 billion. While many of the big deals in 2008 involved agreements with relatively small upfront payments and a series of much larger milestone or contingent payments, the same may also be said of many big deals in earlier years.

The single largest deal of the year is Roche Holdings’ (SWX: ROG) proposed acquisition of the remaining 44.1% interest that it does not already own in the biotech firm Genentech for $43.7 billion. By itself, this one deal accounts for nearly one-fifth of all health care M&A dollars for 2008. As of the time of writing, this deal has not closed, but whenever a comment has appeared in the media questioning Roche’s ability to get the deal done, wondering whether it can raise the $30 to $35 billion in debt financing it needs to conclude the deal, the company has responded that it remains committed to getting the deal done.
Prospects For 2009
Word on the street is that 2009 will experience a decline in M&A activity from 2008, particularly during the first half of the year, after which prospects should improve. This decline will be felt most acutely in the health care services, particularly in the Hospital and Long-Term Care sectors whose overall operations generally include a real estate component. There may also be an uptick in bankruptcy and distressed sales, although we currently don’t see much of that kind of activity. Strategic buyers will keep acquiring, but may for the time being limit themselves to what they consider strictly necessary for their business plans. Other firms, many of them biotechs burning through cash with little hope of additional venture capital, will find it necessary to combine with another company for the funds to keep their research projects alive.