Dealtalk: U.S. healthcare sector ripe for more deals in 2011

By Jessica Hall and Debra Sherman

PHILADELPHIA/CHICAGO (BestGrowthStock) – The U.S. healthcare industry is poised for a robust year of dealmaking in 2011 as a wider variety of players from scientific tool makers to hospital companies looks for new growth.

A quick succession of deals in recent weeks points to the increasing appetite for acquisitions among a broad array of companies. Few expect a return to price-tags like the $67 billion Pfizer Inc paid for Wyeth or the $41 billion Merck & Co spent on Schering-Plough in 2009, but it does mean many more industry names will be targeted in 2011.

“You had last year (2009) as the year of the mega-pharma mergers with the likes of Merck and Schering-Plough. This year was more varied and next year will be, too,” said one healthcare investment banker who declined to be named because he was not authorized to speak to the media.

“You’ll see more bolt-on acquisitions and bite-sized deals that don’t necessarily change the industry but give a company new growth or new products or geographical reach,” the banker said.

As 2010 draws to a close, the number of transactions and the dollar volume of U.S. healthcare deals dropped to the lowest levels in more than five years, according to Thomson Reuters data.

But healthcare companies have many more compelling reasons to grow through acquisitions in the coming year, including the loss of patent protection on many best-selling medicines, a new U.S. healthcare law that requires more controls on patient costs and improved use of information technology, and pricing pressure from cash-strapped governments worldwide.

The stakes are already evident in Sanofi-Aventis’ $18.5 billion hostile pursuit of biotech Genzyme Corp, which is expected to drag on well into 2011.

Tim Nelson, an analyst at FAF Advisors, also expects more deal activity from companies such as Medtronic Inc, Johnson & Johnson, Abbott Laboratories and Pfizer. Many industry experts also see Amgen Inc spending its considerable cash resources on a large deal.

“They are under significant pressure because they’ve underperformed for several years now,” Nelson said. “(The) big guys are looking anywhere they can get reasonable growth that can move their needle. That’s not easy. I think you’ll see them buying more earlier-stage technology.”

Medtronic’s $800 million deal last month to buy Ardian Inc, the maker of a hot new therapy to treat high blood pressure, is one example of that trend, he said. Heart-device makers HeartWare International Inc and Thoratec Corp are “ripe for consolidation,” he added.

Morningstar analyst Damien Conover cited Vertex Pharmaceuticals Inc, Auxilium Pharmaceuticals Inc and Human Genome Sciences Inc as biotech companies with promising products that could be prime takeover targets of large pharmaceutical companies.

Larger companies such as Bristol Myers Squibb Co and Eli Lilly and Co also remain takeover targets, but they may be more difficult to swallow because of potential product overlaps with their peers, analysts said.


The volume of U.S. healthcare deals has dropped 42 percent to $106.3 billion so far in 2010, down from $186.2 billion for the full-year 2009, according to Thomson Reuters data.

Deals for biotech companies was the busiest niche at $26.7 billion, closely followed by the pharmaceutical and equipment sectors.

Worldwide, healthcare deals have totaled $172.4 billion so far this year, down 23 percent from $223.2 billion for all of last year, according to Thomson Reuters.

Auctions as varied as AstraZeneca Plc’s sale of Astra Tech, a Swedish unit that makes dental implants and medical devices, and Pfizer’s sale of its Capsugel unit, the world’s largest maker of hard capsules, have attracted both corporate bidders and private equity firms, bankers said.

“All areas are active right now. From the hospital space to tools and devices to pharma and biotech and managed care, there’s not a sleepy nook,” said a second healthcare investment banker who declined to be named because he was not authorized to speak to the media.

“Strategics remain interested in finding growth outlets. Alongside that, the portfolio companies and the sponsors are also present in auctions because they have money to deploy. There’s a balance between the strategics and the financial buyers as to who shows up to bid these days,” the banker said.

In December alone, HCP Inc agreed to purchase most of the real estate assets of nursing and assisted living firm HCR ManorCare Inc; eyecare company Alcon approved a long-awaited buyout by Swiss drugmaker Novartis; and Thermo Fisher Scientific said it would by lab equipment maker Dionex Corp.

And still more companies are in play. Ambulance company Emergency Medical Services and medical instruments maker Beckman Coulter Inc have put themselves up for sale. Hospital operator Community Health Systems is pushing a $3.3 billion unsolicited bid for Tenet Healthcare Corp.

At the same time, investment bankers and analysts doubt 2011 will bring any mega-mergers.

“For the time being, the mega-mergers are on the sideline … there will tend to be smaller deals,” said Les Funtleyder, a fund manager at Miller Tabak & Co.

“Because valuations are so inexpensive, you’d think there would be more deals. But the acquirers’ valuations are also, so it’s a double-edged sword,” Funtleyder said.

(Reporting by Jessica Hall and Debra Sherman; Editing by Michele Gershberg and John Wallace)

Dealtalk: U.S. healthcare sector ripe for more deals in 2011