Analysis of Mergers and Acquisitions in Global Healthcare

8/3/2019 Analysis of Mergers and Acquisitions in Global Healthcare

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ANALYSIS OF MERGERS ANDANALYSIS OF MERGERS AND

ACQUISITIONS IN GLOBALACQUISITIONS IN GLOBALHEALTHCARE INDUSTRYHEALTHCARE INDUSTRY

Submitted by:

Shival Pahuja,

Tarun walia,

Arshad

UIAMS.Panjab University


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INTRODUCTIONINTRODUCTION

y Merger is a combination of two companies into onelarger company. A merger can resemble a takeover butresults in a new company name (often combining thenames of the original companies) and new branding and is

usually done purely for political or marketing reasons.y An acquisition, also known as a takeover or a buyout, is

the buying of one company (the target) by another, usuallypurchase of a smaller firm by a larger one. An acquisitionmay be friendly or hostile.

y

Types of Mergers:1. Horizontal Mergers

2. Vertical Mergers

3. Conglomerate Mergers


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MAIN MOTIVES OF MERGERS

ACQUIRE UNDER

VALUED FIRMS

DIVERSIFY TO

REDUCE RISKS

CREATING

OPERATIONAL OR

FINANCIAL

SYNERGY


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M&A DRIVERSM&A DRIVERS

y Cross-border expansion

y Innovation

y

Taxationy Economy of scope


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OVERVIEWOVERVIEW OF GLOBAL MERGERS ANDOF GLOBAL MERGERS AND

ACQUISITIONSACQUISITIONS

y Consolidation in medical device, generic and consumer health segment of the healthcareindustry and consolidation in the European and Japanese pharmaceutical industry. Withlow R&D productivity and patent expiry of several blockbuster drugs, big pharmaceuticalcompanies were diversifying into medical devices (J&J, Roche), generics (J&J, Novartis,Sanofi Aventis, and Daiichi Sankyo) and diagnosis (Roche).

y Biotechnology companies were acquired for monoclonal antibodies, RNAi and stem cells

technology platform and R&D pipeline of oncology projects.

y Genentech rejected a $44 billion offer from its majority shareholder Roche for theremaining shares in 2008 but Roche has not given up and offered only $47 billion due touncertain market conditions in early 2009.

y Pfizer bid of $68 billion for Wyeth and Merck 41 billion bid for Schering Plough show thepush of traditional pharma into biologics. These bids have revived the M&A market.

Companies like Amgen, BMS and Lilly need to act fast to grow, to acquire, merge orbecome a target. Mergers and acquisitions were successful if driven by a blockbustermarketed products like Lipitor (Pfizer-Werner Lambert), Niaspan (Abbott-Kos) and Cialis(Lilly-ICOS).


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y New product derived mergers based on potential blockbuster marketedcancer drugs like Erbitux (Lilly-ImClone), Velcade (Takeda-Millenium) andAloxi, Salagen; Hexalen (Eisai-MGI Pharma) will be successful. Rochepotential takeover of Genentech will be a success.

y Pfizer takeover of Wyeth and Merck of Schering Plough will not resolve

the low productivity of combined R&D to produce blockbuster drugs toreplace Lipitor, Zocor and Fosamax. Analysts have termed it more a costcutting effort and a shock absorber to patent expiry of Lipitor in 2011 asmerger will dilute the affect of patent expiry.

y Teva has grown by smart acquisitions in the generic drug business and isnow the top Generic drug company. It started with minor acquisition of

Copley pharmaceutical in 1999 followed a year later of CanadianNovopharm. In a major move Teva bought for $3.4 Sicor which was strongin injectable generics and biogenerics and IVAX in 2006 for $7.4 billion.The biggest M&A in generics was Teva offer of $7.5 billion for Barr andPliva. These acquisitions have made Teva a strong generic company inEurope and USA. It has now shifted its focus in the emerging markets aswell


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METHODOLOGYMETHODOLOGY

y The total data consisted of 977 deals over a period of more than10 years i.e. from January 2001 to February 2011 of which 789were closed, 118 were cancelled, 35 were announced and 35 wereeffective. The data set considered for analysis included 327companies for which both the EV/Revenue and EV/EBITDAmultiples were given which in turn were used to arrive at the

Revenue and EBITDA.y These 327 companies were divided into small cap, mid cap and

large cap based on their revenue. Small cap companies were withrevenue of less than $50 million, mid cap with greater than $50million but less than $500 million and large cap with greater than$500 million. Consequently 163 small cap companies, 111 mid capcompanies and 53 large cap companies were obtained for furtherdetailed analysis

y The trends of valuation multiples (EV/Revenue and EV/EBITDA) arestudied with the help of descriptive statistical tools over a periodof 10 years to draw conclusions regarding the variation in purchaseprice and the reasons.


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STATUS OF DEALSSTATUS OF DEALS

0

200

400

600

800

1000

1200

CLOSED CANCELLED ANNOUNCED EFFECTIVE TOTAL


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DIVISIONSDIVISIONS

163

111

53

0

20

40

60

80

100

120

140

160

180

DIVISIONS

SMALL CAP MID CAP LARGE CAP


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ANALYSISANALYSIS

y Firstly, a comparison of the number of deals in differentsegments was undertaken and reasons for theirincrease/decrease was examined.

y The number of merger/acquisition deals ofsmall capcompanies increased by almost 8 times from 5 in 2001

to 40 in 2010 because1. Buyers see small cap acquisitions as investment

opportunities and a part of diversified investmentstrategy

2. Small cap companies see selling as a means to grow

their businesses without the regulatory expensesassociated with going public.

3. Small cap companies are gaining relevance in themarket owing to various support services andoperations carried out by them.


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NUMBER OF SMALL CAP DEALSNUMBER OF SMALL CAP DEALS

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

NUMBEROFDEALS

NUMBER OF DEALS


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MID CAP COMPANIESMID CAP COMPANIES

y The number of merger/acquisition deals ofmid cap companies have also shown anupward trend particularly in the year 2008

and 2010.y A major reason is the inherent

performance boost they witness whenmergers and acquisitions activity increases as

valuations become favorable and largercompanies with excess cash on their balancesheets look for ways to expand theirbusinesses.


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NUMBER OF MID CAP DEALSNUMBER OF MID CAP DEALS

0

5

10

15

20

25

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

NUMBER

YEAR

NUMBER OF DEALS


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LARGE CAP COMPANIESLARGE CAP COMPANIES

y The number of deals of large capcompanies has remained steady during theinitial years but has decreased particularly in

2007 which have been due to the economicslowdown and regulatory constraints.

y The increasing cost of healthcare and

research and development has madeacquisition of healthcare companies a veryexpensive proposition.


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NUMBER OF LARGE CAP DEALSNUMBER OF LARGE CAP DEALS

0

1

2

3

4

5

6

7

8

9

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

NUMBER

YEAR

NUMBER


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COMPARISION IN NO. OF DEALSCOMPARISION IN NO. OF DEALS

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

NUMBEROFDEALS

YEAR

SC

MC

LC


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TEV/REVENUE OF SMALL CAPTEV/REVENUE OF SMALL CAP

y TEV/Revenue ofsmall cap companies has

shown high variation with the maximum

range of 266.6 and minimum as low as .057

depicting that the data is spread out overlarge range of values.

y Thus, the purchase price in some of the

years was very high as compared to others.

The multiple is negatively skewed since mean

is less than the mode which indicates that

majority of the values were 23 and above.


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SMALL CAPSMALL CAP

0

5

10

15

20

25

30

35

40

45

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

TEV/REVENU

E

YEAR

TEV/REVENUE


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TEV/REVENUE OF MID CAPTEV/REVENUE OF MID CAP

y In the mid cap companies, the cumulativeanalysis depicts that the multiple has a lowstandard deviation. Therefore, most of themultiple values lie close to the mean. This means

that an investor has paid the average purchaseprice for acquiring a mid cap healthcare companyand there has been no over valuation. Even therange of the multiple is not very wide with themaximum value of 24.8 and a minimumvalue of 0.197.

y The mid cap companies are less resistant tomergers as it helps them attain benefit of advanced technology which is very essential inthe healthcare sector.


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TEV/REVENUE OF LARGE CAPTEV/REVENUE OF LARGE CAP

y The large cap revenue multiple has alow range and low standard deviationreflecting that values are close to the

mean .Thus, an investor paid purchaseprice in accordance with what wasprevailing in the market.

y Large cap healthcare companies are not a

very lucrative investment as they involveheavy investments which generate returnsonly in the long run


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LARGE CAPLARGE CAP

0

0.5

1

1.5

2

2.5

3

3.5

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

TEV/REVENUE

YEAR

LARGE CAP

TEV/REVENUE


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COMPARISION OF TEV/REVENUECOMPARISION OF TEV/REVENUE

0

5

10

15

20

25

30

35

40

45

50

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

TEV/REVENUE

YEAR

LC

MC

SC


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COMPARISION OF EV/EBITDACOMPARISION OF EV/EBITDA

y EV/EBITDA multiple is unaffected by differencesin depreciation policy and appears unaffected bydifferences in capital structure. It is affected by afirms level of capital intensity, higher capital

intensity results in a lower EV/EBITDA multiple.y The multiple of small cap companies increased

significantly particularly in the year 2008 ascompared to mid cap and large cap companies.During this period, economic downturn favoured

the M&A of small and mid cap companies as theyoffered greater growth potential as compared tolarge cap stock. Therefore the unlevered value ofsmall and mid cap companies were higher ascompared to the mid cap companies.


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COMPARISION OF EV/EBITDACOMPARISION OF EV/EBITDA

0

5

10

15

20

25

30

35

40

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

TEV/EBITDA

YEAR

SC

MC

LC


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CONCLUSIONCONCLUSION

y Reasons for variation in multiples were

found to be as:

1) Differences in the quality of the business

2) Accounting differences

3) Fluctuations in Profits


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y An important trend that came forth was theincreasing investment in small and mid cap companiesas compared to the large cap companies, especiallyduring times of high market volatility.

y The major factors which led to increased deals wouldbe the deregulation proposals implemented in thehealthcare industry and the need to spread risk ofthe huge cost of developing new technology

y The maximum deals were in the small cap segment,which also experienced large amount of variations in

the purchase price paid by the investor formerger/acquisition.


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Thank YouThank You

Documents

Analysis of Mergers and Acquisitions in Global Healthcare