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Health care firms stand out in 2014 for M&As worth US$438b
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IN a big year for deal making, the health care industry is a standout.
Large drugmakers are buying and selling businesses to control costs and deploy surplus cash. A rising stock market, tax strategies and low interest rates are also fueling the mergers and acquisitions.
It’s all combining to make 2014 the most active year for health care deals in at least two decades. The industry has announced about US$438 billion worth of mergers and acquisitions worldwide so far, about 14 percent of the US$3.2 trillion total for all industries, according to data provider Dealogic. Overall, M&A is on track for its best year since 2007, the year before the financial crisis intensified.
“Health care has been a sleepy niche of M&A until recently, but the giant has been awakened,” says Ken Menges, a senior partner handling M&A at law firm Akin Gump in New York.
To a large extent, the deals are being driven by “cost pressure on the entire health care system,” as insurers and government health plans increasingly hold down or even reduce reimbursements to drug, device and service providers, says Ashtyn Evans, pharmaceutical and biotech analyst with investment firm Edward Jones in St Louis, Missouri.
Companies also are looking to expand market share, and boost their portfolios in hot areas such as drugs for cancer and hepatitis C, she says.
Merck & Co agreed in June to pay nearly US$4 billion for Idenix Pharmaceuticals Inc to combine that company’s hepatitis C medicines with its own.
Taxes are another reason behind the rush to the negotiating table.
Some big, US pharmaceutical, biotech and medical device companies have been trying to acquire overseas rivals, allowing them to move their headquarters to a country with a lower tax rate. The deals also give the buyer access to billions in overseas profits to invest in research and development, without having to bring those profits back to the US and pay taxes on them.
Medical device maker Medtronic’s US$43 billion acquisition in June of Ireland-based Covidien is an example.
For customers, this year’s deal making has both benefits and drawbacks.
Patients could see a slight increase in new medicines and devices over time. That’s because bigger companies typically have more money to spend on developing treatments, and have more experience navigating the difficult process of getting products approved by regulators. But patients could also have fewer doctor and hospital options as companies combine to lower costs.
For employees, the mergers could mean some job losses in areas such as administration and sales, but not in research at drugmakers. Losses at health care providers would be minimal, if any.
The frenzy of health care M&A has been good for stocks.
Mergers tend to boost share prices in general because the acquirer pays a premium over the market value of the target stock to ensure the deal wins approval from shareholders.
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