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ANALYSIS OF MERGERS AND ACQUISITIONS IN GLOBAL HEALTHCARE INDUSTRY

Submitted by: Shival Pahuja, Tarun walia, Arshad UIAMS.Panjab University

INTRODUCTION
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y 1. 2. 3.

Merger is a combination of two companies into one larger company. A merger can resemble a takeover but results in a new company name (often combining the names of the original companies) and new branding and is usually done purely for political or marketing reasons. An acquisition, also known as a takeover or a buyout, is the buying of one company (the target) by another, usually purchase of a smaller firm by a larger one. An acquisition may be friendly or hostile. Types of Mergers: Horizontal Mergers Vertical Mergers Conglomerate Mergers

MAIN MOTIVES OF MERGERS

ACQUIRE UNDER VALUED FIRMS

DIVERSIFY TO REDUCE RISKS

CREATING OPERATIONAL OR FINANCIAL SYNERGY

M&A DRIVERS
Cross-border expansion y Innovation y Taxation y Economy of scope
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OVERVIEW OF GLOBAL MERGERS AND ACQUISITIONS


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Consolidation in medical device, generic and consumer health segment of the healthcare industry and consolidation in the European and Japanese pharmaceutical industry. With low R&D productivity and patent expiry of several blockbuster drugs, big pharmaceutical companies were diversifying into medical devices (J&J, Roche), generics (J&J, Novartis, Sanofi Aventis, and Daiichi Sankyo) and diagnosis (Roche). Biotechnology companies were acquired for monoclonal antibodies, RNAi and stem cells technology platform and R&D pipeline of oncology projects. Genentech rejected a $44 billion offer from its majority shareholder Roche for the remaining shares in 2008 but Roche has not given up and offered only $47 billion due to uncertain market conditions in early 2009. Pfizer bid of $68 billion for Wyeth and Merck 41 billion bid for Schering Plough show the push 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 or become a target. Mergers and acquisitions were successful if driven by a blockbuster marketed products like Lipitor (Pfizer- Werner Lambert), Niaspan (Abbott-Kos) and Cialis (Lilly-ICOS).

New product derived mergers based on potential blockbuster marketed cancer drugs like Erbitux (Lilly-ImClone),Velcade (Takeda-Millenium) and Aloxi, Salagen; Hexalen (Eisai-MGI Pharma) will be successful. Roche potential takeover of Genentech will be a success. Pfizer takeover of Wyeth and Merck of Schering Plough will not resolve the low productivity of combined R&D to produce blockbuster drugs to replace Lipitor, Zocor and Fosamax. Analysts have termed it more a cost cutting effort and a shock absorber to patent expiry of Lipitor in 2011 as merger will dilute the affect of patent expiry. Teva has grown by smart acquisitions in the generic drug business and is now the top Generic drug company. It started with minor acquisition of Copley pharmaceutical in 1999 followed a year later of Canadian Novopharm. In a major move Teva bought for $3.4 Sicor which was strong in 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 and Pliva. These acquisitions have made Teva a strong generic company in Europe and USA. It has now shifted its focus in the emerging markets as well

METHODOLOGY
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The total data consisted of 977 deals over a period of more than 10 years i.e. from January 2001 to February 2011 of which 789 were closed, 118 were cancelled, 35 were announced and 35 were effective.The data set considered for analysis included 327 companies for which both the EV/Revenue and EV/EBITDA multiples were given which in turn were used to arrive at the Revenue and EBITDA. These 327 companies were divided into small cap, mid cap and large cap based on their revenue. Small cap companies were with revenue of less than $50 million, mid cap with greater than $50 million but less than $500 million and large cap with greater than $500 million. Consequently 163 small cap companies, 111 mid cap companies and 53 large cap companies were obtained for further detailed analysis The trends of valuation multiples (EV/Revenue and EV/EBITDA) are studied with the help of descriptive statistical tools over a period of 10 years to draw conclusions regarding the variation in purchase price and the reasons.

STATUS OF DEALS
1200 1000

800

600

400

200

0 CLOSED CANCELLED ANNOUNCED EFFECTIVE TOTAL

DIVISIONS
SMALL CAP 180 MID CAP LARGE CAP 160

140

120

100 163

80

60

111

40 53 20

0 DIVISIONS

ANALYSIS
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1.

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Firstly, a comparison of the number of deals in different segments was undertaken and reasons for their increase/decrease was examined. The number of merger/acquisition deals of small cap companies increased by almost 8 times from 5 in 2001 to 40 in 2010 because Buyers see small cap acquisitions as investment opportunities and a part of diversified investment strategy Small cap companies see selling as a means to grow their businesses without the regulatory expenses associated with going public. Small cap companies are gaining relevance in the market owing to various support services and operations carried out by them.

NUMBER OF SMALL CAP DEALS


45 40

35

30 NUMBER OF DEALS

25 NUMBER OF DEALS

20

15

10

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011

MID CAP COMPANIES


The number of merger/acquisition deals of mid cap companies have also shown an upward trend particularly in the year 2008 and 2010. y A major reason is the inherent performance boost they witness when mergers and acquisitions activity increases as valuations become favorable and larger companies with excess cash on their balance sheets look for ways to expand their businesses.
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NUMBER OF MID CAP DEALS


25 20

15 NUMBER

NUMBER OF DEALS 10

0 2001 2002 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011

LARGE CAP COMPANIES


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The number of deals of large cap companies has remained steady during the initial years but has decreased particularly in 2007 which have been due to the economic slowdown and regulatory constraints. The increasing cost of healthcare and research and development has made acquisition of healthcare companies a very expensive proposition.

NUMBER OF LARGE CAP DEALS


9 8

6 NUMBER

NUMBER

0 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 YEAR

COMPARISION IN NO. OF DEALS


45 40

35

NUMBER OF DEALS

30

25 SC 20 MC LC 15

10

0 2001 2002 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011

TEV/REVENUE OF SMALL CAP


TEV/Revenue of small 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 over large 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 CAP
45 40 35 TEV/REVENUE 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011 TEV/REVENUE

TEV/REVENUE OF MID CAP


In the mid cap companies, the cumulative analysis depicts that the multiple has a low standard deviation. Therefore, most of the multiple values lie close to the mean. This means that an investor has paid the average purchase price for acquiring a mid cap healthcare company and there has been no over valuation. Even the range of the multiple is not very wide with the maximum value of 24.8 and a minimum value of 0.197. y The mid cap companies are less resistant to mergers as it helps them attain benefit of advanced technology which is very essential in the healthcare sector.
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MID CAP
5 4.5 4 3.5 TEV/REVENUE 3 2.5 TEV/REVENUE 2 1.5 1 0.5 0 2001 2002 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011

TEV/REVENUE OF LARGE CAP


The large cap revenue multiple has a low range and low standard deviation reflecting that values are close to the mean .Thus, an investor paid purchase price in accordance with what was prevailing in the market. y Large cap healthcare companies are not a very lucrative investment as they involve heavy investments which generate returns only in the long run
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LARGE CAP
LARGE CAP
3.5 3

2.5 TEV/REVENUE

1.5

TEV/REVENUE

0.5

0 2001 2002 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011

COMPARISION OF TEV/REVENUE
50 45 40 35 TEV/REVENUE 30 25 20 15 10 5 0 2001 2002 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011

LC MC SC

COMPARISION OF EV/EBITDA
EV/EBITDA multiple is unaffected by differences in depreciation policy and appears unaffected by differences in capital structure. It is affected by a firms 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 as compared to mid cap and large cap companies. During this period, economic downturn favoured the M&A of small and mid cap companies as they offered greater growth potential as compared to large cap stock. Therefore the unlevered value of small and mid cap companies were higher as compared to the mid cap companies.
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COMPARISION OF EV/EBITDA
40 35

30

25 TEV/EBITDA

20

SC MC

15

LC

10

0 2001 2002 2003 2004 2005 2006 YEAR 2007 2008 2009 2010 2011

CONCLUSION
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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An important trend that came forth was the increasing investment in small and mid cap companies as compared to the large cap companies, especially during times of high market volatility. y The major factors which led to increased deals would be the deregulation proposals implemented in the healthcare industry and the need to spread risk of the 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 for merger/acquisition.
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Thank You