Two unrelated reports—published within a two month span—present nearly identical M&A forecasts for 2013 and blame last year’s languid performance on various economic, political and market forces.
“Domestically, uncertainty related to the presidential election and the potential impact of the ‘fiscal cliff’ hindered transactions during 2012,” stated a six-page report from PricewaterhouseCoopers (PwC) on fourth-quarter and full-year 2012 M&A activity in the pharmaceutical and life-sciences sectors.“Globally, the Eurozone debt crisis, a stalled economic recovery, persistent weakness in the labor markets, disappointing economic growth in the BRIC nations (Brazil, Russia, India and China) during the first half of 2012, and ongoing instability in the Middle East cooled M&A activity.”
PwC’s latest Pharmaceutical and Life Sciences Deals Insights quarterly report—based on data from Thomson Reuters—revealed a slight year-over-year decrease in transaction volume in the medical device sector but noted that M&As experienced the largest-ever rise in total value. The number of deals fell slightly, from 52 in 2011 to 50 in 2012, but total transaction value jumped 48 percent to $36.4 billion, according to the multinational professional services firm’s analysis. The report attributes the hefty rise in deal value mainly to Johnson & Johnson’s $19.7 billion acquisition of skeletal fixation giant Synthes Inc., which closed in mid-June of 2012.
The opposite occurred during the fourth quarter—deal volume skyrocketed 77 percent, going from nine transactions in Q3 2012 to 16 in the final three months, but total deal value fell 29 percent to $3.4 billion, PwC’s report concluded.
In general, pharmaceutical and life-sciences mergers and acquisitions mirrored the pattern in medical devices—deal volume increased 48 percent in the fourth quarter of last year to 37 but total value fell 19 percent compared with Q3 to $17.2 billion. Both deal volume and deal value declined in Q4 2012 compared with the same period in 2011; the total number of transactions slipped 20 percent from the 46 recorded in Q4 2011 and dollar value tumbled 27 percent from the $23.7 billion that changed hands the previous year.
PwC’s analysis shows a poor appetite in 2012 for M&As among pharmaceutical and life sciences companies (which includes biotechnology, medical device and diagnostics firms). The total number of deals slid 19 percent to 120, though value remained essentially flat at $96.3 billion. “This trend may be the result of companies’ efforts to evaluate and optimize their existing portfolios of assets,” the report states.
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Courtesy of PricewaterhouseCoopers LLP Deals Insights Quarterly, based on data from Thomson Reuters. |
Such logic could help explain the 24 percent drop in the number of pharmaceutical M&As last year (to 39) and the biotechnology sector’s overall lackluster performance. Buyout activity slowed considerably during the fourth quarter, with only two deals recorded (the report does not identify the acquisitions, though one most likely was Amgen Inc.’s $415 million pre-Christmas purchase of Icelandic genome specialist deCODE Genetics. Founded in 1996, deCODE blazed a trail in personal genomics by trawling Iceland’s unique genetic heritage to decipher the links between gene variants and common diseases. It filed for bankruptcy in 2009 but re-emerged as a privately owned company). The $850 million aggregate value of those two deals represented a mere fraction of the $11 billion generated from buyouts in Q3, when heavy hitters like GlaxoSmithKline, Genmab and Molecular Partners AG went on lavish spending sprees. GlaxoSmithKline closed on its $3 billion buyout of Human Genome Sciences, while Genmab entered an agreement worth more than $1.1 billion with JNJ’s Janssen Biotech over global rights to daratumumab, an experimental monoclonal antibody to treat cancer. The deal included a $55 million upfront payment and an $80 million investment from Johnson & Johnson Development Corp. for a 10.7 percent stake in Genmab, an international biotechnology company based in Copenhagen, Denmark, that develops differentiated human antibody therapeutics for cancer treatment. More than a month after the Genmab-JNJ partnership, Molecular Partners entered into a $1.4 billion agreement with Allergan Inc. to develop and commercialize products for the treatment of serious eye diseases. Allergan made an upfront payment of $62.5 million to Molecular Partners as part of the agreement.
Biotechnology M&A slowed considerably at the end of 2012, with deal value plummeting 92.3 percent between the third and fourth quarters, and deal volume falling 60 percent. The biotech sector recorded the highest number of transactions (six) at the start of the year (the first quarter also generated the second-highest deal value for 2012).
M&A activity in the pharmaceutical and medical device sectors, by contrast, gathered steam at the end of the year, with drug-based acquisitions surging three-fold from the second and third quarters (to 12) and medical equipment deals swelling 77.8 percent from Q3 to 16. However, device deals and value peaked in the second quarter, when 17 deals worth roughly $26 billion were negotiated. More than two-thirds of the aggregate value of those acquisitions came from the JNJ-Synthes merger closing, but divestitures contributed considerably to the total: Corning snagged Becton Dickinson & Company’s Discovery Labware Unit for $730 million; Royal DSM doled out $360 million for Exton, Pa.-headquartered Kensey Nash Corporation (expanding its footprint in the market for devices and materials engineered from proteins and synthetic polymers); and Boston Scientific Corp., which took subcutaneous implantable cardioconverter developer Cameron Health Inc. under its wing for $150 million (Cameron, though, could receive an additional $1.05 billion based on the revenue it generates). Analysts claim the deal was designed to boost Boston Scientific’s defibrillator sales, which have plunged since peaking in 2009 amid concerns about safety and overuse. Cameron’s defibrillator is implanted below the skin and does not attach to the heart or blood vessel with the thin, insulated wires that have triggered failures in other devices.
“Divestitures across the United States accounted for 43 percent of total disclosed deal value and 30 percent of deals overall, the highest level since 2005,” the PwC report noted. “The pharmaceutical and life-science industry has been an active player in this trend. In the medical device sector, as companies have sought to unlock the value of non-core businesses and assets, others have sought to achieve growth by entering new markets and diversifying their product offerings.”
Diversification and new market jaunts certainly helped amplify medical device M&A activity in the final months of 2012. Medtronic Inc. accomplished both with its $816 million purchase of orthopedic implant maker China Kanghui Holdings Inc., gaining access to Asia’s second-largest device market as well as thousands of Chinese hospitals. The move also brings the Minneapolis, Minn.-based company closer to its goal of garnering 20 percent of its sales from emerging markets by 2016.
Stryker Corp. also looked outside its comfort zone in acquiring privately held Surpass Medical Ltd. for $135 million; the Israeli firm is developing “next-generation” flow diversion stent technology to treat brain aneurysms using a mesh design and delivery system. Other fearless explorers included Smith & Nephew, which bought Fort Worth, Texas-based Healthpoint Biotherapeutics for $782 million in cash to boost its wound care treatment portfolio; and C.R. Bard Inc., which nabbed sprayable surgical sealant and anti-adhesion product developer/supplier Neomend Inc. for $140 million.
The rebalancing of corporate portfolios is expected to continue this year as companies attempt to lock down top-line growth. As a result, PwC analysts expect M&A activity to intensify over the next eight months.
“We expect the pharmaceutical and life-sciences sector ... to remain acquisitive during 2013 despite economic headwinds,” the report concluded. “Deals supplement the R&D pipeline and help companies diversify into new markets and products and share risk. Because pharmaceutical and life-sciences companies still have access to capital, they can devise innovative ways to structure and finance transactions.”
Leerink Swann & Co. analysts agree, identifying Abbott, JNJ, Boston Scientific, Covidien plc, and Stryker as this year’s big spenders. “2012 was a more active year on the M&A front, though little was done in the way of truly transformational deals,” according to a 112-page report from Leerink analysts.“In 2013, we expect that large-cap medtech companies will continue to pursue M&A as an avenue to achieving higher top-line growth given slowing growth in key (and maturing) orthopedic, cardiovascular and medical supplies end markets; numerous structural industry challenges—pricing/volume/reimbursement pressures; and increasing regulatory hurdles at the FDA that raise internal R&D investment thresholds. We think the most likely large and mid-cap medtech acquirers will be Abbott, JNJ, C.R. Bard, Boston Scientific, Covidien, CareFusion, Stryker and Teleflex. These companies will continue to seek ways to effectively utilize their cash, particularly with dividend tax policy changes on the horizon. Given the heavy balance of OUS [outside U.S.] cash in large-cap medtech, M&A will by no means be restricted to the U.S. In fact, business development activity could be more heavily targeted to OUS assets, at least until there is greater visibility on tax repatriation reform, with now seems to us to have a lower chance of coming to fruition.”
