WASHINGTON—Merger and acquisitions (M&A) activity in the health care industry is brewing.

In the past 10 years ending December 2009, there were 1,345 mergers in the pharmaceutical industry with a total deal value of roughly $694 billion, according to a report from Irving Levin Associates Inc., a health care intelligence service provider.

In 2008, there were 180 pharmaceutical industry mergers, the most in a single year during the entire 10-year period. In dollar value, industry mergers totaled $147 billion in 2009, outpacing all other years.

“In all of the top 25 of the largest pharmaceutical mergers and acquisitions announced during the 10 years ended December 31, 2009, the targets were represented by publicly traded, revenue-producing pharmaceutical companies,” said Irving Levin.

Unlike deal activity in other industries, mergers in the pharmaceutical industry occurred to the largest players—many of the largest revenue-producing firms were bought out or sold off. The U.K.-based SmithKline Beecham Corp., which merged in 2000 with Glaxo Wellcome, forming GlaxoSmithKline, is one such example.

Market-leading Pfizer Inc. spent by far the most among all pharmaceutical industry firms. In 2009, it paid $68 billion in cash and common stock for Wyeth Inc. and in 2003, $56 billion for Pharmacia Corporation, a company that was established in 1837 by well-known pharmacist Carlo Erba. Pharmacia itself went through many merger-related activities by the time Pfizer took over the reign.

Sanofi-Synthelabo, based in Paris, France, became majority owner of Aventis in 2004 for $65.5 billion. The Merck–Schering Plough merger was finalized in November 2009 at a total cost of $41.1 billion.

“The mega-deals that comprise the top 25 pharmaceutical mergers and acquisitions of the past decade were announced at the rate of one or two per year from 2000 to 2004, but from 2005 to 2009 increased to the rate of three to four per year,” according to Irving Levin.

M&A Normal in the Health Care Sector

“The 2009 M&A market was characterized by an absence of mega-deals, but an active middle market, particularly in consumer-oriented sectors,” according to Sandy Steever of Irving Levin, as stated in the report.

In 2009, 80 midrange hospitals went on the sales block with a total price tag of $1.7 billion combined.

This M&A market for hospitals is not interested in financially distressed hospitals, which is the opposite of the typical corporate M&A culture where an investor buys distressed firms, brings them back to health, and sells them later at a profit. The sales did not represent, with the exception of one, any sales of hospitals that were in bankruptcy proceedings.

“With just one distressed facility sale for 2009, the targeted hospitals tended to be of higher quality and greater financial stability than in previous years, and so could command higher prices on average,” said Stephen M. Monroe, a partner at Irving Levin, in the report.

Monroe continued that there were no known buyers for distressed firms in the hospital sector. “With the market feeling the effects of the Credit Crunch, it also appears likely that hospitals faced with bankruptcy in 2009 were unable to find financially robust buyers.”

Between December 1999 and December 2009, 597 hospital deals were consummated at a cost of roughly $74.3 billon. Revenues of the hospitals gobbled up ranged between $1.5 billion and $25 billion per annum.

A private equity consortium bought HCA Inc., a hospital holding company, which owns 163 hospitals nationwide. HCA reported $25 billion in earnings in 2006. The investors group included Bain Capital, Kohlberg Kravis Roberts & Co., Merrill Lynch Global Private Equity, among others. The price tag was roughly $33 billion, including the assumption of debt.

The July 2007 merger between Triad Hospitals Inc. and Community Health Systems was considered the second largest hospital takeover in terms of revenue.

Steever suggests that given the health care reform legislation, companies in the sector will attract funds from investors interested in a piece of the rapidly expanding industry.

“With the recent passage of health care reform, and the addition of up to 30 million customers to the health insurance rolls, investors will very likely use mergers and acquisitions to capture that increased market share in the near future. Targeted sectors will most likely include Hospitals, Managed Care and retail-oriented health care providers,” predicts Steever.

Latest Pharmaceutical Buyouts

Valeant Pharmaceuticals International, formerly ICN Pharmaceuticals Inc., based in Aliso Viejo, Calif., acquired a number of dermatology firms over the past two years, including Dow Pharmaceutical Sciences Inc., Coria Laboratories Ltd., DermaTech Pty Ltd., and EMO-FARM Ltd.

“We plan to maximize our pipeline through strategic partnering to optimize our research and development assets and strengthen ongoing internal development capabilities,” published Valeant on its website.

Valeant acquired an unnamed Brazilian pharmaceutical firm for roughly $28 million in March, according to the Pharma and Healthcare website.

Pharmaceutical industry M&A activity will continue, despite unrealized benefits concerning research and development and earnings. According to a number of analysts, pharmaceutical giants are looking to acquire smaller, more innovative firms as their patents expire and with few blockbuster drugs in the research pipeline.

“While history shows that few mega-mergers have delivered real long-term benefits for buyers or their shareholders, the ‘quick fix’ that such transactions offer is clearly still difficult for some to resist. The deals unveiled by Pfizer and Merck in 2009 will not be the last global-scale transactions witnessed in the sector, but a more strategic approach to M&A activity will begin to prevail,” predicts the Beta Stock Market and Accounting website.

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