HEALTHCARE M&A

The Healthcare M&A Index is a long-only, USD-based, actively managed total return Index

The Index invests in companies which are to benefit from M&A potential (takeover targets and acquirers) as well as from long-term industry drivers and specific company catalysts in the healthcare sector

M&A is the natural response to industry’s ongoing challenges (intense competition, pricing pressure, rising costs and complexity of regulatory compliance, slower organic growth and blockbuster drugs going off-patent) and changing market dynamics, as it allows to reignite growth and deliver operating leverage.

With increased focus on personalized medicine and continued innovations from the Tech world (wearables, next-generation sequencing, etc.), MedTech is to top the M&A list

… BUT VISIBILITY
IS FINALLY IMPROVING

LARGE HEALTHCARE PLAYERS
HAVE ALL REASONS TO LOOK AT M&A

TECH GIANTS ARE ALSO POTENTIAL PREDATORS

MARKET DYNAMICS ARE RAPIDLY CHANGING:
LONG-TERM DRIVERS REMAIN INTACT…

HEALTHCARE FUNDAMENTALS:
GROWING NICELY BUT
THERE’S STILL MUCH TO BE DONE

ORPHAN DRUGS - MEDICINES IN DEVELOPMENT IN THE US FOR

RARE DISEASES IN 2016

CROs & CDMOs

TECH TO TAKE THE LEAD IN CROs

The CRO (Contract Research Organizations) industry barely existed ten years ago but outsourcing is the logical consequence of a maturing industry. The CRO market is now consolidated, as the top 10 players command 80% of the market ($60B market by 2020 with a CAGR of 9%), with the APAC region growing the fastest. With greater complexity and competition, mounting pressure on drug cost containment and the need to cut time for product marketing, an ever increasing number of Pharma, Biotech and MedTech companies outsource many tasks they previously performed in-house, notably:

• site selection and patient enrollment through final regulatory approval (FDA, EMA etc.),
• independent data generation, proving concrete evidence of clinical superiority and costeffectiveness
  of products, a key feature for the future of personalized medicine.

CROs & CDMOs

TOWARD A MERGER OF BOTH BUSINESSES?

The same dynamics apply to CDMOs (Contract Development Manufacturing Organizations). CDMOs, a highly fragmented market, has a 25% share of the outsourced manufacturing and packaging functions (top 10 companies have a 30% combined market share). CROs bear 50% of the Pharma’s clinical trials → Consolidation in CROs took place fast as larger CROs were preferred by the Pharma & Biotech industry with their end-to-end product offering (multiple geographies and multiple complex trials). 

We believe that CDMOs mergers are on every banker’s mind as the next logical step would see CROs and CDMOs merging → The best example is the just completed $7.2B (30% premium) acquisition of Patheon by Thermo-Fisher. 

BIOSIMILARS – CLOSELY HELD

BY THE LARGE PHARMA PLAYERS BUT…

Due to complexities in the manufacturing process and to reluctance from physicians prescribing these drugs (very small changes can affect safety/effectiveness), biosimilars are in a completely different shape from generics as:
 

• discounts vs. branded drugs are lower (in the range of 30% in the US and 50% in Europe) vs. generics (90% on average)

• development costs in the range of $100M/$200M vs. $1M to $2M for generics

• dominated by a few large players such as Sandoz (generic arm of Novartis), Pfizer (Hospira), Amgen, German privately-held Boehringer Ingelheim and South Korean Celltrion

Roughly 50% of biosimilars sales will go off-patent in the next four years. The 3 best-selling biosimilars (out of seven approved by the FDA so far) - Humira, Enbrel and Remicade - were FDA-approved but only Pfizer’s Inflectra (biosimilar of Remicade) is currently commercialized as Humira and Enbrel are held-up in patent litigation and are not expected to be commercialized before 2018. 

In Europe the number currently stands at 32 and the main difference between the two continents is regulations. In the US there are two FDA approval pathways: “highly similar” or “interchangeable”. Interchangeable (allows for automatic substitution by pharmacists) means that the biosimilar is expected to have the same results as the original biological drug.

No one of the approved biosimilars got the “interchangeable” status in the US so far and a such it represents a “legislative” loophole which is to delay the entry of biologics in the US market but clouds are clearing out under the helm of the new FDA Commissioner. 

M&A within the biologic manufacturing space is to gain speed as it’s one of the few growing markets in the pharma space.

The Cancer profiling market is set to grow from $25B in 2015 to $62B by 2021, a 19% CAGR, as personalized medicine allows a better prediction of cancer and better targeted therapies with less side-effects.

GENERICS – CONSOLIDATION AMONG

LARGE PLAYERS IS NOW NEEDED

The Generics industry is seeing increased competition, most notably from Indian drug makers (24% market share in the US), which pressures industry margins as volume growth is unable to offset declining prices (Mylan citing high-single digit price erosion). The FDA, which approved a record of 800 generics in 2016, is speeding up the approvals for generics (from four years to ten months), notably on those generic drugs where fewer or no competition exists as a way to drive overall drug prices lower. At the same time, manufacturing capacity of products becoming generic is divested from Pharma, which is an additional catalyst for consolidation in the CDMO space.
 

HEALTHCARE SERVICES – NO CHOICE BUT

TO CONSOLIDATE IN ORDER TO SURVIVE

This is the largest pie of the Global Healthcare sector, representing 2/3 of the total. The future in this space is driven by further consolidation across all segments including hospitals, physicians organizations, surgery centers, imaging centers and many others as downward pressure on margins is set to continue in the next few years. 

The industry issues are compounded by baby boomers which are exiting the job market and are adding to an already strained shortage of nurses and physicians salaries (and costs) are expected to grow more than the rate of inflation.