The Healthcare M&A 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.
After two strong years (2014/15), Global Healthcare M&A decelerated sharply in 2016 due to a couple of powerful headwinds (regulations targeting US tax inversion, Trump’s election).
M&A deal activity in the industry should be back in force in the next few quarters, possibly beating the 2015 record as:
The forthcoming US tax reform should notably give a boost to mega deals as smaller ones are driven by fundamentals and are more immune to the political and tax landscape.
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.
M&A allows to reignite growth and/or deliver operating leverage.
Low net debt / EBITDA levels (below a max. level of 3-4x) point to a huge M&A firepower.
M&A is the natural response to these changing market dynamics as it allows to reignite growth and deliver operating leverage.
M&A focus by the large Pharma players is near the post-approval phase but, as shown by the Gilead-Kite deal (announced before an FDA approval), earlier-stage assets purchases (notably through contingency deals) are likely to accelerate in the next few quarters.
Contingency deals are an important part of the ongoing R&D externalization process together with outsourcing to private contract research organizations (CROs).
Biologics and OTC (over-the-counter) are growing the fastest.
Oncology is the largest therapeutic area with 16% of total pharmaceutical sales by 2021 from 10.7% in 2015.
Orphan drugs growing twice (11%) the prescription drug market and to account for more than 15% of worldwide prescriptions (including generics) by 2021.
Increased complexity, larger size of trials and greater focus on chronic and degenerative disease are the main reasons behind cost inflation.
70% of drug sales today derive from drugs initially developed by smaller companies vs. 30% during the 1990’s.
M&A is an important driver for pipeline enhancement.
A strong number as typically out of 10K compounds, only five advance to the human testing phase and only one is successfully commercialized.
Over 1/3 of ongoing developments are for rare diseases.
Oncology treatment sales (a somewhat crowded space) are expected to reach $190B by 2022¹.
1/3 of total new drugs to be introduced focus on cancer therapies.
The patient thresholds for orphan drug designation by comparable regulators (FDA, EMA) is in US: 6.37 patients out of 10'000, in Europe: 5 patients out of 10'000 and in Japan: 4 patients out of 10'000.
Insurers are set to continue covering such drugs (on average $140K vs. $27K for nonorphan), as it is in most cases the single possibility for patients.
2016 saw a record number of applications (582, a 23% Y/Y growth) made to the FDA for orphan drug designations.
Larger players include Novartis (11.3% share), Roche (8.8%), Celgene (8%) others include Alexion Pharmaceuticals, Shire, Vertex and Kite (just bought out by Gilead Sciences), Tesaro and Bluebird Bio.
We believe that gene therapies and advances in machine learning, computer vision, robotic automation and high throughput sequencers are expected to boost the discovery of new therapies for rare diseases.
Fewer FDA restrictions and faster FDA approvals particularly in the Rare Diseases space
are likely to attract a lot of M&A attention.
Healthcare IT spans notably Medical Document Management Solutions, Clinical Analytics and Mobile Health Applications. It’s a $134B market growing at a 16% CAGR¹, one of the fastest growth rates within Healthcare. More importantly, Technology is positioned as a tool to deliver improved health outcome rather than as a contributor to rising Healthcare costs. Aside from Artificial Intelligence, Virtual Reality, Augmented Reality, 3D Printing etc., we believe that the internet of medical things (IoMT) and blockchain could play a very important role as:
The most interesting targets are those providing a better consumer experience via wearables and mobile technologies by exploiting people’s data.
¹Source: Markets & Markets
A huge $370 bn industry growing nicely
(5% CAGR) but still highly fragmented.
2015 was a record year for MedTech M&A with a total of 240 deals and $128B in deal value. Abbott was responsible for a large part with the $30.7B acquisition of St. Jude Medical and the just-completed embattled $5.3B Alere acquisition.
Larger companies in the MedTech space are looking for increased market share and scale in each of their specialty category as a way to better respond to endlessly larger clients (hospital systems notably) and secure market share at the expense of lower margins. This market is also disrupted by new startups and Tech giants developing smart medical devices or turning their usual devices (smartphones, watches) in medical ones.
A few examples of the new MedTech and Tech partnerships:
Europe, home to 25’000 MedTech companies (for the most part SMEs) with 31% of the worldwide MedTech market, is ripe for consolidation ahead of the new European Medical Devices Regulation (MDR) which applies from May 2020.
In the US (6’500 companies and 39% worldwide market share), many companies will face an increasingly intensive competitive environment:
We believe that the small-to-mid players on both sides of the Atlantic have a great opportunity just ahead to further consolidate the market and the chance to make accretive acquisitions. Larger MedTech players on the other side are likely to keep active in their search for higher market share and are expected to keep adjusting their portfolios (buying or divesting assets) accordingly.
The interest shown from Tech giants for medical devices could give rise to significant M&A with huge premiums.
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:
Sophisticated data analysis (including AI & machine learning) in clinical trials (and trial designs) is critical to the drug development process and payer reimbursement strategies. We believe that CROs are to shift their focus to the IT world as shown by the merger of
product and healthcare service provider Quintiles with IT provider IMS Health, creating one of the largest pure-play service providers in the personalized medicine space.
M&A in the Medical Software space is likely as large Tech companies are to play an ever more important role over the next few years.
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.
Thanks to this merger, Thermo-Fisher has become (for now at least) the sole fully integrated player servicing the Pharma & Biotech industry, offering services spanning from solutions for drug development, delivery and manufacturing.
Companies such as Swiss-based Lonza and US-based Catalent are topping the list of potential consolidators/M&A targets.
The battle for targets is likely to intensify, notably in Europe (the leading CDMO market) as private equity firms and corporations compete.
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.
Understanding the molecular bases of the disease and identifying biological markers (DNA, RNA, Proteins) associated with safety and tolerance for each patient is fundamental and will spark the personalized medicine take-off.
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.
Finally, from 2018 onwards, the number of drugs going off-patent is expected to decline sharply, a negative catalyst for this industry. For the generics industry there is no alternative but to search for even larger “economies of scale” to survive the present environment. Entry into Biosimilars is a bet they have to do in the next few quarters or they will take the risk of being left out from this market.
While it might already be too late for small players, large scale M&A is likely to take place in the next few quarters.
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.
While IT is likely to alleviate some burdens of the labor shortage (telehealth, wearables, apps etc.), the service providers standing to benefit and to gain market share are those which are able to be the most efficient ones.
The Healthcare services segment is not the key focus of our M&A portfolio but opportunities can pop up from time to time.