The Horsepower & Strategy Behind Healthcare Product Manufacturer Mergers And Acquisitions — John G. Baresky
… 2017 was an impressive year for healthcare product manufacturer mergers and acquisitions…What were the strategic catalysts triggering these buys? …
… Johnson & Johnson’s $30 billion takeover of Swiss pharma firm Actelion … Gilead’s $12 billion acquisition of Kite Pharma … Abbott finalizes Alere deal for $5.3 billion … Reckitt Benckiser Group acquires Mead Johnson Nutrition for $17.9 billion … Sanofi picks up Protein Sciences with an upfront payment of $650 million … Cardinal Health acquires Medtronic business unit for $6.1 billion … Teleflex buys Vascular Solutions for $1 billion … Hologic acquires Cynosure for $1.7 billion … Stryker purchases Novadaq for $700 million … Allergan completes deal to buy Zeltiq Aesthetics for $2.4 billion … Integra Lifesciences buys J&J’s Codman Neuro business unit for $1.05 billion … Gilead purchases Cell Design Labs for $567 million … Takeda acquires Ariad Pharmaceuticals for $5.2 billion … Stryker picks up Entellus Medical for $662 million … Boston Scientific snaps up Symetis for $435 million … Mallinckrodt buys Sucampo Pharmaceuticals for $840 million … Becton Dickinson buys C.R. Bard for $24 billion … Roche acquires Ignyta for $1.7 billion …
…According to an EY ( Ernst & Young ) report on mergers and acquisitions, biopharma M&A has averaged above $200 billion over the past three years…
The healthcare manufacturing sector has always been a changing landscape of new and old firms impacted by mergers and acquisitions as companies jockey for the lead. Biotech, pharmaceutical, diagnostic, medical device, medical supply and other healthcare manufacturers have heavily hoofed the M&A range. Over the last several years, a remarkable drive has established itself in healthcare M&A activity.
A combination of strategies, resources and triggers has proven to be a catalyst for the healthcare manufacturing sector to charge ahead with merger and acquisition initiatives:
- Margin Pressure
- Favorable Financing
- Private Equity
- Corralling Revenue Loss
- Checkbook R&D
- Come Buy Me ( CBM ) Strategy
- Competitive Threats
- Diminishing Returns / Damaging Effects Of Continual Cost Cutting
- Technology
Margin Pressure
Continued pressure on margins by managed care, regulatory agencies and patient / consumer advocate groups are having an impact on manufacturers. It drives them to increase product lines to add revenue streams and having more products widens market presence that provides leverage in MCO, PBM, GPO and other contracting opportunities. Increased sales volume and contracting leverage as a result of M&A can be a strategically effective combination to offset margin pressure.
Favorable Financing
Strategically creative and assertive lenders, large cash reserves and solid stock performance are a combination that builds corporate confidence in exploring their M&A options. Investors are seeking more from their holdings and companies have to find ways to satisfy them -especially if they have accumulated large sums of cash. Companies can choose to build themselves up with their own funds through stock buybacks or plow money into their own operations. Based on favorable financial conditions, they can also choose to execute a financially sound acquisition or have a “going out with a bang” sale to another company. Eager lenders, low-interest rates, substantial cash reserves and investor hunger combine for an M&A stampede thanks to favorable financing.
Private Equity
…According to Bain & Company’s annual “Global Healthcare Private Equity And Corporate M&A Report”, the total value of healthcare private equity deals announced in 2016 surged to $36.4 billion, the highest level since 2007…
Healthcare has always been a popular playground for private equity (PE). Favorable financing cultivates optimum conditions for PE initiatives. Some healthcare PE entities are specialized practices within larger PE firms, others are PE firms dedicated to the healthcare sector. Both types take large or small companies private and with a variety of options available to them, retain them as cash cows for other deals, sell them to other PE companies or build them up to re-launch into the public sector again. Other arrangements include acquiring companies to partner with PE firms for money muscle and guidance to navigate complex and / or large scale deals. In a variety of ways, PE firms are strategically savvy perpetuators of M&A activity in the healthcare sector.
Corralling Revenue Loss
Corralling revenue loss becomes necessary when the buyer’s existing commercial organization is not robust enough to sustain itself over the long run. Blockbuster products are harder to develop as technology propels higher standards and levels of performance across product sectors. High margin niche products deliver good income but treat fewer numbers of patients. Technology and material advances can quickly render existing medical devices obsolete. Research and development do not generate an approvable product with each of its candidates and some don’t perform as well as expected once they are approved and launched.
Meanwhile, established products reach the end of their patents or fall out of favor with clinicians and provider organizations as clinical and cost standards change. Revenue growth flattens. Acquiring another company’s market share and pipeline buys time, widens and refreshes portfolio offerings while adding cash flow / sales. Corraling revenue loss due to patent expiration, obsolescence, pipeline concerns and changing standards is an ongoing management challenge for healthcare product manufacturers to account for; M&A is a viable go-to option.
Checkbook R&D
Some established and new healthcare product manufacturers are relying much more on buying other companies and investing less in traditional internal research and development. Their R&D initiatives are commercially-centric and seek to find embryonic / startup firms with novel product concepts. These companies can be invested in as satellite R&D units and funded as appropriate depending on the progress and promise of product approvals. If one of these investments produces a champion product, the backing company buys them outright or acquires an influential percentage of their shares.
A “bulk approach” to checkbook R&D is scaling up the deal and buying a well-established entity of comparable size to the buyer. This delivers more impactful growth, multiplies pipeline candidates while creating opportunities to save money through the elimination of redundancies. The ROI destination is more complex to reach, however; as debt load and integration challenges can lead to buyer’s remorse. Either way, the checkbook R&D strategy spans the smallest to the largest organizations in the healthcare sector.
Come Buy Me ( CBM ) Strategy
The “Come Buy Me” / CBM Strategy is executed on the seller side and is a contributor to the healthcare sector M&A activity through a two-phase process. The first process is based on CBM organizations being frequently smaller “one-horse” to mid-sized firms regularly executing a series of small acquisitions usually focused in select healthcare sectors; for example dermatology, orphan drugs, respiratory, lab diagnostics, etc. With a small but growing stable of offerings, the company establishes a market presence within the particular medical sector. Collectively, the lines produce more meaningful total revenue.
The CBM continues to ratchet up its growth through incremental product introductions and additional deals but the goal is never to build a dominant, long-standing player. The second phase is to build up enough of a commercial organization to market it to other companies with long-term growth goals who then acquire the CBM. The CBM business model inherently cultivates M&A activity from start to finish.
Competitive Threats
Even established healthcare product companies historically adverse to mergers and acquisitions are engaging in them to blunt competitive threats. Other companies accelerate their market presence by acquiring other companies and quickly scale up to become assertive challengers to sector incumbents. Conversely, to prevent challengers from penetrating a long-held sector or invading a new one that an established company has just started to enter, they conduct an acquisition to fortify their position. Competitive threats spur companies to consider M&A as a way to neutralize and leapfrog rivals. They can also help a company, by taking on debt through a deal, to avoid being acquired themselves.
Diminishing Returns / Damaging Effects Of Continual Cost Cutting
Detrimental effects of relentless cost-cutting measures are more apparent in many industries, including healthcare manufacturing. There is only so much that out-sourcing, budget slashing and other “streamlining” measures can achieve until they have a corrosive effect on organizational effectiveness and deliver less return on the bottom line. Companies are overly reliant on cost-cutting measures to make their number reach an endpoint. They aren’t able to further reduce costs to increase income, haven’t cultivated innovation to replenish product lines and are at a competitive disadvantage -plus investors see earnings flatten. An acquisition or merger is now necessary to remain viable.
Another realization is more companies embrace the need for innovation and growth-productive strategies such as bolting on assets to acquire specific capabilities and strategic offerings to sell. While cost-cutting measures take place once an acquisition is completed and redundancies removed, the pivotal direction is to then loosen the reins on the new assets and let them accelerate growth. More companies are demonstrating their ability to decisively outdistance competition by developing entirely new products / solutions in a technology-driven world. The diminishing returns / damaging effects of continual cost cutting are more critically assessed; an assertive long term strategy of M&A, technology and innovation is more favorable and productive.
Science / Technology
For biotech, pharmaceutical, diagnostic, medical device, medical supply and other healthcare product manufacturers, science / technology is a difference-maker. Science / technology-driven research insights, development prowess and production capabilities are critical contributors to competitive performance. Using the right science / technology through optimized execution enables companies to assess challenges and needs, develop customer-focused products both simple and complex, then consistently deliver them at high-quality levels quickly and cost-effectively.
Organizations can buy another entity with advanced science / technology attributes and market their products or apply the science / technology assets to their own commercial operations while preventing competitors from having access to it. There is the option to develop science / technical advantages internally but there is not always time or the organizational resources to generate productive ROI quickly. A strategic acquisition aligned with science / technology can be a catalyst for innovation, growth and competitive advantage.
Saddle Up
…According to research conducted by BCG (Boston Consulting Group), more pharmaceutical mergers could be on the way if Washington lines up a tax holiday on repatriation of overseas cash which companies hold; U.S. pharma firms may likely spend sizable amounts of it on mergers and acquisitions…
Depending on the company, any combination of these strategies, resources and triggers can result in M&A measures. This not only applies to healthcare product manufacturers but also to some healthcare service companies and healthcare provider organizations as well. While there is considerable decision making leading up to a deal, the execution afterward is just as critical. As they are a culmination of commercial, financial and organizational strategy, alignment and integration have to be well thought out in advance for the combination of assets to quickly gain traction as one entity.
Healthcare manufacturing M&A has a wide ranging effect on patients, consumers, providers, public / private investors and other commercial entities. In addition to providing value for investors, they provide enormous potential for organizations to tip the competitive scales in their favor while generating additional opportunities for better healthcare products to be developed and more sales to be made. While overarching economic / marketplace conditions can change rapidly and reverse the healthcare manufacturing M&A trend, for now, it is charging ahead.
Thank you for reading this story
Learn more about the healthcare industry; read my articles about its medical and business trends, content marketing and digital strategy, brand and product management, mergers and acquisitions, consumer wellness, managed care and market access strategy.
About me
Hi, my name is John Baresky ( pronounced “ buh — ress — key “) and I have over 25 years of experience in healthcare.
Throughout my career, I have been writing about healthcare while developing and sharing important information with physicians, nurses, pharmacists and other clinicians plus consumers, patients, healthcare business professionals, investors and other stakeholders.
Healthcare is a vast industry. I organize its clinical, business, academic, technical and consumer topics into precise messages and stories that are easily understood and immediately useful. The content I write resonates across audiences with objective accuracy and clarity.
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