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Winter is coming

4 January 2016 By Robert Cyran

Healthcare M&A will soon be wearing down. The industry’s $550 billion of deals last year is three times more than the previous annual record, according to Thomson Reuters data. Anything close to that sum will prove challenging to repeat.

There are several reasons to expect a reversion to the dealmaking mean. First is tax savings, which has been one of the biggest catalysts for the industry, including Pfizer’s $160 billion agreed acquisition of Allergan. The year’s biggest transaction took out one of the few targets large enough to allow a major pharmaceuticals company to relocate its domicile and thus cut its tax bill. U.S. lawmakers are also steadily cracking down on such so-called inversions.

Second, many of the obvious mergers already have been struck. That probably will make it harder to find good targets. Increasing skepticism among investors speaks to the point. Across all industries, fewer than four out of 10 U.S. buyers experienced a rise in their share prices after an acquisition. That’s half the rate it was in the first quarter of 2014.

Third, serial buyers including Valeant Pharmaceuticals, Horizon Pharma and Endo International are likely to be restrained. These companies have been on a binge. Valeant’s chief executive said in 2014 that his company would triple in size to more than $150 billion by the end of 2016. Concerns about these so-called “platform” companies have increased, however.

The amounts of debt they absorb, along with the lack of new drugs produced by their quarry following takeovers, have become less-acceptable propositions to shareholders. Valeant has lost about 60 percent of its market value from its peak in August. That makes it harder both to issue equity and borrow more for acquisitions.

Finally, the rollout of Obamacare and its associated reforms set off a fearful scramble for every medical dollar. Drug distributors, hospitals and insurance companies have consolidated to cut costs and to jockey for negotiating power against each other. Regulators are taking a close look at some of these deals, including Aetna’s $37 billion plan to buy Humana and Anthem’s $48 billion purchase of Cigna, and may nix one or more. Healthcare has proved a rich vein for investment bankers of late, but they’ll have to look elsewhere for fat deal fees in 2016.


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