Overall, 2014 was an exciting and active year in terms of deal flow and activity in the healthcare industry. We witnessed a large number of mergers and acquisitions, innovative deals designed to allow large, diversified players to monetize assets perceived as undervalued/non-core, and a record year for IPOs, particularly in the UK. There were also a few prominent takeover battles, although some of the highest profile deals failed to successfully conclude. On a different note, 2014 will go into the history books as being the year when drug spending exceeded the trillion dollar mark for the first time.

As we look into 2015, we expect deal activity to remain vibrant, with strong fundamental, external and financial drivers in the healthcare business sector likely to prevail over concerns about slowing global economic growth.

Tax inversions ruled
While 2014 fell short of expectations in terms of mega mergers, there were certainly a few large deals that caught the industry’s attention. A key theme this year turned out to be the tax inversion, essentially an acquisition driven by the buyer’s intention to relocate a company’s headquarters to a jurisdiction with a lower tax rate. One such successful deal, and indeed the second largest deal in the healthcare sector in 2014, was U.S.-headquartered Medtronic’s purchase of Ireland’s Covidien for $42.9b in June. This was a notable deal for the medtech industry, not least because the combined entity will be in a strong position to compete with J&J, the world’s largest medical devices company.

Takeover battle of the year culminates in largest deal of the year
The biggest takeover battle of the year was without doubt Canadian Valeant’s hostile pursuit of U.S. Botox-maker Allergan, a saga that started in April and witnessed several iterations. Allergan eventually sold itself to U.S. company Actavis for $66b—substantially higher than the $53b bid Valeant and activist investor Bill Ackman had offered—in what marked the largest healthcare deal in 2014. Prior to teaming up with Actavis, Allergan, had been looking to complete acquisitions of its own to become less attractive to Valeant. To that end it had held talks with gastrointestinal specialist Salix, which had been due to merge with Swiss-listed Cosmo earlier this year, incidentally another tax inversion deal—Cosmo’s parent company is Ireland domiciled—that fell apart due to planned changes to U.S. tax rules.

Diversification also on the agenda
Other prominent deals motivated by fundamental drivers were Actavis’s purchase of Forest Laboratories for $25b in February, which, according to the acquirer, created a powerful engine for the generation of double-digit revenue and earnings growth, and Merck KGaA’s acquisition of Sigma-Aldrich, a leading manufacturer of specialty chemicals and biologics for life sciences, for $17.4b in September. The deal will bolster the Millipore acquisition completed in 2010 and further reduce Merck’s reliance on its prescription drug business, Merck Serono, which has failed to bring to market a significant new drug in over ten years. Another deal worth mentioning, owing to its unorthodox nature, is LabCorp’s acquisition of Covance for $6.1b in November. In light of limited operational overlap and hence minimal synergies, the purchase of the top 10 contract research organization (CRO) by America’s second largest clinical lab testing company, was largely driven by its desire to expand its customer base into large cap pharma to accelerate top line growth and provide a more end-to-end solution.

Two mega-mergers that could have been
Two mega-mergers that were largely motivated by tax inversion and failed to materialize include Pfizer’s ultimately failed pursuit of UK-based AstraZeneca, which rejected the U.S. company’s final bid of $119b in May on the basis that it undervalued AstraZeneca’s pipeline, and Abb-Vie’s planned takeover of Shire for $54b. The latter fell apart unexpectedly after the U.S. Department of Treasury issued changes to tax rules in September, which invalidated the valuation underpinning the merger despite the strategic rationale remaining intact. Hopes that both pharma behemoths may revisit their targets in the next year were dampened by suggestions that the U.S. will make these re-domiciliation transactions more difficult, coupled with recent announcements of share buybacks totalling $11b for Pfizer and $5b for AbbVie, as the companies seek alternative ways to enhance shareholder value. Shire on the other hand is enjoying the windfall from the $1.65b break-up fee, which has added more firepower for M&A.

Innovative deals unlock “hidden value”
The past year showcased a number of innovative deals, designed to help pharma unlock “hidden value” by shedding non-core assets that are worth more, either as stand-alone entities or as part of a different organization. The prize for most innovative deal of the year has to go to GSK and Novartis for their asset swap in April, in which GSK sold its cancer drug portfolio to Novartis for about
$16b and bought the Swiss company’s vaccines division for about $7.1b. Novartis further complemented this transaction with the divestment of its animal health unit to Eli Lilly for $5.4b, and later in October sold its flu vaccine business to Australia’s CSL for $275m.

The GSK/Novartis asset swap was widely touted as offering a template for pharma and beyond, as it is an efficient and cost effective way for companies to divest and acquire assets. However, these deals are likely to remain rare, as they rely on a pair of companies having assets of interest for each other. For companies looking to focus their efforts on their core strengths, standard asset divestments have been the norm. Notable deals in this respect were J&J’s divestment of its Ortho-Clinical Diagnostics division to the Carlyle group for $4.2b in January, and the sale of Merck’s OTC business to Bayer for $14.2b in May.

The IPO window remained wide open
Contrary to expectations following a strong 2013, the IPO window has been wide open in 2014 as well, particularly in the U.S. and the UK, where solid economic growth boosted investor confidence. Private equity and venture capital firms have certainly taken advantage of the capital markets’ appetite for new stocks to exit investments and realize attractive returns. In the UK, 2014 has been the strongest IPO market for healthcare and pharmaceuticals companies in over a decade, with over £800m ($1.2b) raised in nine deals as of the end of October, equating to a total market cap of £2.1b ($3.2b). Two notable offerings that attracted much attention are private hospital network Spire Healthcare, which tops the IPO list both with regard to money raised and market cap, £315m ($475m) and £854m ($1.3b), respectively; and Circassia, a specialty biopharmaceutical company focused on allergy, which raised £200m ($301m). Other deals include Horizon Discovery, a translational genomics company; and Abzena, a services and technology provider to pharma and biotech companies.

Continued boom in the outsourcing space
High valuations also attracted established service providers to the stock market, with two of the top 10 contract research organizations (CRO), INC Research and PRA Life Sciences, going public this year to capitalize on the increasing outsourcing trend and overall rise in global pharma R&D spend, raising $150m and $306m, respectively. The significance of these two events is that except for InVentiv Health, all of the top CROs will now be public. This increases transparency not just for industry participants, but also for investors, which should boost valuations in the sector as a whole. Similarly, contract manufacturer (CMO) Catalent decided to join the ranks of its listed peers through its successful IPO at the end of July, through which it raised $871m.

Confidence high going into 2015
Overall, the team at Results Healthcare expects M&A activity to remain dynamic, as strong fundamental drivers remain intact. However, certain activities could be dampened by concerns related to slowing economic growth and the risk that the Eurozone may slip back into recession.

Large pharma still hungry for deals
Some big pharma companies appear to have got back their drug discovery mojo, with the camp split into those who are bringing exciting new products to the market (e.g. Roche, J&J, Novo Nordisk) and those which are struggling (Pfizer, Lilly, GSK, Merck, AstraZeneca). Those in the latter group are likely to continue fuelling M&A in the space, but the jury is still out on whether this will take the form of transformational mega mergers, or more modest strategic bolt-on acquisitions. There will likely still be deals driven by tax inversion, but we expect this to be a less important driver following the adverse decision from the U.S. Government.

Who should pay for innovation? And how much?
The debate as to who should pay for innovation is poised to continue as innovators seek to earn a return on their investment while payers try to put a lid on rapidly escalating healthcare expenditure. In this respect, the high-profile, public debate around the price of Gilead’s innovative and highly effective HCV protease inhibitor Sovaldi comes to mind, with the $1,000 per day medicine winning the top prize for most successful drug launch in history, selling $2.3b in its first quarter on the market and, $8.4b in the first nine months. Sovaldi is on track to break the $10b mark when Gilead reports first year sales.

More IPOs and company break-ups on the horizon
IPOs of strong performing business units with a view to enhancing returns to shareholders are likely to continue into 2015 and beyond, particularly as some companies have already indicated their plans in this respect. Specifically, in September Baxter noted that it would IPO its therapeutics business under the name Baxalta in mid-2015, while Bayer announced that it would float the Materials Sciences business in 2016 at the latest to focus entirely on the life sciences. A few weeks later, GSK admitted that it was considering an IPO for a minority stake of its HIV joint venture, ViiV—jointly owned with Pfizer and Shionogi—in an effort to monetize a rapidly growing asset and further lower R&D costs as part of its company-wide shake-up. Two successful precedents of these deals are Zoetis, Pfizer’s animal health business, taken public in February 2013, and the listing of AbbVie, Abbot’s prescription drugs business, in January 2013. The latter has returned over 70% since the IPO, fuelled largely by its key money spinner: the $10b anti-TNF Humira.

We would expect to see other deals through which companies will seek to monetize undervalued assets, and not just due to companies’ own initiatives. Amgen’s management for instance may eventually give in to growing pressure from leading investors to split into two companies, one for established brands, and the other for its promising pipeline.

Biotech is firmly back, and service providers are taking note
One sector that has done very well in the last few years, and should continue to do so, is the Biotech sector. Having benefited from high levels of funding including a strong IPO market, confidence is high. In parallel, this should underpin on-going attempts to plug into innovation in academic and governmental institutions. Notable examples include the J&J Innovation Center, which, following the successful opening of offices in Boston, California and London, has recently opened an office in Shanghai.

Pharma service providers have taken notice and are increasingly focusing on this rapidly growing and well-funded customer segment, with Quintiles recently announcing the launch of Quintiles Emerging Biopharma solution, to specifically meet the needs of small biopharmaceutical companies. Other large CROs are likely to take note and follow suit. Overall, we expect this sector to continue benefiting from pharma’s rising need to outsource R&D, plus the overall growth of the global pharma R&D budget, which according to Evaluate pharma is projected to rise by approximately 3% in 2015.

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Brigitte de Lima
Results Healthcare

Brigitte de Lima, manager, Results Healthcare, joined the company in April 2013 from a long/short start-up investment fund focused on healthcare. She has nine years of experience in the healthcare sector, with particular expertise in biotechnology. Brigitte started her career as a healthcare analyst at Datamonitor. She then worked as an equity research analyst at Merrill Lynch and then Bank of America Merrill Lynch.