FORUM: M&A in the healthcare & pharma sector


Financier Worldwide Magazine

June 2016 Issue

June 2016 Issue

FW moderates a discussion on M&A in the healthcare & pharma sector between Adam Bellack at Hogan Lovells, Jeremy D. London at Skadden, Arps, Slate, Meagher & Flom LLP, Catherine Wigmore at Stevens & Bolton LLP, and Fred Hassan at Warburg Pincus.

FW: How would you describe the current appetite of companies in the global healthcare & pharma sector for M&A activity? To what extent can M&A assist companies looking to bolster product pipelines, improve efficiencies and tap into new markets?

London: Overall, there is still an appetite for healthcare M&A despite a slowdown in deal activity globally, and healthcare is likely to remain one of the more active sectors in 2016 and beyond. The drivers for growth on the managed care side remain scale, broad geographic coverage and the flexibility to react to a changing reimbursement environment. These are expensive initiatives that require a lot of capital to develop organically. M&A has proven to be the primary method to add them and we think this will continue. In addition, strong equity valuations will continue to fuel larger transactions using stock as currency. In the biopharma industry in particular, the need by larger pharma and biotech companies to continually refresh their pipelines creates a structural need for continuing M&A. Macroeconomic trends involving interest rates, economic growth, perceptions of near term changes in market values and boardroom confidence can shift the timing of these acquisitions, but the absolute need for this activity remains. Accordingly, we see the appetite for acquisitions in the biopharma sector remaining healthy for the foreseeable future.

Wigmore: 2014 and 2015 were bumper years for healthcare M&A globally. Deal activity hit a record-breaking $725bn in 2015, much of this value being attributed to numerous mega deals among pharma and health insurance giants, driven by cross-border corporate tax inversions and a ‘bigger is better’ approach to market positioning. The last quarter of 2015 saw these big-ticket pharma deals cool down considerably, in part due to uncertainty around the global implications of a potential Brexit and other political and regulatory factors. However, there is still a strong appetite across the sector for M&A, particularly in the mid-market. Acquirers and investors still have capital to deploy and those in the pharma and private care sectors alike are looking to strategic deals whether through buying, selling or collaboration as a means to spur growth, improve their product or service offerings, achieve cost synergies and consolidate their market position.

Hassan: Appetite for M&A remains high but deals are harder to find after the hectic pace of announced deals over the past two years. Generally, M&A can help companies to boost product pipelines, as happened with the Merck/Schering Plough deal. It can also boost efficiencies, as we have seen with consolidating deals such as B&L/Ista. Finally, M&A can help companies tap into new markets, as was the case in the Mylan/Meda and Merck/Cubist deals.

Bellack: Our sense is that the appetite for M&A activity is still strong, but may be on a cooling trend as companies work on implementing recently closed transactions and look for the right opportunities going forward. This may be more apparent in pharma, where the lower hanging fruit may have been picked, than in healthcare. At the moment, some of our pharma clients seem more focused on developing assets they acquired in the recent M&A surge, or working through integration challenges, than seeking new M&A targets. But this sentiment is not uniform within all organisations. Dealmakers may be looking for their next targets while operational teams try to keep up. In pharma, M&A continues to be a critical path to expand product pipelines, while in healthcare we expect the pressure to consolidate will continue to drive M&A activity.

Appetite for M&A remains high but deals are harder to find after the hectic pace of announced deals over the past two years.
— Fred Hassan

FW: What advice can you offer to companies in terms of scoping deals and identifying opportunities across the healthcare & pharma sector? Have there been any regional hotspots?

Hassan: Opportunities exist among almost all companies, however it is always specific to the company’s situation whether the company needs to access new products and R&D projects, access new customers or geographies, and reduce costs via consolidation. So, scoping the deal accurately will improve the downstream probability of success. Growth remains the key driver for dealmaking, along with the search for category leadership. Non-core assets continue to be targeted for divestment. The US continues to be the biggest environment for deals, partly because it has a vigorous base of smaller companies often working on innovations in products and services.

Bellack: It is a cliché, but our advice is always to do your homework. Not every deal process allows companies to front-load diligence, but the more you know about a potential target, the better positioned you are to assess value, negotiate agreements and expeditiously navigate the transaction process. The same goes for understanding market conditions and similar transactions. When acquirers do their homework in advance, they are less likely to encounter surprises or question their decisions. In terms of regional hotspots, in pharma, China continues to be on everyone’s radar, but given recent market developments and struggles with pace and strategies for market entry, it feels like there has been more activity in the US and EU.

Wigmore: Healthcare deals accounted for around one out of every five acquisitions worldwide last year. M&A was strongest in the US due to low interest rates, economic growth and political factors including ‘Obamacare’ which has shaken up the market. We are seeing a fair number of cross-border deals, particularly among US acquirers and UK/Western European targets. Notwithstanding the inherent regulatory and economic challenges, there are innovative solutions and new markets and opportunities to be exploited. The world’s population is aging but life expectancy is improving. As patents for many of the main blockbuster biologics are in the process of expiring, ‘biosimilar’ development offers potentially lucrative revenues, particularly in emerging markets where the cost barriers to entry are lower, and even electronics giants such as Samsung and LG teaming with innovative biotechs to enter this market. Similarly, the ‘digital health’ and wearable technology trend also will be a strong growth area.

FW: To what extent are regulatory changes or pressures influencing M&A strategies?

Wigmore: Regulatory changes can be a minefield for companies in the healthcare and pharma industries, and it is no surprise that this shapes M&A strategies. In the care provider arena, regulatory pressures have always been high but even more so in light of increased scrutiny and the recent shift toward an outcomes-based approach. In the UK, this has been exacerbated by the introduction of the mandatory National Living Wage. Some providers are looking to M&A to cut costs and others are looking to move into the gap left by exited or failed providers. In the pharma and generics sector, as the market has matured, so too has the regulatory landscape. There have been a number of recent changes, particularly over the last several years, in relation to pricing and the PPRS regime, consumer protection and managing anti-competitive behaviours, fraud and abuse. These factors influence whether a so-called ‘vertical’ or ‘horizontal’ M&A strategy is most appropriate.

Bellack: In pharma, US pressure to shut down tax inversion transactions is an obvious influence. Separately, the unfavourable media attention on Martin Shkreli and price gouging, generally, have made anticipated pressure on pricing another factor. Uncertainty on pricing novel immunotherapies and personalised therapeutics certainly has not prevented deal activity involving those technologies, but open questions have made those deals more difficult to structure and price. On the healthcare side, implementation of the Affordable Care Act, or ‘Obamacare’, and general uncertainty continue to be a catalyst for M&A activity with providers, health systems and insurers feeling like they need to get bigger in order to survive. One contrary trend, increased attention from US antitrust regulators, has become more of an issue, especially in markets that have already seen some consolidation.

London: Regulatory changes continue to have a significant influence on M&A strategies that is matched only by valuations and the availability of financing. On the managed care side, providers and insurers continue to find their way in an era of profound changes in reimbursement rates. These changes focus on improving quality of care, expense reduction and value – all at the expense of volume. Cost-reduction pressure continues unabated. Companies will continue to seek horizontal and vertical transactions that add scale, new technologies and product offerings in response to these fundamental changes. This will also increase disposition activity as larger players jettison non-core assets to focus capital and other resources on principal lines of business. Other significant regulatory developments, like the emergence of a biosimilar regulatory pathway in the US, have affected M&A strategies and trends, but potential pricing regulation is the biggest uncertainty in the US biopharma industry. While resolution doesn’t seem to be forthcoming, it has a potentially meaningful effect on valuation of some companies and industry strategies. On the other hand, there are companies and products that clearly would be meaningfully less affected by pricing regulation. The impact of the recent focus on drug pricing, including through congressional investigations and rhetoric in the presidential campaign, remains to be seen.

Hassan: Regulatory changes and pressures often influence M&A strategies. These can include tax rules, which derailed Pfizer/Allergan, as well as antitrust adjudication practices, as seen in the Comcast/TWC deal.

Regulatory changes can be a minefield for companies in the healthcare and pharma industries, and it is no surprise that this shapes M&A strategies.
— Catherine Wigmore

FW: Have any recent M&A healthcare or pharma deals caught your eye? What market insights can we draw from these deals?

Bellack: Some of the most exciting recent transactions involve traditional technology companies, like IBM or Google, making waves in the digital health and health technology space. IBM Watson Health has announced a series of initiatives and collaborations aimed at transforming global healthcare through cognitive computing, while Google has announced partnerships to develop groundbreaking technologies, like a glucose-monitoring ‘smart lens’ and artificial pancreas for the treatment of diabetes, among others. Some of these trends have been discussed for years, but wearable devices and other smart phone enabled digital health technologies seem primed for a breakthrough. Healthcare information and technology companies are hardly new, but the involvement of traditional technology giants like IBM and Google in healthcare R&D could accelerate the pace of development and usher in an exciting new era of innovation and opportunity for researchers and patients, and with it a wave of interesting new transactions.

Hassan: The Teva/Allergan deal on generics in 2015 was good for both sides as it represented a ‘strengthening of the core’ for both. For Allergan, it was also good timing as years three and four following the Generic Drug User Fee Amendments of 2012 are creating price pressures in most generic categories. The Gilead purchase of Pharmasset for $11.2bn in November 2011 was a bold move that was initially greeted with some scepticism. However, it yielded a breakthrough therapy for Hepatitis C – the new product, Sovaldi, reached over $10bn in sales in its first full year in 2014. The biggest market insight is that the acquiring company should be really good at assessing the value of the asset even if the expected initial post announcement reaction may not be very favourable.

Wigmore: There have been a number of interesting deals involving pharmaceutical companies foraying into the rare disease and cancer breakthrough therapy. For example, in Q4 of 2015 AstraZeneca PLC acquired ZS Pharma Inc for $2.7bn giving it access to a specialist hyperkalaemia treatment, and in Q2 Alexion Pharmaceuticals acquired Synageva BioPharma Corp for $8.4bn which, with its eight clinical trial candidates, gives Alexion one of the strongest rare disease platforms. In January 2016, Shire announced its proposed takeover of Baxalta, a company with a portfolio of drugs in development to treat rare forms of blood diseases. In a market traditionally geared toward debt financing, this area particularly has attracted significant interest from private equity investors as these portfolios represent very valuable targets. ‘Breakthrough’ status can allow for higher pricing and longer market exclusivity, although the events last year involving Turing Pharmaceuticals means this area is increasingly facing heavier regulatory scrutiny.

London: In 2015 we saw numerous large public managed care deals. The market will be watching closely as these transactions look to close in 2016. Another interesting trend is the continued evolution of strategic affiliations and alliances, rather than outright mergers. As hospitals and other healthcare providers seek to emphasise quality and cost reduction, they are increasingly partnering with other healthcare participants to deliver innovative solutions, rather than a one-time transfer for value. Properly structured, these alliances allow industry participants to experiment with lower levels of risk, relative to an M&A deal that might not ‘take’ for one reason or another – culture clash or integration execution, for example. In terms of market insights, a consistent theme is that size does matter in certain segments of healthcare. Industry players continue to position themselves in a market where cost reduction means continued pressure on margins.

FW: When pursuing a transactions, how important is it for healthcare & pharma companies to undertake thorough due diligence and take other steps to manage transactional risk?

London: Due diligence remains a key component. Of course, it takes on greater importance in a private transaction. In a biopharma transaction, key areas of legal diligence include ‘ABC’ – anti-bribery and corruption – diligence of foreign operations, the broad range of US regulatory compliance, as well as the terms of collaborations. One very important issue is that, often, target companies are involved in complex collaborations. The day-to-day execution of that collaboration may have drifted over time from the collaboration agreement that was signed years earlier. While this may be of no concern to the two original parties to the collaboration who have a commercial history, these gaps between the contract and practice can re-emerge as very important when one of the parties is acquired by a large pharma or biotech company. On the provider and payor side, diligence on government investigations and qui tam suits is critical. Claims are often under seal, which can make it difficult to make an informed judgment. Another example is False Claims Act cases. The government will often take aggressive positions in calculating potential damages, which makes the need for thorough due diligence even more important.

Bellack: Thorough legal and financial due diligence has been, and always will be, critical to healthcare and pharma companies pursuing M&A transactions. This is true for all M&A buyers, but the regulatory challenges and complexities in the healthcare and pharma space make the need for thorough diligence even more critical. Compliance issues make the questions more difficult, while the consequences can be more severe. Further complicating matters, where traditional due diligence tends to focus on current operations in static legal environments, in pharma and many health businesses the biggest risks can involve whether the rules of the game are likely to change – for example, how the business may be impacted by new eligibility or pricing limits from governmental or private insurers – which requires dealmakers to look over the horizon while also considering existing and historical risk. Insurance and contractual measures to protect against risk can help manage the unknown, but they are not well suited to protect against changed circumstances. Accordingly, thorough research and understanding transaction risk are essential for buyers to make informed decisions and avoid surprises.

Hassan: It is very important to do thorough due diligence, however if time is a constraint, then focusing on the truly relevant matters may be a good backup strategy. To reduce transactional risk, one can still rely on seller’s warrantees, published reports such as 10-Ks and access to compliance documents such as FDA inspection reports. Finally, securing the loyalty of key people of the acquired company early after the announcement date can greatly diminish the post day one risk.

Wigmore: Carrying out thorough legal, financial and commercial due diligence is important in any transaction, and in healthcare deals it is particularly important this is undertaken in a tailored and meaningful way. Management should ensure their legal and financial advisers have expertise in the relevant subsector. Beyond the obvious regulatory considerations, for pharma the focus is likely to be on IP and licensing, pricing structures, sales and distribution networks, and for care deals, government contracts and carers will be key focus points. The primary purpose of due diligence is to identify risk but it should also be undertaken with a view to how the risk will ultimately be managed – firstly, by getting the deal structure right and implementing deferred consideration, escrow arrangements, earn outs and other price adjustment mechanisms, but also through appropriate contractual protections including tailored and industry-specific warranties and indemnities, restrictive covenants and limitations in the transactional documentation.

Due diligence remains a key component. Of course, it takes on greater importance in a private transaction.
— Jeremy D. London

FW: How important is it for companies in this sector to pay careful attention to intellectual property and related licences when drafting transaction documents?

Hassan: Assets such as IP, knowhow, FDA approved manufacturing facilities and labs all need to be diligenced and appropriately secured as part of the contractual documents.

Wigmore: For product-based healthcare businesses, particularly those in the pharma and biotech sectors, IP and licensing considerations are of paramount importance although the precise considerations will vary depending upon where that company is positioned in the product lifecycle – for example, R&D and trialling, manufacture or distribution. Before drafting any purchase documentation, companies and their advisers will need to be particularly careful to identify the nature and scope of the proprietary IP, who owns it, who has the rights to use it and how it is used. The acquisition agreement will need to include appropriate warranties and indemnities and rights assignments, and clear language should also be built into employment and contractor agreements. Ideally, a full pre-completion IP audit should be carried out to check whether rights are protected appropriately and identifying threats posed by employees or competitors. Litigation is costly and time-consuming, and a negative finding can quickly dissolve the value in a business.

Bellack: On the pharma side, intellectual property is of paramount importance. Intellectual property rights may be the core asset, or only asset, being acquired. It is therefore critical to understand exactly what is being acquired, the strength of those rights, and any limitations on those rights – whether from the seller or any upstream licensors. Thorough diligence on upstream licences is essential, and acquirers need to carefully coordinate transaction licences with upstream licences. In some cases, amendments to upstream licences can be necessary conditions to closing. It is always important that intellectual property licences work together and consistently with other transaction documents, but without appropriate intellectual property protections, other assets – or even entities – in M&A transactions may have limited value, so in some transactions the licences can be the most important documents.

FW: What general steps should companies take in the pre- and post-deal phases to help deliver the intended benefits of a transaction and optimise long-term value?

Wigmore: In any deal, the pre and post-deal stages are important to ensure that value is maximised and the intended benefits of a transaction are ultimately realised. A buyer should identify its goals and vision from the outset and formulate appropriate short, medium and long term strategies. Finding a target which is the right organisational ‘fit’ can be just as important as the financial motivations. As ever, communication is key – fleshing out the critical points earlier on in the heads of terms and via issues lists often saves negotiation time and cost and lowers the risk of a later dispute, and expectation management with all potential stakeholders is crucial. Having a sound post-completion strategy is equally important, yet often overlooked. Take good legal and financial advice and ensure that commercial integration and legal tidying relating to employment and commercial and regulatory issues are dealt with in an appropriate and timely fashion.

London: In any transaction, up-front planning is critical. Principals and advisers pay close attention to the usual suspects – valuation, financing considerations, closing certainty, risk allocation and remedies. In healthcare transactions, there is also a heavy focus early on integration issues and regulatory matters. In a strategic transaction, companies should, and usually do, undertake a significant effort to ensure that the parties’ cultures and operations can be successfully integrated, on a number of fronts – most notably care delivery models, information technology and compliance cultures. These are often very different even if the lines of business are substantially similar. Second, a clear regulatory plan, not just analysis, is required to successfully execute healthcare transactions. Parties should not only conduct an analysis and develop a deep understanding of the issues, but should have a clear plan to obtain approvals and clear risk allocation and understanding of the efforts required to obtain them. This includes not only the legal elements, but a good understanding of the regulatory and political landscape, and anticipation of the issues that are likely to arise. State insurance, healthcare commissions and state attorneys general are increasingly proactive in their review of and engagement on healthcare transactions and careful preparation is key. Post-deal, the prime objective is working collaboratively so that the combined or surviving company is positioned to deliver on all the anticipated benefits of the transactions that have been communicated to the various constituents, comprising the market, patients and customers and regulators.

Hassan: Three important pre-and-post day one steps are worth mentioning. First, appoint ‘merger coordinators’ to serve as single points of contact on both sides. They should be tasked with detailed pre and post merger Gantt charts to make sure the deal delivers on its promises. Also, ‘quick wins’ post day one can boost morale in the combined company. Second, secure the collective mindset of people in both companies so that they keep paying attention to customers, to innovation and to supporting their colleagues. Finally, if needed, reduce the combined headcount after the post day one transition in a systematic, respectful and humane manner.

Bellack: In the pre-deal phase, companies should first understand their target and the proposed value proposition. From there, they can develop objectives and clear action items for realising that value. Following the transaction, it is important to go back to the assumptions and objectives developed before the transaction to measure performance against those assumptions and objectives. Things never work out exactly according to plan, but when assessing transactions in the post-closing phase, companies sometimes forget to look back at their pre-deal objectives. Doing so helps identify areas for continued focus on particular transactions and can help optimise long-term value, but it can also improve the planning process and value recognition in subsequent transactions.

We anticipate a degree of cooling in pharma and healthcare M&A, relative to the recent surge, as companies work on developing recently acquired assets and focus on integration.
— Adam Bellack

FW: How do you envisage M&A in the healthcare & pharma sector developing over the next 12 months? Are there any particular trends you expect to see?

Bellack: We anticipate a degree of cooling in pharma and healthcare M&A, relative to the recent surge, as companies work on developing recently acquired assets and focus on integration, but that is largely relative. We expect to see continued activity, just maybe not at quite the same pace as last year. In healthcare, we expect to see further consolidation, subject to antitrust constraints, but note that different sectors face different constraints. For example, in the US insurer market, significant consolidation has already occurred, leaving the industry with few remaining targets and steep antitrust hurdles. In hospital services, the pace of deals is strong and may accelerate, and in ambulatory services, there are myriad targets. In pharma, we expect to see continued M&A aimed at expanding pipelines while diversifying and mitigating R&D risk. Digital health will continue to attract investment, and we expect to see deal activity involving traditional pharma and healthcare companies, as well as traditional tech companies becoming more involved in the sector. One unifying theme, in an environment of constrained healthcare budgets and increasing cost pressure, the key question is increasingly whether products or services save money rather than simply whether they improve outcomes. As a result, products and services – whether pharma or digital health – that keep people out of hospitals, shorten hospital stays, or otherwise reduce the cost of care will continue to attract investment and deal activity.

Wigmore: In the pharma sphere, it looks like deal activity will remain high, albeit with a shift toward ‘vertical’ and synergistic M&A. Some of the big-ticket deals of 2014 and 2015 have now resulted in spin offs and carve outs where sub-critical portfolios are sold off to prioritise core business lines. Meanwhile, the care provider market is continuing to consolidate. It has historically attracted private equity investment characterised by ‘buy-and-build’ strategies. However, in light of increased regulatory scrutiny and government spending cutbacks, which have squeezed providers’ profit margins, M&A is likely to now be driven predominantly by cost and risk management in the short-to-mid-term as providers look for innovative strategies to survive and thrive.

London: One trend we think will continue to accelerate is US investment – both by private equity and strategic acquirers – in the healthcare economies of other countries. A few factors are at work. Given the cost pressure and narrowing margins in the US system, acquirers are looking overseas for better returns. Emerging economies also are increasingly opening their healthcare economies to foreign investment. As one example, Brazil passed a law in 2015 allowing foreign investment in certain healthcare providers. Finally, as emerging economies mature, their healthcare spending tends to grow at an attractive rate driving additional investment. However, one of the most interesting aspects of this segment of the M&A marketplace is that it is constantly changing.

Hassan: M&A activity will remain at a good, albeit slower, pace than the announced deal rates in 2014 and 2015, when tax inversions were important elements of many deals. The recent IPO slowdown and the low interest rate environment for higher quality debt will help contribute toward maintaining an active M&A environment. Large, serial M&A operators may sit on the sidelines as they digest past acquisitions, deleverage balance sheets and wait for better tax opportunities.


Adam Bellack is a corporate lawyer who focuses on transactional matters involving life sciences companies. Mr Bellack co-heads Hogan Lovells’ life sciences transactions team, and for the past two years, he has been named a “Rising Star” by Law360 and recognised as one of the top US life sciences lawyers under 40. He can be contacted on +1 (202) 637 6961 or by email:

Jeremy D. London concentrates his practice in the areas of mergers and acquisitions, corporate finance, securities law and general corporate matters in a variety of industries, including healthcare, energy and telecommunications. Mr London has represented acquirers, targets and financial advisers in significant transactions, including public and private acquisitions and divestitures, negotiated and contested public acquisitions, and other corporate matters. He also counsels on leveraged buyout transactions, joint ventures and other strategic alliances. He can be contacted on +1 (202) 371 7535 or by email:

Catherine Wigmore is an associate in the corporate team at Stevens & Bolton LLP. Having previously worked as an in-house assistant counsel for a care provider implementing a ‘buy and build’ acquisition strategy, she advises clients in the wider healthcare sector on a range of corporate matters including mergers & acquisitions, private equity investments and corporate restructuring. She is an active member of the firm’s Life Sciences group. She can be contacted on +44 (0) 1483 401214 or by email:

Fred Hassan is a partner and managing director with the private equity firm, Warburg Pincus. He is also a board member of Time Warner and Amgen. He is the former chairman of the board and chief executive officer of Schering-Plough Corporation. Mr Hassan received a B.S. degree in chemical engineering from the Imperial College of Science and Technology at the University of London and an M.B.A. from Harvard Business School. He can be contacted on +1 (561) 395 7860 or by email:

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