Q&A: Risky Business
CastleOak Securities managing director Schond Greenway offers insight on the concerns surrounding healthcare and what dealmakers should keep in mind.
August 5, 2011
Between the Dow Jones Industrial Average falling more than 500 points yesterday, and last week’s debt-ceiling deal sending policy makers on a rant, indeed there’s a lot of noise surrounding the healthcare sector. Mergers & Acquisitions decided to break through and consult CastleOak Securities’ newest managing director Schond Greenway on what the latest issues and trends mean for dealmakers in the space who might find themselves increasingly nervous, at least in the short term.
“As pressures mount to cut Medicare spending, hospitals, nursing facilities and medical device companies may face significant cuts over the coming years,” warns Greenway, who joined CastleOak in March from Barclays Capital where he was an analyst focused on healthcare. "Until this overhang is lifted, these types of companies may be less likely to do a deal over the near-term."
Prior to Barclays and New York-based CastleOak, Greenway served as vice president and head of investor relations for pharmaceutical company DURECT Corp. He began his career at Morgan Stanley as a senior associate in corporate finance and M&A.
In speaking to Greenway this week, it seems that some health and pharma deals are still getting done despite investors being less risky and losing faith in the revival of the global economy. The following is an edited version of the conversation.
Mergers & Acquisitions: Deal pros harp of the mounting pressure in the medical-device sector, including slow growth in top markets and declining product prices. Yet Boston Scientific recently reported a 49% climb in second-quarter earnings. Exaggerated much?
Greenway: Companies like that have primarily been looking internally for additional cost savings and value. Boston, in addition to others, is going through major restructurings. They’ve announced three different types of restructurings where they effectively gained $800 million in contributions. One from October 2007 where a workforce reduction generated $500 million in savings, a plant optimization in January 2009 which amounted to $100 million and another workforce reduction in February of 2010 that saved them $200 million. That is what’s making their numbers look a lot better. Medtronic also announced a restructuring. In February of this year they announced a workforce reduction of about 2000 people.
M&A: What kind of deals should we expect to see?
Greenway: A lot of pros are looking at top lines slowing and an increase in price pressure going forward, which may result in either heated or non-competitive auctions. Recently, [Kinetic Concepts Inc.] got a bid but it may not have been a hot auction*. The street’s view at the time was that it was a good situation for KCI, but we probably won’t see any interlopers make a counter offer, versus other companies that have been taken out in the past. Ev3 – a device company purchased by Covidien in 2009 – had a decent sized multiple relative to other transactions at the time.** A number of companies bid for that.
M&A: How does a growing population influence deals in healthcare?
Greenway: Population growth will fuel acquisitions in certain demographics, specifically in Japan. As part of their healthcare system, they have been pushing for the use of more generic drugs, or those that are not necessarily name brands. The country predicts 30% penetration of generic drugs by 2012. What does that mean? Well, look at the size of the U.S. pharmaceutical market, a $300 billion market where about 75% of our drugs are generic. The number two pharmaceutical market is Japan at about $100 billion. It has one of the largest groups of aging populations in the world and when you look at its generic drug utilization, it’s currently at only 20%. Juxtapose that to the U.S. and there’s significant potential in increasing the use of generic drugs. This opportunity is what prompted TEVA to buy Taiyo. They paid $460 million to buy the remainder of what they didn’t already own and that should bring the enterprise of value $1.3 billion. I wouldn’t call Japan an emerging market but they’re definitely under utilized in the generic medicine space and more transactions are going to come from that area. With TEVA in Japan and Boston Scientific in China—population dynamics are driving their M&A activity.
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