7 Merger and Acquisition in Healthcare (Pharma) Industry

Merger and Acquisition in Healthcare (Pharma) Industry By: Somak Chakrabarti (Manipal College of Pharmaceutical Sciences, Manipal)

Abstract

Equity investment in the pharmaceutical and healthcare industry has grown exponentially over the last two decades. Since 2010, the value of M&A deals has amounted to over $750 billion. This rate is expected to increase further since the pandemic has necessitated the consolidation of resources to combat it. However, information on M&A deals in the post-pandemic era is limited. The primary goal of this study is to assess the rate of growth in mergers in post covid era and compare it to the previous years. The aim is to assess the impact ofcovid-19 on M&A in healthcare. The study employs secondary sources in its research. The data was sourced from the internet and a primary analysis was conducted. There was a dramatic rise in the number of mergers and deals in the healthcare and pharmaceutical industry. This explosive growth in the industry has been attributed to increased spending in the markets for pharma. Given the longevity of the pandemic, M&A patterns have seen sharp increases, especially in the pharmaceutical sector as many players sort to outsource some of their activities to smaller companies.

Introduction

The Covid-19 pandemic has had divergent effects on the consolidation activity of the healthcare industry. It has accelerated and decelerated its process with varying levels of change. However, it is important to note that the onset of the pandemic serves as a mere disturbance to a phenomenon that has been occurring for almost two decades (Scheffler and Alexander, 2021, p. 1). In the United States, the hospital industry has been consolidating the healthcare market since 2010. Multiple studies have attempted to evaluate how this consolidation affects the quality of healthcare provided to patients. Conceptually, it is expected that any mergers and acquisition is attempted at bolstering service provision (Numerof, 2020, p. 3; Su, 2017, p. 7; Postma and Roos, 2015, p. 3; Fitzpatrick, 2019, p. 3; Cerezo-Espinosa de Los Monteros et al., 2021, p. 2). However, as the studies suggest, the impacts are varied depending on the type of merger or acquisitions drafted. The following paper will present a case for mergers and acquisitions in healthcare before and after the Covid-19 pandemic.

Although merger and acquisition are used interchangeably, different economic implications surround the two. (Piesse et al., 2013, p. 412; Soundarya, Lavanya, and Hemalatha, 2019, p. 70) define acquisition as an activity by which an acquiring firm takes control of over 50% of the equity of a target firm. On the other hand, a merger involves at least two firms that combine their resources to form a new legal entity (Malik et al., 2014, p. 522; Chui and Ip, 2017, p. 2). Both activities are a key part of maintaining a business and eliminating competition. There are multiple types of acquisitions. The following are the most common: vertical acquisition, horizontal acquisition, conglomerate acquisition, and market extension acquisitions (Herger and Mccorriston, 2016). Vertical acquisition is the most common type of acquisition. It involves purchasing another company by a company that differs in the supply chain level (Kedia, Ravid, and Pons, 2011, p. 845; Kedia, Ravid and Pons, 2009, p. 7). This acquisition is either of a higher or lower company than the acquiring company, hence the vertical reference.

In horizontal acquisition, there is no reference to the supply chain; instead, the companies participating in this activity belong to the same industry (Bhattacharyya and Nain, 2011, p. 97; Brekke, Siciliani and Straume, 2017, p. 1065). They are often aimed at eliminating competition. Conglomerate acquisition occurs when a company buys out another company that deals in a very differentiated industry (Panigrahi, Mansinghka, and Gupta, 2020, p. 127). Market extension acquisition is similar to a horizontal acquisition (Brueller, Carmeli, and Drori, 2014, p. 2). Companies acquire similar-sized but different industry players. The dominant role is to extend markets for other products. Mergers share the same type of traits in their acquisition process. The three main types include horizontal, vertical, and conglomerate.

Historically, pharmaceutical companies have often strived to pursue M&A primarily for value creation (Zweiphenning, 2016, p. 2). (Cooper et al., 2019, p. 2) noted that between 2007 and 2011, hospital mergers and acquisitions saw their overall prices increase by up to 6%. A similar study by (Dafny, Ho, and Lee, 2019, p. 7) over the period between 1996 – and 2012 showed a similar increase in prices by up to 9%. Other studies have also shown similar results (Nazarova, 2018, p. 21; Li and Yu, 2018, p. 4; Bosis and Herrmann, 2019, p. 10). Given the rapid increase in prices and value creation for these hospitals, more industry players became willing to form mergers to maximize profits. A report compiled by (Ascher et al., 2020, p. 3) showed this increase in M&A

over the years. The report estimated that deals drew since the start of this century amount to over $414 billion as of 2019. In essence, the pharmaceutical M&A has more than doubled since 2005.

Figure 1 Bar Graph shows deal count since 2000. Source (Ascher et al., 2020, p. 21)

Figure 2: Value of the indicated deals over the years. Source (Ascher et al., 2020, p. 21)

Figure 3: Number of M&A deals in the pharmaceuticals sector from 1995 to 2020. Source (Statista Research Department, 2020)

As the world continues to reel over the impact of Covid-19, M&A during the same period saw an unprecedented increase. According to (Landi 2021, p. 1), as of the close of the financial year 2021, there were expected to be more than 3000 transactions involving acquisitions. This presented a 25% increase in comparison to the period before. (Levine, Rao, and Wol, 2021, p. 2) noted that companies that were involved in programmatic acquisition achieved higher in terms of total returns to the shareholders. This was especially true for large public healthcare companies that adopted M&A to deliver higher rates of total returns.

Figure 4: Quarterly value of U.S healthcare M&A transaction for the period leading up to the pandemic Source (Landi, 2021, p. 1)

One of the primary reasons for the increased M&A activity in the pharmaceutical sector during the covid period is that most of the blockbuster drugs that define the early 2000s are going off patent. Most pharmaceutical companies seek to maintain their returns rates by leveraging on price through mergers (Feldman, 2021, p.1). Another reason for the increased M&A activity is the need for research and development (Richman et al., 2016, p. 788). The covid-19 pandemic has necessitated the consolidation of resources by the creation of contract research organizations mostly led by the pharmaceutical industry to combat it (LaPointe, 2021, p. 5). Most of the administrations across the globe have outsourced the search for Coronavirus vaccine and treatment to pharmaceutical companies. They have since expanded operations to include R&D. 2021 saw some of these ambitions executed; Thermo Fisher, a leading industry in the production of laboratory equipment and Covid-19 test kits, acquired CRO PPD for US$21 billion (Reiss and Deyong, 2021). CRO PPD is a global research organization that provides integrated drug development.

Conclusion

All healthcare organizations have at some point held talks over possible acquisitions and mergers with their counterparts. The need to change and evolve their business models is limited to value creation and incentives for their blockbuster drugs going off patent. The last decade saw a steady rise in the number of M&A acquisitions for companies seeking to create value for their services. However, this number was lower compared to the mergers that have been made during the pandemic period. This period saw an increase in the demand for R&D as many pharmaceutical companies rushed to meet deadlines set by management. Given the urgency of the situation, more companies were willing to consolidate their resources to meet deadlines. Multiple types of research have supported the analogy that Mergers improved the overall running of the business and service provision. Merged companies had the best practices and capabilities as compared to those that opted out of the strategy. As we emerge from the crisis, there is a need for all healthcare companies to consolidate some of their activities to provide better services. For example, new trends such as digital adoption and migration have been the highlight of many business models today. The healthcare industry ought to adopt a digital health platform and tool that will make service provision faster and cheaper as they are run from one pool.

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