Despite the significant number of mega deals over US$10 billion in the Healthcare and Pharmaceuticals sector – in fact, all the top 10 deals exceeded US$5 billion – the value of announced deals in 2016 is only a little over half that of 2015.
Despite the significant number of mega deals over US$10 billion in the Healthcare and Pharmaceuticals sector – in fact, all the top 10 deals exceeded US$5 billion – the value of announced deals in 2016 is only a little over half that of 2015. But the volume of transactions is similar to the level achieved in previous years, with the exception of the record number in 2015.
“The level of transactions is likely to have been influenced by forthcoming changes to the rules on tax inversion deals in the United States,” explains Andrew Nicholson, KPMG’s Global Head of Healthcare M&A. “The changes will make it less attractive for corporates to use M&A transactions to drive tax efficiencies, with the result that corporates may have been keen to complete deals before the full effect of changes is felt.”
The same 3 countries accounted for the highest number of both outgoing and incoming deals. The picture is less consistent in terms of deal values, however.
“There has been a huge amount of spend between the United States, the United Kingdom and China, as expected, with China in particular accounting for more smaller-value deals. Chinese buyers are keen to acquire IP from Western companies to drive growth at home, so it’s no surprise to see Chinese corporates so active in originating transactions. In the United States, slower domestic growth is driving corporates to look overseas to increase earnings, whether in Europe or beyond,” Nicholson notes.
“Japan and Switzerland have also been active in seeking growth outside their home markets via M&A. It’s common for Japanese corporates to buy overseas. Switzerland has some big pharmaceuticals that tend to make limited, but large transactions,” he says.
The M&A Predictor data suggests a similar message. Corporate appetite for M&A transactions, as indicated by forward P/E ratios, is expected to decline by 11 percent over the course of 2017. The capacity to transact, however, as measured by net debt/EBITDA, is predicted to improve by 20 percent, as healthcare companies continue to pay down debt.
These numbers support the expectation that there will still be a respectable volume of deals next year, yet the value of deals may drop due to announced tax changes and the reduction in announced deals in 2016.
Nicholson believes the fundamentals of the sector remain strong and, while deal levels may not match 2015, he expects them to remain on a par with preceding years.
“The changes around tax inversion may kill a few potential mega-mergers but in terms of day-to-day acquisitions, debt is still cheap, cashflow is good and P/E ratios are strong, so corporates are still likely to see M&A as an attractive option to grow their earnings.”