Sanofi-Genzyme Deal Latest In Heating Health-Sector M&A Space

Drug giant Sanofi-Aventis SA's (SNY) purchase of biotech concern Genzyme Corp. (GENZ) for at least $20.1 billion is the latest landmark deal in a pharmaceutical industry merger-and-acquisition spree that's unlikely to ease.

The agreement also comes as broader health-care M&A activity has picked up significantly following a slump linked to the credit crisis, weak stock valuations and uncertainty--now significantly diminished--over the U.S. health-care overhaul.

"We're in a multiyear boom of M&A activity" in the pharmaceutical industry, said Adam Berger, managing director and head of M&A at health-care investment bank Leerink Swann. Even in 2008 and 2009, generally a slower time for health deals, pharmaceutical purchases kept a brisk pace, he noted.

The French drug maker's purchase of Massachusetts-based Genzyme, expected to close early in the second quarter, is the largest U.S. health-care deal since Merck & Co.'s (MRK) $49.6 billion merger with Schering-Plough in 2009. The Merck-Schering deal closed weeks after Pfizer Inc. (PFE) acquired Wyeth for more than $68 billion.

As blockbuster brand-name drugs lose their patent protection and face competition from lower-cost generic copies, drug makers have scrambled to pump up their pipelines by merging with smaller pharmaceutical and biotechnology companies.

"There's been a real anxious desire on the part of pharmas to replace that revenue" with small to large deals, Berger said.

"You can't start (developing a drug) today and hope it'll be on the market in a couple of years," as pharma research and development takes about a decade, noted Dimitri Drone, who leads pharma-industry deal services for PricewaterhouseCoopers. Drug companies need to buy therapies if they want a shorter pipeline, he said.

Drone said he expects to see an "off the charts" flow of U.S. companies buying foreign pharma businesses.

U.S. drug makers have moved much manufacturing and intellectual property overseas because of favorable tax rates, so a great deal of their cash is overseas, he noted. One of the best ways to put that cash to work "is to buy something outside of the U.S.," he said.

Big pharma also will look overseas because the U.S. market is fiercely competitive and developed, with reimbursement pressures and limited growth potential, he said.

Developing countries where people are getting wealthier and want more Western goods, such as medicine, make "very attractive markets," Drone said.

In 2009, there were 963 U.S. health-care M&A deals announced totaling nearly $185 billion, with a few big pharma deals, including Merck-Schering and Pfizer-Wyeth, accounting for the bulk of the dollar amount, according to Dealogic.

Last year, there were 1,220 deals totaling $125.6 billion. Dealogic includes the Sanofi-Genzyme deal in that number because the drug maker made public its unsolicited bid, then at $18.5 billion, in August.

So far in 2011, health-care companies have announced 156 U.S. deals totaling more than $15.4 billion. And that doesn't include the $2.9 billion private-equity buyout announced this week for ambulance and physician-services concern Emergency Medical Services Corp. (EMS), which Dealogic classifies as a transportation deal.

Globally, including the U.S., 2009 saw 2,220 deals totaling more than $232.7 billion; last year, there were 2,742 deals at $240.8 billion.

"In general, I think health-care M&A is picking up" across most industries, and this year should bring more deals than last year, Leerink's Berger said.

Jones Day law firm partner Toby Singer, who specializes in health-care mergers, noted that "there is a real push toward consolidation of hospitals." Health systems anticipate more limited reimbursement, with or without the health overhaul, she said.

"They believe that they must become more efficient and must squeeze unnecessary costs out of the system, and consolidation is an important vehicle for becoming more efficient," Singer said. "There is also a trend toward more combinations of physicians and physician organizations with each other and with hospitals."

Hospital operator Community Health Systems Inc. (CYH) has made a $3.3 billion hostile bid for Tenet Healthcare Corp. (THC), which would create the largest U.S. hospital company in number of facilities. The nation's largest for-profit hospital chain, HCA, plans to go public next month.

Last week, hospital- and rehab-center operator Kindred Healthcare Inc. (KND) announced plans to acquire long-term acute-care and rehab-hospital concern RehabCare Group Inc. (RHB) for about $900 million, excluding debt assumption.

Activity in the health-services space started increasing significantly in early 2010, PricewaterhouseCoopers partner Steven Elek III said. He predicts more big health-services mergers, and notes valuations have started to inch up lately.

By Dinah Wisenberg Brin, Dow Jones Newswires, 215-656-8285; dinah.brin@dowjones.com

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