Americans spend so much on health care that it accounts for between 15% to 20% of the nation's gross domestic product. By some estimates, that number could balloon to 28% within two decades, so it's not surprising Wall Street wants to harness the rapidly growing segment of the nation's economy.
For some deal makers, the industry — encompassing a huge range of businesses, from hospitals to insurers and drug and device makers — will be a new find. For others, the underwriting of stock and debt, and providing M&A advice for health care businesses, has been a steady source of fee income that has gained in importance over the last two decades.
The growth in spending, and the recent debate in the nation's capital about health care reform, has fueled expectations among Wall Street professionals that health care could be a source of deal-making activity as new legislation spurs mergers and acquisitions.
At the same time, there are other factors behind the pickup in M&A activity, notably the impending expiration of 20-year patents on best-selling drugs. And it doesn't hurt that the industry is widely viewed as recession-proof.
"Health care has always been an important industry sector for a couple of the leading investment banks and, over time, other firms have attempted to enter the space by hiring whole groups or individuals to start up groups," says Marc Cabrera, who runs health care investment banking for Morgan Joseph. Speaking of the recent pickup in hires of investment bankers specializing in health care, Cabrera says: "Wall Street is very efficient in identifying the most immediate users of capital."
"It has been one of the most steady performers" for Wall Street, Jeffrey Leerink, founder of health care boutique Leerink Swann, says of the industry. "If you look at fee pools, energy and health care stood out for everybody."
Joel Shalowitz, professor of health care industry studies at the Kellogg School of Management, agrees that the sector has always been a source of steady and reliable fee income for Street banks, but its importance becomes more evident at a time when advisory work for many other industries has slumped.
"When the economy goes down, health care becomes more popular. It does not soar as high but it does not dip as deeply as a lot of other sectors," he says.
Choosing Sides
Earlier this week, UBS announced the hiring of four new managing directors to fill spots left open by a group of health care pros who decamped for Jefferies & Co. Jefferies just hired a trio of senior analysts for its health care equity-research team — it aims to have the largest analytic team devoted to the sector — while Morgan Joseph brought on Mitchell Stern, the former head of health care and life sciences banking at SMH Capital, as part of an ongoing expansion of the team.
Early next year, Cain Brothers, a New York outfit that specializes in tax-exempt financings for hospitals and advises smaller firms on mergers, will add professionals to its ranks.
This summer, Boston's Leerink Swann added dramatically to its pool of talent, pinching professionals from bulge-bracket firms like Citi, Bank of America Merrill Lynch and Morgan Stanley.
B of A, meanwhile, brought on Benjamin Perkins from Pacific Growth Equities in San Francisco as a managing director of life sciences investment banking, and the Charlotte banking giant hired Martin Friedman from Credit Suisse to co-head the life sciences team. Credit Suisse added Tom Davidson, formerly with B of A, as its co-head of health care in the Americas.
"We needed to have a larger banking footprint," Leerink says of the flurry of hires this year. "It was not driven by any near-term events or regulatory or political changes that were on the horizon. It was just that, strategically, Leerink Swann needed to have a world-class group of bankers on its platform to support its long-term goals."
Asked if the debate in Washington, D.C., has spurred some of the hires by Leerink and other firms, Jeffrey Leerink says that "any time you have change — change in reimbursement, change in the way health care is delivered or the way health care is paid for — that change is going to create uncertainty, and during times of uncertainty people turn to trusted advisers to help guide them through those strategic issues that the business may face."
Sage Kelly, head of health care banking at Jefferies, says advisers specializing in the sector can expect to be busy with not only mergers and acquisitions but also equity and debt issuance.
M&A assignments likely will keep deal makers busy because patents for best-selling drugs are set to expire in the next three to five years.
"Tens of billions in revenues will be lost by some companies," says Kelly. "A fair amount of M&A activity will be related to patents. It is a significant contributor to the M&A market." Pfizer's Lipitor, for example, is set to expire next year.
The M&A work, though, is not just for large companies. Cabrera says roughly 95% of the health care industry is made up of companies with $100 million or less in revenues and this paves the way for roll-up strategies. "Most sectors within health care remain highly fragmented," he says.
And the activity is not just relegated to the U.S. Kelly and his colleagues at Jefferies recently completed a $650 million follow-on deal for a Greek specialty-pharmaceutical company. UBS, meanwhile completed a $1.1 billion IPO for a Chinese health care company, Sinopharm, this week.
"There is a globalization of health care services [going on]," says Robert DiGia, global head of health care banking at UBS. DiGia, a 20-year veteran of the sector, says his firm has been active in Brazil, where it has helped bring to market eight health-care equity offerings.
Not only are Wall Street firms advising companies overseas, they are helping U.S. companies looking to expand across borders.
According to Davidson, manufacturers of pharmaceuticals need to merge with others so they can effectively maneuver on the world stage. "You need to be global. It is expensive to be global," says Davidson. "If you are selling products overseas you need a lot of products."
While he has not been approached by a larger investment bank with an offer to buy his health care boutique, Leerink's founder believes that in some cases larger firms looking to ramp up a presence in health care banking may skip the piecemeal hiring of deal-makers and swallow up a boutique firm.
He cites Merrill's 2006 purchase of energy banking firm Petrie Parkman & Co. as an example of how a Wall Street giant can aggressively shift into a banking specialty area. James Cain, co-founder and CEO of Cain Brothers, would not comment on whether a large banking firm had offered to buy his specialty boutique.
"There is always a need for health care bankers," says Charles Ditkoff, head of Americas health care banking at B of A. "What you are seeing now is that a lot of folks want to invest in health care."
Ditkoff, a two-decade veteran of the industry, says that the pool of talent is not large. Why? Many bankers have gravitated to "hot" banking arenas like tech and media in the 1990s so there were never "too many bankers" oriented to the health care industry.
Also, health care banking is a specialty that takes time to grow into.
"Health care bankers are not inherently easy to create," says Davidson, adding that even within the health care world specialists cannot readily hop from one sub-sector to another. "There is specialization in health care. A medical tech guy cannot readily take on biotech."
Keeping Busy
For Wall Street, 2009 may be remembered as a year of rebirth. Credit markets reopened in the first two quarters, IPOs were successfully floated, activity came back to life in mergers and the leveraged loan market appeared to be revitalized.
Against the picture of a slow and, sometimes, tentative rebirth, dealmakers in health care have been working at a hectic pace. Along with FIG bankers, they are set to complete one of their busiest years.
In the first two quarters, M&A for Wall Street was given a big boost by Pfizer's $68 billion bid for Wyeth in January and Merck'splan to buy Schering Plough for $39 billion. According to a report published by Leerink Swann, the dollar size of deals announced in the first quarter of 2009 is the highest ever committed to M&A in a single quarter.
At B of A, Ditkoff expects 2009 to be his third best year in terms of fee income earned by the group, and if things stay as busy as they have been, 2009 could eclipse two high-water marks — 2006 and 2007 — boon years aided by LBOs. B of A was in on the Pfizer and Merck deals as well as Express Scripts' purchase of Wellpoint.
In addition to advising M&A deals, Ditkoff's firm has been active in selling equity as well as debt transactions for the health care industry. Investors, he says, are lured to the sector because even in down times, consumers will not forgo medical and health services.
For investors buying into health care, the industry has offered positive returns. S&P's Healthcare Index — composed of companies like Johnson & Johnson, Abbott Laboratories, Pfizer Wyeth, and Cephalon Inc. — was up just under 8% for the year.
The banking work for health care is diverse, as is seen from the niche handled by Cain Brothers. Founded in the early 1980s, Cain advised hospitals on raising money through tax-exempt bonds — it still underwrites bond deals for special issuers building housing for seniors — and it serves as an adviser for hospital restructurings on top of M&A work for mid-cap and small-cap companies.
Many health care pros on Wall Street likely will be busy selling regular corporate debt this year. The proceeds will be used to fund the mergers and pay down debt coming due in 2010, 2011 and 2012. "Companies need to refinance impending maturities," says DiGia.
Darren Alcus, president and CEO of GE Capital Health Care Financial Services, which lends to health care companies, says demand for financing has picked up, suggesting that M&A activity could be lively in the fourth quarter and early next year.
"We have seen a threefold increase in the level of activity in recent months," he says.
