Article contributed by Matt Arens, CEO and Senior Portfolio Manager, First Light Asset Management
The health care sector historically has been a relatively fertile ground for merger and acquisition (M&A) activity. So far this year, many signs point to a potential increase in the pace of health care M&A.
Two large acquisitions already have been announced in 2018, with Sanofi buying Bioveratriv Inc. for approximately $11.6 billion and Celgene Corp. acquiring Juno Therapeutics, Inc. for approximately $9 billion. These announcements come on the heels of a number of transactions that took place in 2017, most notably, Optum buying DaVita Medical Group; CVS Health acquiring Aetna; Abbott buying St. Jude Medical, Inc.; Becton Dickinson and Company acquiring C.R. Bard, Inc.; Gilead Science, Inc. buying Kite Pharma, Inc.; and Johnson & Johnson acquiring Actelion Ltd. In addition to these large deals, numerous smaller mergers and acquisitions also were announced last year.
Overseas Cash Repatriation Could Spur Increased M&A
In our view, M&A momentum within the health care sector should continue to accelerate in 2018. Why? We believe a driving factor will be recent tax legislation — specifically, a key part of the tax bill allowing multi-national companies to repatriate dollars held overseas at a one-time 15% tax rate.
We anticipate large volumes of cash trapped overseas are likely to start flowing back into the United States. According to Capital Economics, there is approximately $600 billion in cash from large U.S. health care companies parked overseas. That’s a significant amount considering the total market capitalization for micro- and small-cap health care stocks on U.S. exchanges is just $222 billion (Source: FactSet as of 1/3/18).
We predict repatriated cash has the potential to spur greater M&A activity as larger health care companies increase their efforts to add innovation and growth to their more mature product portfolios.
Aging Demographic Driving Need for Innovative, Cost-Effective Treatments
The aging U.S. population also is an important factor in making the health care sector ripe for M&A activity. In the United States, a baby boomer will turn 65 an average of every 9 seconds until the year 2030 (Source: Pew Research Center). And, U.S. per capita health care spending for people aged 65+ is nearly triple that for people 19 to 64 (Source: Centers for Medicare and Medicaid Services).
As the percentage of people 65 years of age and older grows, so does health care spending as the prevalence of cancer, heart disease, diabetes, Alzheimer’s and other diseases increases among this population. Consequently, the opportunity for health care companies to develop and market better, more cost-effective treatments has, arguably, never been larger or more important.
Oftentimes, acquiring innovative products and services is a more attractive and expeditious alternative for larger health care companies than relying solely on internal research and development efforts to generate and bring new products to market.
Additionally, while the human genome was sequenced back in the 1990s, it has only been recently that the health care industry has begun to understand protein chemistry and human biology well enough to start taking advantage of some of the important and critical data contained in DNA. This evolution has led to meaningful success and advancements in important therapeutic categories, such as immunotherapy, gene therapy and editing, and treatments for central nervous system disorders. The aging population is only increasing the need for these new types of therapy to both treat and potentially cure diseases.
All of these factors help set the stage for consistent, predictable investment flow into health care starting at the venture level and, in many cases, ending in an M&A transaction.
About First Light Asset Management
First Light Asset Management’s investment strategy is largely driven by the conviction that a disproportionate number of health care innovations tend to come from smaller, more agile companies with disruptive technologies. As a result, First Light finds the greatest opportunities in micro- to small-cap public securities, balanced with positions in select mid- to large-cap companies.
www.firstlightam.com
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