BLOOMBERG: Budget Constraints Drive Buying

Date: 27-Sep-2011

By Meg Tirrell and Jeffrey McCracken

The U.S. health-care law and budget cuts will drive consolidation in the industry as companies compete for fewer dollars and to protect profits, said JPMorgan Chase & Co. (JPM)’s Jim Woolery.

“Budgetary constraints around health care, say over the next five years -- that’s a headwind on profitability,” Woolery, JPMorgan’s co-head of North American mergers and acquisitions, said today at the Bloomberg Dealmakers Summit in New York. “It’s a major catalyst for consolidation.”

Companies in the health-care industry will need to get larger to combat those challenges, Woolery said. JPMorgan advised Medco Health Solutions Inc. (MHS) on the $29.1 billion deal announced in July in which St. Louis-based Express Scripts Inc. (ESRX)would take over Franklin Lakes, New Jersey-based Medco. The acquisition requires approval from U.S. antitrust regulators and would create the biggest U.S. pharmacy benefits manager.

The deal will face sharp scrutiny from regulators, said Frederick Frank, vice chairman of Peter J. Solomon Co.

“In pure antitrust rules, this is an endangered deal,” he said at the summit.

Woolery disagreed.

“It hasn’t been challenged by the government yet,” he said. “I do think that the deal is going to go through.”

Deal Data

There have been 1,088 acquisitions in the past year of U.S. health-care companies, according to data compiled by Bloomberg. The announced and completed purchases had an average disclosed price of $318.5 million with a typical premium of 39 percent. Express Scripts’ pending Medco purchase would be the biggest.

Large drugmakers also need to look to deals to gain new products, Frank said.

“The big pharma companies, if you look at history, are not good at R,” Frank said today at the summit, referring to the research half of research and development. He cited Paris-based drugmaker Sanofi’s $20 billion purchase of Genzyme Corp. this year.

Small drugmakers and biotechnology companies “are good at R, but not very good at D,” Frank said. “They can’t afford it. So, there’s a natural relationship here.”

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