We explain why the broader sector is seeing increased M&A activity
Thursday 07 Feb 2019 Author: Lisa-Marie Janes

Corporate activity in the healthcare sector is heating up. GlaxoSmithKline (GSK) and US rival Pfizer plan to marry their consumer health businesses in a £10bn joint venture. Bristol-Myers Squibb has made a $74bn takeover offer for Celgene and Eli Lily is to pay $8bn for Loxo Oncology.

Analysts are confident the mergers and acquisitions (M&A) trend still has legs in the sector and many believe there are numerous potential takeover targets among London-listed stocks including Indivior (INDV), CareTech (CTH:AIM) and Consort Medical (CSRT).

While buying a stock purely for takeover potential is risky, in case it doesn’t happen, it is worth understanding what’s driving
the latest bout of M&A and to spot any shared characteristics
among the targets.

WHY ARE THE DEALS HAPPENING?

There are various reasons why takeovers and mergers have happened of late. Principally, large drug companies have struggled to create enough replacements for old blockbuster drugs which have lost patent protection so they are buying rival companies to access new products and treatments.

Pharmaceutical firms have also been seeking complementary drugs and treatments as many try to refine their focus and concentrate on certain niches.

Others have simply decided that buying new developments is easier, faster and potentially cheaper in the long run than ploughing large amounts of money into research and development.

And some are making strategic moves to reposition their portfolio with a view to strengthening certain segments and then selling them off or separating them.

That is certainly the case with GlaxoSmithKline which will have a 68% controlling stake in its new consumer healthcare venture with Pfizer. It will demerge and float the business within three years, thereby splitting GlaxoSmithKline into two distinct businesses: one focused on consumers, the other on pharmaceuticals and vaccines.

In the broader field, many medical device makers and healthcare service providers are also seen to be takeover candidates.

TAKEOVER TARGETS OF VARYING QUALITIES

Some takeover targets are companies with promising drugs or treatments, or established firms making good profit. Others are struggling firms who may benefit from being owned by a larger company with deep pockets and widespread expertise.

Healthcare companies which have suffered a delay or product failure, but which still have something to offer to a third party, may be vulnerable to a low-ball bid if they are strapped for cash.

Clinical trials are extremely expensive and could spiral to millions of pounds, so investors may be less willing to back a drug company with more money if a major setback occurs during the trial process.

Peel Hunt analyst Amy Walker argues companies with multiple Phase III assets (either in the middle of Phase III trials or successfully completed them) are likely to be at the top of any M&A list as most of the hard work will be done bar approval and commercialisation.

Companies that have overcome problems could also be bid targets. For example, last November Boston Scientific offered £3.3bn for global healthcare company BTG (BTG). The target had previously suffered setbacks including a £53.5m payout for damages for breaching a distribution deal and a £150m impairment charge for severe emphysema treatment PneumRx Coil.

In the run up to the takeover, BTG upgraded its pharmaceutical sales guidance twice, illustrating it was on the road to recovery.

WHY IS INDIVIOR A POTENTIAL TARGET?

Investment bank Stifel suggests addiction specialist Indivior could be snapped up by someone else.

‘With a low valuation, strong balance sheet, steady growth of Sublocade, as well as Perseris awaiting launch, we believe Indivior is now an attractive acquisition target,’ says Stifel analyst Max Herrmann.

Herrmann believes global biopharma firm Alkermes could be an ideal partner for Indivior as taking over the business would make the suitor immediately profitable and diversify the company’s treatment range.

Indivior had a torrid time last year after tussling with rival Dr Reddy’s Laboratories over its attempts to sell a generic version of Indivior’s sublingual film product Suboxone to treat  opioid addiction.

Panmure Gordon analyst Julie Simmonds doesn’t see Indivior as a takeover target, flagging ongoing legal battles and reimbursement issues for Sublocade as possible deterrents – although one could argue some or all of these risks are already priced into its low valuation.

It is trading on 11.3 times current year earnings and an EV/EBITDA (enterprise value-to-earnings before interest, tax, depreciation and amortisation) ratio of 1.5-times, according to Refinitiv data.

CARETECH’S ROUTE TO THE UK MARKET

Simmonds says residential care home specialist CareTech is a potential target. The healthcare business has historically enjoyed strong growth and is cheap compared to its peers.

CareTech trades on a 7.8 times forecast earnings per share for the year to 30 September 2020 compared to an average of 13.5 times for its peers, according to Refinitiv data.

Simmonds believes CareTech is potentially attractive to overseas companies looking for a strategic entry into the UK residential care market where it has a 5% market share.

The company last year bought Cambian for £372m, expanding its presence in services for children and specialist education.

CONSORT MEDICAL’S COMEBACK

Consort Medical is another potential takeover target, says Simmonds. Its share were struggling between 2017 and late 2018 but have started to pick up more recently.

In 2017, Consort’s partner Mylan had its launch of generic asthma treatment Wixela blocked by US authorities. Consort manufactures the device used in Wixela which is Myland’s version of GlaxoSmithKline’s Advair treatment.

The setbacks triggered a series of events including a £3m pre-tax profit hit for Consort as Mylan had a lot of inhalers that were yet to be sold before approval, suppressing demand for more stock.

The US authorities have now approved Mylan’s Wixela product which has helped to renew market interest in Consort’s shares.

 

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