Juvan's Health Law & Private Equity Report : Corporate & Health Care Lawyer & Attorney : Jayne Juvan : Benesch Friedlander Law Firm : Private Equity, Corporate Governance

On Friday, I moderated a panel - M&A and Investment Trends in Health Care: Outlook in for 2009 and Beyond - at the Cleveland Metropolitan Bar Association's 25th Annual Health Law Institute.  The panel featured two local health care M&A attorneys - one from Benesch and another from Jones Day - and a member of GE Health Care Finance. 

The panelists covered a wide range of issues, reflecting back to the glory days of M&A activity in 2006 and 2007 and the doom and gloom of the recession and corresponding dramatic deal decline.  The panelists generally agreed that credit is available, but that it's a flight to quality and often times very expensive.  So, essentially, you have to be both the "right" company and willing to pay the price.  Deals are still underway, but often get tripped up in due diligence or when parties try to renegotiate terms (imagine the deal fatigue!).  Reimbursement concerns continue to stay at the forefront of many investors' minds, as they (quite obviously) do not want to pay $1.00 today for something that's worth $.67 tomorrow.

When asked when the rebound will begin, the panelists responded that investors are waiting on the sidelines until there's more certainty, and they refused to speculate as to the approximate date.   They all agreed that we're in for a long haul and that the recovery will be slow in coming.  Still, there are opportunities in certain sub sectors of health care (there's always a silver lining, right?) - sub sectors that benefit from the stimulus package and Obama's budget and reform efforts are likely to be winners (such as health information technology companies and companies that provide home and community based care). 

Sincere thanks to the panelists for their participation!

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8th Annual MedTech Investing Conference, May 6-7

The 8th Annual MedTech Investing Conference, May 6-7 is right around the corner and looks like it will be a great conference!  I have a conflict and can't attend, but would encourage you to take a minute to view the agenda topics, as well as the stellar line-up of speakers!  Continue reading for a quick over view of the program and registration information.

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Interested in learning about acquiring a health care company in bankruptcy?  Then tune into Benesch's webinar entitled A Case Study:  Bankruptcy Acquisition of a Distressed Health Care Enterprise. 

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• Pfizer / Wyeth Transaction.  On January 26, 2009, Pfizer and Wyeth announced that they entered into a definitive merger agreement.  The agreement calls for the acquistion by Pfizer of Wyeth in a cash and stock transaction.  In connection with the transaction, Pfizer announced that the Federal Trade Commission has made a second request for information pursuant to the Hart-Scott-Rodino Antitrust Improvements Act of 1976 regulatory process.  Presumably to resolve post-merger integration concerns, Pfizer also announced today the planned leadership and organizational structure for research and commercial operations.  The company's research structure will have two distinct research organizations - The PharmaTherapeutics Research Group (with a small molecule research focus) and The BioTherapeutics Research Group (with a large molecule research focus), and the company will have nine diverse business segments. 
• Private Equity to Have "Obama" Focus?  The Chicago Tribune reported on an Association of Corporate Growth meeting that questioned whether the private equity industry will experience an "Obama" effect.  The Tribune reported that, among other industries, health care will likely be a focus given the stimulus package.  Indeed, the American Recovery and Reinvestment Act of 2009 (the "Stimulus Bill") makes certain health care companies an attractive investment, as it sets aside $53 billion specifically for health care, along with non-specific spending bringing the total closer to $150 billion.  The Stimulus Bill provides over seven million unemployed Americans and their families with a 65% tax credit for COBRA premiums for up to nine months and gives unemployed workers who failed to elect COBRA coverage within the applicable time frame a second chance to elect coverage.  The Stimulus Bill also provides an estimated $87 billion to states over the next 27 months in the form of a temporary increase in the Federal Medical Assistance Percentage.  While by no means a long-term fix, at least temporarily, these two measures are likely to shore up utilization and stabilize revenues where there may otherwise have been a more considerable decline. The Stimulus Bill also provides incentives for the adoption of health information technology and for clinical preventative services and community-based prevention programs.  

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• CVS Announces Acquisition of Longs Drug for $2.9 Billion.   CVS Caremark Corp. (CVS) announced the $2.9 billion dollar acquistion of Longs Drug Stores (LDG), resulting in the addition of 521 drug stores in California, Hawaii, Nevada and Arizona.  According to the press release, the network of stores opens the doors to highly attractive markets.  Shares of CVS stock closed down .49 at 38.05, off 1.27%, and shares of LDG closed at 54.04, off 1.07 or 1.94%.  Check out the story from MarketWatch.
•  Icahn Announces Stake in Biogen Idec, Inc.  Activist investor Carl Icahn announced his 6.03 percent stake in the common stock of Biogen Idec Inc., a biotechnology company.  Icahn reports that he raised his stake because the shares were undervalued.  Note that a link to Icahn's blog has been added to the blogroll.

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The decline of deal activity during the first quarter of 2008 weighed heavily on the shoulders of many in the health care industry.  Just a few months back, I attended iiBIG's Investment and M&A Opportunities in Healthcare Forum, and the news from the street was sobering - deal activity was down, even in the health care space, and the pain inflicted by the credit crunch took center stage.  Despite the somber tone, one message (an obvious message to many, I'm sure) still left a glimmer of hope - health care, more than most industries, is somewhat recession proof, leading many analysts to believe that there may be an uptick in deal activity in the months that lie ahead. 

An article recently released from Reuters, which examines data published by Irving Levin Associates, suggests that these analysts may be correct and that some of the bleeding in the health care sector has subsided, at least temporarily.  Unlike most of the headlines of stories in leading publications such as the New York Times (from the Dealbook: "Hedge Fund Manager Describes Rock Bottom," and we can't forget the stories of bloodletting and the images of the MIT grad standing on the street corner with a sign begging for work), the article's title is positive, upbeat, and hopeful ("Second Quarter Health Care M&A Strongest In Years According To New Report From Irving Levin Associates, Inc."). 

The article boasts that, "based on preliminary figures, a total of $85.5 billion was committed to fund the second quarter's M&A activity, a 209% increase over the prior quarter's $27.7 billion. It is also a 25% increase over the $68.3 billion spent in Q2:06 and a 39% increase over the $61.3 billion spent in Q2:07. Despite the slow-down in global M&A, activity in the health care industry is robust and on the rise."

No, you're not seeing things - the article really says that health care M&A activity is robust and on the rise.  And I promise - the article was just written and reports 2008 data - not 2007 (yes, I double checked)!!

****** 

As an aside, I can't help but to note another positive article published today - the so called silver lining to the skyrocketing gas price crisis.  Indeed, an Associate Press article entitled "As Gas Prices Go Up, Auto Deaths Drop" states that "Professors Michael Morrisey of the University of Alabama at Birmingham and David Grabowski of Harvard Medical School said they found that for every 10 percent increase in gas prices there was a 2.3 percent decline in auto deaths. For drivers ages 15 to 17, the decline was 6 percent, and for ages 18 to 21, it was 3.2 percent."  

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The April 2008 issue of the Health Care M&A Monthly (subscription only publication) reports the announcement of 219 health care transactions in Q1 2008, down from the activity in both Q4 2007 (301 deals, down 27%) and Q1 2007 (237 deals, down 8%).  Biotechnology, pharmaceutical and medical device deals account for almost 75% of the deals announced, while home health, managed care, hospitals, long term care and behavioral health transactions collectively accounted for only about 8% of the volume.  The authors recognize that the decline is due, at least in part, to the credit crunch and the fact that activities of financial buyers have slowed, but point out that health care tends to be anti-cyclic and that the industry is still very much in need of consolidation.  Make sure to check out the full report for additional analysis on these and other industry trends.  For those who closely follow HC M&A activity, you may want to consider a subscription to this publication, as I have found the analysis to be very good.

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The Healthcare Dealmaking Symposium recently held by The Deal in New York City offered great insight into 2008 M & A trends in the health care space. One of my colleagues was in attendance and provided me with a brief overview of the major themes from event.  For those of you following health care M & A trends who couldn't attend, I would encourage you to check out online coverage of the event, as The Deal includes top notch video footage clips of several of the lead presentations. 

I'm sure it will come as no surprise, but the collapse of the credit markets seemed to take center stage.  An article from The Deal's web site entitled Healthcare Dealmaking Symposium: 12 Month Outlook quotes Russell L. Carson, co-founder of Welsh Carson, Anderson & Stowe, who summed up investor sentiment when he stated, "I don't think we want to do anything today that's reliant on capital markets to close.  There won't be a lot of $5 billion-plus deals by private equity firms until the credit markets unfreeze, and I don't see that happening this year." 

Other deals may be slow to take off as buyers and sellers continue to find themselves at a pricing standstill.  Sellers still expect 10-12 x EBITDA, while buyers are looking for multiples in the range of 6 to 8. 

According to panelists, strategic buyers with a lot of cash on hand are well positioned, followed by PEs and SPACs.  The hottest space in health care will likely be pharma, med tech, diagnostics, biotech and companies that focus on cost-containment. 

I'll be in attendance at the conference sponsored by iiBig at the end of the month entitled Investment and M & A Opportunities in Healthcare: Generating BIG Returns in a Fast-Growing Sector and will provide coverage of the trends highlighted at the conference.   For those of my readers who will also be in attendance, I look forward to seeing you there!

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According to a company press release, on July 2, 2007, Manor Care (NYSE: HCR) announced board approval of an all cash $6.3 billion dollar transaction with Carlyle Group to take the company private.  The deal contemplated that shareholders would receive $67.00 per share, a twenty percent premium in relation to the closing price on April 10, a day before the company announced it would "evaluate strategic alternatives," and thereafter received shareholder approval. 

The timing of the transaction comes amidst increased state and federal scrutiny of private equity fund buyouts of nursing homes.  This transaction and others similar signal a shift in nursing home deals--not only in the sense that consolidation and ownership by private equity funds is becoming more prevalent as the baby boomers are set to retire, but also in the sense that regulatory scrutiny of transactions involving the facilities may be different, and perhaps more vigorous, than it has in the past.

Recently, the New York Times ran a string of articles addressing the new issues arising out of consolidation and fund ownership, including:

• Nursing Home Buyouts Face Scrutiny (From the New York Times Deal Book) (“Nursing homes aren’t just investment vehicles,” Mr. Baucus said in a statement. “They’re homes for some of America’s most vulnerable citizens.”)
• Inquiries at Investor Owned Nursing Homes  (“There are serious concerns that private equity firms are reducing the care at nursing homes by decreasing the number of employees,” Mr. Dingell said. “We’ve been made aware that nursing home residents are losing their ability to use lawsuits to fight poor care, and that people may be suffering.”)
• At Many Homes, More Profit, Less Nursing ("But in recent years, large private investment groups have agreed to buy 6 of the nation’s 10 largest nursing home chains, containing over 141,000 beds, or 9 percent of the nation’s total. Private investment groups own at least another 60,000 beds at smaller chains and are expected to acquire many more companies as firms come under shareholder pressure to sell.")

Transactions such as the proposed Manor Care/Carlyle deal often trigger prior approval and notification reporting requirements.  For example, many states require that, upon a change of ownership at the operating company level, the entering operator must apply for a new license.  Some states also require that the new entity obtain a certificate of need before the transaction may close.  As you might expect, the regulatory process is often fairly involved, requiring the submission of ownership information, information about the incoming management team, a demonstration of financial solvency sufficient to maintain the facilities, and staffing numbers.  Many times, the applications are deemed incomplete by regulators, requiring that the applicant submit further information to satisfy the regulators' questions and thereby requiring that the closing date be pushed back.    

In the Manor Care/Carlyle transaction, a few state officials and regulators have indicated a desire to more closely scrutinize the deal, delaying the closing date.  In an unprecedented move, the State of West Virginia Health Care Authority granted the requested certificate of need, but then rescinded the decision shortly thereafter in response to an appeal filed by the Service Employees International Union. In an article published by the State Journal, Rick Rump, assistant vice president of corporate communication at Manor Care, is quoted as stating, "No other state approved a certificate of need and then stayed the process, and it's the first time in West Virginia, too. They've never granted a CON and then rescinded it," Rump said. "It's an odd precedent."   The Health Care Authority will hold an administrative hearing at 9 a.m. Dec. 14 at 100 Dee Drive, Charleston to reconsider its decision.

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The Wall Street Journal reported today that the Delaware Chancery Court has postponed the shareholder vote on CVS Corp.'s ("CVS") takeover bid of Caremark Rx Inc. ("Caremark").  According to the article, the Chancery Court also suggested that Caremark should enter into negotiations with Express Scripts Inc. ("Express Scripts"), whose $27.3 billion dollar bid has been rejected.  At the earliest, the shareholder vote on the CVS deal will take place on March 9. 

Caremark has long rejected the competing proposal of Express Scripts on the grounds that the deal would violate antitrust laws.  Indeed, the merger of these two companies would unite two of the largest pharmacy benefit managers in the country.  Nevertheless, the judge questioned this rationale, stating that such concerns did not prevent Caremark from entering into negotiations with Express Scripts in the past.  

Responding to the move by the Chancery Court, Caremark stated in a press release,

Caremark will inform shareholders as promptly as possible regarding the new date of the special meeting to approve the CVS merger. With the tripling of the special cash dividend to $6.00 per Caremark share announced earlier today, the CVS merger now offers Caremark shareholders even greater near-term value than it did before, in addition to longer-term strategic benefits and growth opportunities. The Company looks forward to obtaining shareholder approval as soon as possible and promptly closing this merger, which has already received regulatory clearance.
     

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