Pharma Business Services Market Analysis – September 2015

As the pharmaceutical market undergoes changes, pharma business services companies continue to expand the breadth and depth of their service offerings.

Valuations in the space continue to rise, with revenue multiples in the public markets currently tracking at a median of 1.2x, and median EBITDA multiples of 12.2x.

Median revenue transaction multiples are higher, at 2.5x while median EBITDA multiples are 9.3x for transactions over the past two years.

Brocair’s index of pharma business services companies has largely tracked the broader S&P index. However, since late 2012, our index has consistently performed above the S&P 500. In the last 12 months, the index reached a 10-year high.

M&A activity in the space has been robust as companies have been trying to strengthen and broaden their capabilities and geographic reach.

Pharmaceutical Distribution Market Analysis – September 2015

Domestic and international expansion spurs acquisitions as the pharmacy market continues to vie for growth

Over the past three years, revenue multiples in the public markets have remained consistent at a median of 0.5x while EBITDA multiples have increased to a median of 10.5x. Since 2012, mean EBITDA multiples have increased by approximately 62%.

Transaction multiples are in a similar range with median revenue multiples of 0.6x and median EBITDA multiples of 11.4x over the past two years.

Our pharmacy index has largely outperformed the S&P 500 index over the past three years. The recent spike in the number of transactions within the industry has fueled the unprecedented growth. In an effort to gain market share, the top players in the industry continue to acquire smaller companies. The competition between these market leaders has led to the inflation of both public and private multiples.

Medical Reprocessing Market Analysis – August 2015

Medical reprocessing market sees renewed growth as healthcare providers face pressures to manage costs and increase sustainability

The global medical sterilization, repair, and refurbishment industry is expected to reach roughly $13 billion by 2017.¹

In the last 24 months, the medical reprocessing index has seen renewed growth and has outperformed the S&P 500. In the last three years the S&P has increased 23%, while the medical reprocessing index has increased 57%.

Median revenue multiples in the public markets are currently tracking at a median of 2.5x, while EBITDA multiples have a median of 11.9x. Since 2013, these have seen growth rates of 7% and 23%, respectively.

Transaction multiples are tracking in a somewhat lower range, with median revenue multiples of 1.5x and median EBITDA multiples of 8.1x over the past two years. These numbers remain similar to 2013 results.

Healthcare Insurance Services Market Analysis – July 2015

The healthcare insurance services market has been undergoing diversification, innovation and consolidation.

As a direct result of the Affordable Care Act, from 2011 to 2019 the profit margins of U.S. insurers could decline by more than 40 percent¹. Recognizing that low-cost services will be fundamental to their success, numerous industry leaders are lowering administrative costs by restructuring their practices and specializing on their core business along with other initiatives to improve efficiency. These regulatory changes to the health insurance industry have led to an increase in acquisitions that promote a more consumer-driven health insurance business model.

Over the past five years, our Healthcare Insurance Services Index has roughly lagged the S&P 500 Index. Given the dynamic nature and complexity of changes in the health insurance industry, the companies that have been more active in pursuing inorganic growth have been able to stay ahead of the competition.

Revenue multiples among public companies in the space have been tracking at 0.9x while EBITDA multiples have remained around 11.1x from the third quarter of 2014.

Dental Products Market Analysis – March 2015

Geographic expansion and advanced technology help drive acquisitions in the dental products market.

The dental products market is expected to grow at an annualized rate of around 7%, reaching $27.6 billion by 2015. The market for dental implants and dental biomaterials is expected to grow at 6% and 10.5% respectively from 2010 – 2015.¹

Revenue multiples are currently tracking at a median of 1.8x, while EBITDA multiples have a median of 14.2x. Since 2012, these have seen 71% and 35% increases, respectively.

Since the acquisition of Astra Tech by DENTSPLY in August 2011 and the acquisition of BioHorizons by Henry Schein in December 2013, there has been further consolidation among the top players in the market. In April 2014 Zimmer announced an agreement to acquire Biomet for $13.4 billion. Seven months later, Nobel Biocare, the world’s second-biggest maker of dental implants, was sold to Danaher Corp. for $2.4 billion.

Wound Care Market Analysis – March 2015

Wound care companies are consolidating their position in the market through geographic and portfolio expanding acquisitions.

The global wound care industry is currently valued at $20 billion and is expected to grow at a CAGR of 7% for the next four years to reach approximately $26 billion by 2018.

Median comparable public company multiples are currently tracking at 1.9x latest twelve months revenue while median EBITDA multiples in the same period are 12.4x. There has been a 37% and 55% increase in the sales and EBITDA multiples respectively since 2012.

Median transaction revenue multiples in the last two years are tracking at 4.0x while EBITDA multiples are at 10.9x.

The Wound Care Index has been largely tracking the S&P 500 but has consistently outperformed the S&P 500 since the beginning of 2013.

Recent M&A transactions in the wound care industry show an ongoing trend of companies looking to deepen and strengthen their portfolio through acquisitions.

Most recently in February 2015, Medtronic closed its acquisition of Covidien, the second largest player in the wound care market, for $48 billion. Covidien, based in Ireland, had a 11.4% market share in 2013.

In September 2014 Kinetic Concepts (KCI), LifeCell and Systagenix came together to form Acelity, a global leader in advanced wound care therapeutics and regenerative medicine.

Dental Products Industry Perspective – November 2014

The worldwide professional dental industry encompasses the diagnosis, treatment and prevention of disease and ailments of the teeth, gums and supporting bone.

The principal categories of the dental products market are dental consumables and dental equipment.

The global market for dental consumables is expected to grow at a 7.1% compound annual growth rate (CAGR) through 2018, reaching an estimated $23.8 billion. The global dental equipment market is to grow at a 4.7% CAGR over the same period, reaching an estimated $7.6 billion by 2018.¹

The largest geographical markets for dental products are in North America, Europe, and Japan, followed by the rest of Asia, Latin America, Africa, the Middle East, and Australia.

The U.S. and Europe represent the fastest growing markets for dental products, due to the generation of aging baby boomers who can afford higher quality dental procedures. Europe is expected to show exceptionally high growth due to the added element of dental tourism from patients migrating from Western Europe to Eastern Europe, seeking cheaper dental care. Consequently, Europe is forecasted to grow at a 5% CAGR from 2012 to 2018.²

While the top ten competitors used to account for only 60% of the overall market, consolidation of the largest players in the past few years have led to a changing dynamic in the market. In 2011 DENTSPLY acquired Astra, the third largest dental implants maker for $1.8 billion. In 2012 Straumann acquired 49% of Neodent for $275 million, positioning itself as a leader in the Brazilian market. Straumann has the option to acquire the remaining 51% within 6 years. In 2013 Mitsui Chemicals significantly increased its presence in the dental market through the acquisition of Heraeus for $578 million.

More recently, Zimmer’s anticipated acquisition of Biomet for $13.4 billion will double Zimmer’s spine and dental business. Danaher’s anticipated acquisition of Nobel for $2.2 billion, will help it become the world’s biggest player in dental implants. As these deals complete and the these firms begin to integrate their operations, the dental implant market is likely to experience a transformation and look quite different in the coming years.

Brocair Partners quoted in Article on Market Confidence

Strategic buyers currently have the upper hand in competitive auctions

By Anthony Noto

themiddlemarket.com

The stage is set for strategic buyers. Uncertainty over macroeconomic issues may have dimmed the corporate lights on M&A plans in previous years, but 2014 is providing a more promising script. Debt financing is readily available; many corporations boast significant cash on their balance sheets; shareholders are clamoring for more than just share buybacks; and companies are scouring for targets at home and abroad with more immediacy than before. CEOs are viewing the M&A scene with more confidence than they have in a long time.

Ametek (NYSE: AME) provides a good showcase for the trend. The Berwyn, Pennsylvania-based maker of electronic instruments and electromechanical devices has inked five acquisitions in 2014 and expects to do more, says William Eginton, senior vice president of corporate development.

“There is a greater depth of deals that are available now,” Eginton says, adding that 2014 has been especially right for well-positioned companies to scoop up targets.

The numbers back him up. Strategic buyers closed 1,251 middle-market deals valued at $144.4 billion in the first eight months of 2014, up from 1,157 valued at $129.3 billion during the same period in 2013, according to Thomson Reuters.

Across all sectors, strategic buyers are making their way back to the negotiating table. General Mills Inc. (NYSE: GIS), for example, recently acquired Annie’s Inc. for $820 million. The deal marks the latest venture into the organic food space for the Minneapolis-based buyer. The last deal of this type for the company was in 2012, when General Mills purchased Food Should Taste Good, a natural snack- foods company based in Needham Heights, Massachusetts. That year, General Mills also focused overseas. It bought a majority stake of the international business of Yoplait SAS for about $1.2 billion, as well as the Brazilian food company Yoki Alimentos SA, which make snacks, side dishes and other products, for $940 million.

The 2012 acquisition spree helped General Mills get greater access to fast-growing international markets, but like other corporate acquirers, General Mills chose to remain quiet on the M&A front during 2013 – a year many dealmakers predicted would be a boon but turned out to be a bust.

When domestic sales jumped for many companies in 2014, Annie’s became an attractive target. The company, backed by Solera Capital, achieved $204 million in food sales over the last fiscal year.

Berkeley, California-based Annie’s exemplifies the huge shift in consumer demand for healthier foods. Annie’s is known for not using any artificial flavors, synthetic colors or preservatives – the same additives that General Mills is known for using in popular cereal brands and traditional bagged snacks.

The private equity industry has pounced on the good-for-you trend. Now, strategic buyers are more willing to take risks and put money to work.

Strategic buyers are spending more, too. Deal value for transactions helmed by corporations amounted to $144.4 billion for the first eight months of 2014. That’s 11 percent more than the first eight months of 2013, propelling the first half of 2014 to be the best for overall M&A in three years, according to Thomson Reuters.

“The deal flow is higher than it has been in the past several years,” says Eginton, who stepped into his current post in 2004. Before that, he had been overseeing Ametek’s corporate development efforts since 1998.

In 2014, Ametek teed off with the $91.7 million purchase of Luterbach, Switzerland-based Teseq Holding AG. The company, which included 13 affiliates, manufactures test and measurement equipment. Ametek hired Swiss law firm CMS von Erlach Poncet Ltd. to advise on the acquisition process.

A month later, Ametek paid $74 million for VTI Instruments Corp., an Irvine, California-based company that makes testing and measurement instruments for the aerospace and defense sectors.

And in June, Ametek bought Zygo Corp. (Nasdaq: ZIGO) for $372.8 million. The Middlefield, Connecticut, company provides optical metrology services and products for the defense, semiconductor and life-sciences markets.

August also proved to be busy. Ametek acquired two companies: Luphos GmbH in Mainz, Germany, and Amptek Inc. in Bedford, Massachusetts. Luphos was a technology play that Ametek expects will expand the company’s access to innovations in measuring optical surfaces. Amptek is a provider of sensor and detector technology used in the metal, environmental monitoring, petrochemical and semiconductor markets. Terms of each deal remain undisclosed, but Eginton reports that the price tags on companies that are up for sale are rising.

“Bankers are busier,” Eginton adds. “Also, we have a tremendous team that’s able to recognize trends.”

One trend propelling the company forward is the fact that companies with a manufacturing component are more in demand.

As companies work to meet development needs, and get products to local markets at a quicker pace, they are opting to grow via M&A as opposed to bolstering in-house research and development departments, says Daniel Meckstroth, chief economist at the Manufacturers Alliance for Productivity and Innovation, a research organization in Arlington, Virginia.

Merck KGaA (ETR: MRK), based in Darmstadt, Germany, provides a good example. In September,Merck agreed to buy Sigma-Aldrich Corp. (Nasdaq: SIAL) for $17 billion in cash to expand in chemicals used in research labs and pharmaceutical manufacturing. The purchase, announced just months after the May close of Merck’s $2.5 billion acquisition of chemical supplier AZ Electronic Materials SA, serves as a way to boost Merck’s growth and reduce dependence on researching biotechnology developments within its own subsidiary, Serono. Before AZ, the Germany-based company last announced a major acquisition in 2010, when it acquired Millipore Corp., a U.S. maker of lab equipment and chemicals, for about $6 billion.

“Corporations have the cash to do deals and spend,” Meckstroth says. “They don’t have to borrow it; they can finance it internally and they’re much more willing to take risks.”

With the general economic outlook relatively stable, executives are more willing to pursue acquisitions they have long considered.

“How do you achieve superior growth? You get it through mergers and acquisitions, because you’re essentially buying sales,” Meckstroth says.

Fueling these deals is the fact that companies are more willing to sell at the valuations they are at today.

That has helped foster a different tone in 2014, says Ulderico Conte, former chief executive of self-serve yogurt franchiser U-Swirl Inc. Conte, who led three acquisitions in 2014 for Henderson, Nevada-based U-Swirl, explained that strategic transactions are now coming to fruition based on prior plans. From 14 stores in 2011 when it was founded, the company wielded M&A to expand to roughly 298 self-serve frozen yogurt cafés in 37 states and four non-U.S. countries.

U-Swirl is majority-owned by Rocky Mountain Chocolate Factory Inc. (Nasdaq: RMCF), which acquired a 60 percent equity interest in the company in January 2013. At the time, the company set out to scoop up rival self-serve yogurt franchises and made good on its plan.

In 2014, U-Swirl has spent a total of $10 million on three rival companies: CherryBerry Enterprises LLC, Yogli Mogli Franchise LLC and Fuzzy Peach Franchising LLC. Tulsa, Oklahoma-based CherryBerry and Atlanta-based Yogli Mogli were both bought in January, followed by Wilmington, North Carolina-based Fuzzy Peach in February.

“Market conditions have played a factor,” Conte says on the trio of purchases. “We were finally able to get strategic.”

Investment bankers agree.

“Deals are getting completed this year even though a strategy was set last year,” says Gregg Blake, managing partner of advisory firm Brocair Partners. “Valuations are also substantially higher than they were before.”

The high prices aren’t intimidating strategic buyers, who are able to write bigger checks. As a result, targets now find themselves in a position to be pickier with suitors, or hike up already-high terms.

Take the competition for Family Dollar Stores Inc. Dollar General Corp. was spurned twice in its attempts to buy Family Dollar. Then the company tried a hostile bid, bringing a whopping $9.1 billion offer directly to shareholders. But Family Dollar has accepted a lower bid from DollarTree Inc. instead, saying that deal is more likely to gain regulatory clearance with antitrust authorities. A merger with Dollar General would create a massive retail chain with almost 20,000 locations, putting it in direct competition with Wal-Mart Stores Inc., the largest retail chain, which has been pushing deeper into the market for neighborhood discount stores.

In other cases, strategic buyers are competing with private equity firms, which have been fairly consistent when it comes to deal flow, just as much as they have been in previous years. In fact, in 2009, private equity firms disbursed more capital to U.S. firms than the previous year, and they’ve done the same in every year since, according to Thomson Reuters. From the looks of it, 2014 is on track to surpass previous years. That was not the case with strategic buyers-until now.

While corporate acquirers take the field, some private equity firms may feel benched as strategic capital tends to be cheaper than private equity capital, leaving sponsors at a competitive disadvantage. This is evident in many auction situations, says Brocair’s Blake, who advised UDG Healthcare plc, a Dublin-based provider of health care services, on its successful bid for the health care communications business of KnowledgePoint 360 LLC. UDG beat several PE firms to acquire the Lyndhurst, New Jersey-based target, which was sold by PE firm Abry Partners LLC.

“Borrowing costs are low and financing is so cheap that it makes strategic buyers able to outbid PE funds for the same assets,” Blake adds. “Sometimes strategic companies are outbid by PE funds, but right now it’s the other way around. If you’re a big enough company, you can theoretically finance an acquisition entirely with debt. PE funds can’t do that. If they’re doing an add-on acquisition they might be able to, but they traditionally have to use a certain amount of equity, especially for a new platform.”

As the crucial fourth quarter rolls out, the strategic hits are likely to keep on coming. Don’t be surprised to see some big deals before the year is over. Megamergers, deals of more than $20 billion, have hit a record $788 billion in 2014. The tech sector seems especially ripe. In September, China’s Alibaba Group Holding Ltd. (NYSE: BABA) raised $21.8 billion in the largest tech initial public offering ever. Led by CEO Jack Ma, now the richest person in China, Alibaba has already spent $4.6 billion in acquisitions in 2014. Some speculate that the e-commerce giant may try to buy Yahoo Inc. (Nasdaq: YHOO), which holds 16 percent of Alibaba. Another potential bidder for Yahoo is Japanese telecommunications company SoftBank. Led by CEO Masayoshi Son, the second-richest person in Japan, SoftBank retains 32 percent of Alibaba.

Strategic buyers may make hay only when the sun shines, but the sun doesn’t seem likely to set any time soon.

Healthcare Insurance Services Market Analysis – October 2014

The healthcare insurance services market has been undergoing diversification, innovation and consolidation.

As a direct result of the Affordable Care Act, from 2011 to 2019 the profit margins of insurers could decline by more than 40 percent¹. Recognizing that low-cost services will be fundamental to their success, numerous industry leaders are lowering administrative costs by restructuring their practices and increasing automation along with other initiatives to improve efficiency. These regulatory changes to the health insurance industry have led to an increase in acquisitions that promote a more consumer-driven health insurance business model.

Insurance services companies are seeking to expand their product offerings in order to offer payers and providers more efficient products. IMS Health Holdings, an insurance services industry leader, has made 11 acquisitions in the last 18 months mainly focusing on information technology geared toward the healthcare industry. One example is its announced acquisition of Cegedim SA’s information solutions and customer relationship management businesses for approximately $520 million. The acquisition will add a suite of CRM solutions used by clients in over 80 countries to drive sales effectiveness, optimize marketing programs and mitigate new regulatory compliance risks.

CRO Market Analysis – September 2014

The CRO market favors a full service model and strategic partnerships

The U.S. CRO industry is currently valued at $24 billion and is expected to grow to $33 billion by 2018.¹

Revenue multiples are currently tracking at a median of 1.7x, while EBITDA multiples have a median of 12.9x. Since 2012, these have seen compound annual growth rates of 55% and 32%, respectively. Since the end of 2013, the CRO Index has consistently outperformed the S&P 500. Transaction multiples are tracking in a similar range, with median revenue multiples of 2.5x and median EBITDA multiples of 11.3x over the past 2 years.

Recent M&A activity in the CRO industry indicates a continuing trend toward a full service model. Top players have been acquiring small niche CROs to expand service offerings and form strategic partnerships with large pharmaceutical companies.

In the past two years, some notable expansion trends have been moves into technology platforms and widespread geographic expansion.

An example of a large player targeting technology is Quintiles’ acquisition of Patient Reminders in June 2013. This equipped Quintiles with a new service that allows clients or sponsors to reach patients directly with personalized messages and reminders of their study. The goal of this transaction was to increase subject compliance and retention in clinical trials.