VENUE ® ® Market Spotlight

October 2017 Edition

HEALTHCARE

VENUE® Market Spotlight: Healthcare

Dear Valued Reader,

Welcome to the October 2017 edition of the Venue Market Spotlight. This month, we will examine the current state of healthcare M&A.

Like many other sectors, healthcare is undergoing a dramatic transformation caused by technology. This, in turn, is affecting M&A trends. Take the US$3.6bn acquisition of medical benefits manager EviCore Healthcare by Express Scripts Holding earlier this month; the deal came as a direct reaction to Amazon’s intentions to enter the market for prescription drugs.

Regulation continues to play an outsized role in the sector as well, and is re-shaping dealmaking. In particular, antitrust oversight has made megadeals in the sector less common. As a result, healthcare transaction value declined 17% from 2015 to 2016, even as volume increased by 1%.

Nonetheless, most of our respondents to this month’s Spotlight express optimism about healthcare M&A over the coming 12 months. They predict a strong uptick in emerging markets activity, especially in India and China, and believe that private equity buyouts will increase further. A positive environment for IPOs is foreseen after a rebound in public offerings so far in 2017.

At Donnelley Financial Solutions, we support every step of healthcare business growth. Our end-to-end Venue Deal Solutions suite provides the world’s leading healthcare companies cutting-edge technology and cloud solutions that transform the way they communicate, collaborate, and develop value. No matter the stage, nature, or size of a business, our unparalleled breadth of solutions can support every growth and deal process.

Sincerely,

Craig Clay President, Global Capital MarketsDonnelley Financial Solutions

WELCOME

Foreword 3

Survey 4

Healthcare deals 10 in the room

About Donnelley 11 Financial Solutions

CONTENTS

Donnelley Financial Solutions is the sponsor of the Venue Market Spotlight. All information contained in this publication is for informational purposes only and should not be construed as legal, accounting, tax, or other professional advice of any kind, on any subject matter. Donnelley Financial Solutions expressly disclaims all liability in respect to actions taken or not taken based on any or all the content herein.

METHODOLOGY

In October 2017, Mergermarket interviewed 25 global dealmakers from across the corporate, private equity, and investment banking communities for their views on healthcare M&A. Respondents were split between the US (36%), Europe (32%), and APAC (32%).

3

As demand for healthcare rises in both developed and emerging markets, growth in the sector is set to ramp up in the coming years. Indeed, strong growth is being seen already: over the 12 months prior to October 2017, revenue at public healthcare companies rose 53.6%, according to a Fidelity analysis.1 At the same time, M&A activity among healthcare companies has slowed due to factors such as regulatory pushback against megadeals and uncertainty over the future of US health policy.

Overall, healthcare players are using M&A strategically to react to the shifting market. In the pharma sector, the biggest companies are placing large bets on biotech firms that they hope can re-fill their drug pipelines, particularly in growing treatment areas such as oncology. One wager that appears likely to pay off is Japanese pharma giant Takeda’s US$4.8bn purchase of Ariad Pharmaceuticals in January: just four months later, the US Food and Drug Administration approved Ariad’s new lung cancer treatment.

With increasing pressure on healthcare costs, providers and insurance companies are also consolidating to create synergies and adapt to patients’ changing habits, such as choosing clinics over hospitals. In January, medical company UnitedHealth – the sixth largest US corporation – acquired outpatient services company Surgical Care Affiliates for US$3.2bn, thereby obtaining approximately 200 surgery centers. Demand by private equity firms and sovereign wealth funds (SWF) is playing a role in healthcare M&A as well: three of the top ten healthcare deals in Q1-Q3 2017 were by PE funds or SWFs.

Looking forward to the coming 12 months, a majority of our survey participants (72%) believe healthcare M&A activity will increase. They foresee acquisitions of technology and innovation-based companies (64%) and the overall growth of the sector (44%) to be the top drivers, while high valuations (56%) are considered to be a potential barrier to dealmaking.

It seems clear that healthcare targets will continue to draw close attention from acquirers as the sector grows and evolves. The question is: In what directions will that evolution take place?

Other key findings include:

FOREWORD

56% of respondents

think India will be one of the top destinations to see an increase in healthcare M&A over the coming 12 months, while 40% predict China will be as well

60% of respondents

believe digital health will be one of the top two sub-sectors for healthcare M&A deals in the next year, and more than a third (36%) think medical devices will be

36% of respondents

foresee an increase in the number of healthcare IPOs, compared to 56% who think the number will remain the same

1. https://eresearch.fidelity.com/eresearch/markets_sectors/sectors/sectors_in_market.jhtml?tab=learn&sector=35

VENUE® Market Spotlight: Healthcare

SURVEY

Q1 What do you expect to happen to healthcare M&A activity over the next 12 months?

The healthcare industry is currently undergoing rapid change worldwide, and the nature of M&A activity is changing as well. Whereas megadeals defined the transactional landscape several years ago, driving value in the sector to a high of US$380.7bn spread across 1,348 deals in 2014, a greater number of smaller deals is now the trend. In 2016, there were 1,516 healthcare deals worth just US$284.5bn.

Through the first three quarters of 2017, deal activity in the sector has been roughly on pace to match last year’s level; there were 1,054 transactions valued at US$208.2bn in the period. There has continued to be a steady flow of major pharmaceutical and medical device deals, such as US-based Gilead Sciences’ US$10.1bn acquisition of US-based cancer drug developer Kite Pharma in August.

Nearly three-quarters of our survey respondents (72%) expect healthcare M&A to increase in the coming 12 months either significantly (24%) or somewhat (48%). Sixteen percent predict it will remain at the same level and 12% think it will decrease somewhat.

The global head of M&A at a Chinese investment bank expects a slight increase in activity due to the reliability of demand in the industry. “It’s a safe bet for investors — the healthcare sector tends to maintain its importance because of its need around the globe,” the head of M&A said. “There are a lot of countries working towards establishing an efficient healthcare infrastructure, and that’s where buyers or investors find their opportunities.”

Q2 In which of the following countries or regions do you expect to see the biggest increases

in healthcare M&A activity over the next 12 months? (Select top two)The US and Western Europe have historically been the most active regions when it comes to healthcare M&A. There were 396 pharma, medical & biotech deals in the US in Q1-Q3 2017 valued at US$126bn, which represents more than a third of the global volume and more than half the value. Western Europe saw 227 deals worth US$56.3bn in the same period.

48%Increase somewhat

24%Increase significantly

16%Remain the same

12%Decrease somewhat

Q1

USA32%

Latin America 28%

China 40%

Central & Eastern Europe12%

WesternEurope24%

India56%

Q2

5

44% OF RESPONDENTS BELIEVE THAT

CROSS-BORDER EXPANSION WILL BE A TOP DRIVER OF HEALTHCARE M&A

Big pharma needingto refill drug pipelines

Consumer base

Private equity buyouts

Hospital consolidation

Cross-border expansion

Overall growthof healthcare market

Acquisitions of technology-and innovation-focused companies

32%

64%

44%

44%

8%

4%

4%

Q3However, our survey respondents very clearly identified two Asia-Pacific countries as the markets most likely to see an increase in healthcare dealmaking over the coming 12 months: India (56%) and China (40%).

In India, healthcare is gradually becoming a greater priority as the economy strengthens. Earlier this year, the government approved a proposal to increase public health spending to 2.5% of GDP, up from 1.4% in 2014 and compared to 8.3% in the US. Within the medical sector, India dominates the global market for generic pharmaceuticals.

Across the northeastern border in China, federal authorities are encouraging domestic healthcare companies to become international players. As part of this push, Shanghai Fosun Pharmaceutical Group paid US$1.1bn in September for 74% of Indian generic drug maker Gland Pharma.

Q3 What do you expect will be the most important drivers of healthcare M&A activity over the coming

12 months? (Select top two)

Innovation and technology are key drivers of M&A activity across sectors, and nearly two-thirds of our respondents (64%) believe that will be the most important motivator of healthcare deals in the coming year. Other influential forces will be the overall growth of the healthcare market (44%) and cross-border expansion (44%) into growing economies, they said.

Across all segments of the medical sector, companies are seeking to leverage tools such as genetic sequencing, telehealth, and artificial intelligence to improve patient outcomes and increase profits. So far in 2017, the deal most focused on technology was KKR’s US$3.4bn purchase in July of health information website WebMD, which the PE firm plans to pair with portfolio company Internet Brands, Inc.

Cross-border dealmaking has certainly also been a trend in recent years, though it has steadily declined since 2014 in value terms. There were 528 cross-border healthcare deals in 2014 valued at US$277.7bn, compared to 575 transactions worth just US$139.4bn in 2016. Through the first three quarters of 2017, there were 423 cross-border deals in the sector with a value of US$111.1bn. The largest deal of the year so far was cross-border in nature: US-based pharma producer Johnson & Johnson’s US$29.5bn acquisition of Swiss drug company Actelion Pharmaceuticals.

VENUE® Market Spotlight: Healthcare

Q4 What do you expect will be the most significant barriers to healthcare M&A activity over the coming

12 months? (Select top two)

One of the top two barriers to healthcare dealmaking over the coming year will be high valuations, according to a majority of respondents (56%). More than four in ten believe the unpredictable trajectory of the industry (44%) and uncertainty over health policy in the US (44%) will also be among the biggest stumbling blocks for dealmakers.

Rising valuations have indeed been problematic in almost all sectors, since demand for M&A targets has increased. In the healthcare space specifically, the median EBITDA multiple of acquisitions jumped from 12.4x in 2015 up to 14.8x last year, according to Mergermarket data. However, this trend flattened out in Q1-Q3 2017, when the median multiple was 14.6x. In one of the year’s biggest deals, the $23.6bn tie-up between US medical supply makers Becton Dickinson and C.R. Bard, the EBITDA multiple was nearly double the median at 28.7x.

“Regulatory barriers and consolidation have raised up valuations and averaged out the potential growth of prime assets,” said an executive vice president for strategy at a US-based medical device maker.

Q5 In which healthcare sub-sectors do you expect to see the biggest increases in M&A activity over

the coming year? (Select top two)

A large majority of our respondents (60%) predict that digital health will be one of the top two sub-sectors to see growth in M&A activity, while about a third think that medical devices (36%) and biotechnology (32%) will be. Just one-fifth (20%) think the more traditional sector of hospitals, clinics and labs will have the biggest increase in deals.

Digital health remains a young, burgeoning segment, with deals concentrated in the lower value range of less than US$1bn. Among the most intriguing deals so far in 2017 was cloud-based software maker Castlight Health’s US$153m acquisition of healthcare app developer Jiff in January. Jiff offers a range of apps that includes capabilities such as tracking patients’ weight and activity levels and providing telemedicine services.

“With the advent of monitoring devices and digital health apps, there is a lot of power given to the user to make informed decisions and keep

Environmental protection

Trade regulations and policies

Lack of efficiency

Antitrust action

Lack of high-quality targets

Uncertainty over healthcarepolicy in the United States

Unpredictable trajectoryof change in the industry

High valuations

12%

56%

44%

44%

32%

4%

4%

4%

Q4

Hospitals, clinics and labs

Pharmaceuticals

Healthcare services (e.g., emergencytransportation, homecare)

Biotechnology

Medical devices

Digital health

24%

60%

36%

32%

28%

20%

Q5

7

real-time checks on their health,” said a partner at a mid-market US private equity firm. “This is completely changing the ball-game.”

Q6 What do you expect to happen to private equity activity in the healthcare sector over the coming year?

Nearly two-thirds of our respondents (64%) believe private equity activity in healthcare will increase either significantly (24%) or somewhat (40%) in the coming year. Twenty-eight percent foresee it remaining the same and just 8% think it will decrease somewhat.

PE buyouts in the healthcare sector reached a nine-year high both in volume and value in 2016 at 290 deals worth US$31.2bn. This year has already set a new high for value at US$46.5bn in Q1-Q3, spread across 228 acquisitions. These included the blockbuster US$5.8bn purchase of German pharmaceutical maker STADA Arzneimittel by a Bain Capital-led consortium in July.

“Investment levels and PE fund allocations will see an overall increase of around 7 to 8%, given the robust demand in the market and emerging economies performing well,” said the CFO of a medical device and software company based in California.

Q7 What do you expect to happen to the number of healthcare IPOs over the coming year?

Healthcare IPOs are rebounding this year after a significant slump in 2016. In Q1-Q3 2017, there were 134 offerings globally with total proceeds of US$13.3bn, compared to 146 IPOs that brought in US$14.9bn in all of last year.

Over the last 24 months, international exchanges have landed many of the largest IPOs in the sector – just three of the top ten took place in the US. The biggest offering so far in 2017 was by Swiss pharmacy retailer Galenica Sante, which raised US$1.8bn on April 7 on the SIX Swiss Exchange. The company’s stock has fluctuated substantially since then; as of October 12, it had increased by 7.7%.

Looking ahead to the next 12 months, 56% of our respondents believe the number of healthcare IPOs will remain flat, while 36% think the number will increase and 8% predict it will go down.

40%Increase somewhat

24%Increase significantly

28%Remain the same

8%Decrease somewhat

56%Remain about the same

36%Increase

8%Decrease

Q6

Q7

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$127.5M

SEPTEMBER 28, 2017

IPO

$150M

SEPTEMBER 20, 2017

IPO

Acquires

$633M

JUNE 20, 2017

Acquires

JULY 28, 2017

Acquires

$2.48B

FEBRUARY 13, 2017

Acquires

$20M

AUGUST 2, 2017

Acquires

$11.9B

AUGUST 30, 2017

Acquires

$6.4B

MAY 5, 2017

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