Vito (00:06):
Hello and welcome to Strategic Alternatives, the RBC M&A podcast. In each episode, we explore the trends shaping tomorrow's global mergers and acquisitions landscape. I'm your host, Vitos Peru, global head of m and a. Today you'll hear one of our healthcare m and a conversations with special guests, Andrew Calloway, global Head of Healthcare Investment Banking, David Levin, co-head of us m and a, and Amedia, managing director in m and a. Maybe just to set the tone, we can go into a little bit of the background of what we're seeing generally, and I think coming into this year, we had talked about the fact that the first half of the year was likely to be very slow, which we're seeing right now, and we're about to have a m and a volume for the first half of the year. That adding the first two quarters of this year, plus the last two quarters of last year, it will be a trough of about 2.8 trillion of global m and a volume, which the last time we saw that was in the second quarter of 2020, which was obviously at the shutdown we had for the pandemic, and we had just come off of 21, which is the best year in history.
(01:15):
By all measures, we're certainly seeing some strong conditions in the marketplace, and things seem to be stabilizing a bit across the board from an m and a perspective. And you know, as we've talked about amongst ourselves, we have a significant amount of volume going on in terms of activity as folks are trying to prepare themselves for the upcoming wave of m and a in the third and fourth quarter this year. So I'd love to get some perspective from you, and maybe we'll start with you, Cal, in terms of what you're seeing from your clients, how are they preparing themselves and, you know, what level of activity are they, are they expecting?
Cal (01:49):
So on the corporate side, there is a tremendous amount of conversation at the moment. I think the large caps are all very well suited to pursue select acquisitions. Capital is not an issue for these larger cap companies, so we're seeing them really look at all lists at the moment and think about what targets they wanna chase over the next six to 12 months. On the smaller cap side, it's a very different story. Obviously there's select companies that do have access to capital, but many don't, and many are running short from a runway perspective. And we're seeing those companies think long and hard about strategic alternatives, and therefore it's the perfect storm for what looks like a very active second half, uh, from an m and a standpoint.
Vito (02:33):
That's great. And, and maybe what, if we drill down a little bit guys into the specific verticals that the two of you cover from an m and a perspective, and we'll start with you Ahmed. You know, traditionally, you know, we've seen a lot of activity in terms of the healthcare services space. We've been a beneficiary of that as a firm, but what are you seeing in terms of your clients?
Ahmed (02:52):
Yeah, Vito, it's, it's been a very interesting and robust market, especially with the financial sponsors and pharma services in particular. And I think the pillars that are driving some of the m and a include, uh, the need to accelerate top line growth. Fundamentally, the market, uh, has been rewarding businesses that are excelling in that regard. So as a result, we've seen a lot of Bolton m and a deals in situations that we've been a part of. So for example, we advised a dare, uh, which is a business jointly owned by th Lee and Frazier in buying a business called Frontier to basically further expand and build momentum on on that business, which has been interesting. And I would say also there's been a heightened focus by, uh, larger players in the, in the space to really build scale, not just accelerate top line growth, but really build scale.
(03:40):
So we were fortunate to work with Premier, who is a leading financial sponsor in the space that had a very strong asset called Ellis n e. And that was a very strong business that gave very differentiated capabilities to the ultimate buyer. And that dynamic continues to drive a lot of focus in pharma services. And the fact that there's been a lot of really good returns based on these assets gives us conviction that it's gonna be a space that, uh, garners continued attention from both financial sponsors and strategics, which is gonna continue accelerating volume through the balance of this year. And, and next,
Vito (04:12):
David, on the corporate side, as you and I often talk about, you can have the greatest conditions in the market, everything can be lined up, but if there isn't confidence in the boardroom between the c e O and and their board, it's very difficult to get transactions done. One of the positives right now is that we've actually seen c e o confidence this quarter increased for the first time in four quarters, and certainly seeing it on the rise gives us some positive notes in terms of the ability to get transactions done. Maybe talk a little bit about what you're hearing from your clients on the corporate side, especially we've seen some larger players actually complete transactions and take advantage of this quiet window. What are some of the conversations you're having?
David (04:56):
Yeah, I think when you think about c e o confidence amongst the, the large gap pharma, um, you know, that's definitely there. They're looking to do deals and, and they really are focused on what's happening in the back half of the decade. Um, you know, they're going to be losing, you know, 200 billion worth of revenue on their products that's giving them some real urgency to try and do transactions right now. And given their access to capital, uh, they've got, you know, 500 billion of capital available to them, that's, that's not an issue for them. So a lot of the things that are affecting some of the other sectors out there aren't affecting life sciences as much, and you're seeing that in the activity that's taking place. You know, we've seen multi-billion dollar deals, you know, whether it's Pfizer Cgen at, you know, 40 billion plus or Merck GSK and most recently Astellas, uh, doing multi-billion dollar deals in the last few weeks. You know, that's, that's coinciding well with this uptick in CEO confidence, uh, that you're seeing. And, you know, I think there is alignment for them to look, to continue to do deals. Doesn't, they won't be selective about which deals they do, but you know, when they see significant opportunities that can fill their needs, um, you know, they're, they're ready to act.
Vito (06:06):
And certainly as we're thinking about strategic alternatives with our clients, whether it be our private equity clients, our our corporate clients, one of the thing that's always top of mind is valuations, both external and internal thinking about where the market valuations are, where transactions are getting done. And certainly as we're seeing some of that stabilized, there's a greater confidence in in doing transactions. But let's start with you Cal, maybe thinking a bit about where valuations are for some of your clients and how is that impacting their decision making on transactions? Is it causing them to pause? Are they being more aggressive in what they're considering? You know, maybe give some perspective.
Cal (06:45):
Well, the good assets are still trading for, uh, pretty crazy prices, to be perfectly honest with you. I think for that next set of companies where valuations have compressed a little bit, it's a lot more difficult for boards and management teams to think about transacting and they're looking for bridges. And I think what you're seeing on the life sciences side is a turn to CVRs, which obviously have been used for the last 20 years. But I think if you look at some of the mid-cap deals that have been done this calendar year, uh, quite a few of them have had that component and it's becoming a larger and larger part portion of the overall consideration. And it's something that clearly is, has been a real factor in, in deal making this year.
David (07:27):
Yeah, one of the things we've seen in life sciences m and a over the last several years, um, I would say up until, um, call it the, the fourth quarter, maybe late third quarter of 22, is that valuations in biotech with a really strong biotech financing market had gotten incredibly robust and it made it difficult for the large cap buyers to get to a place where they could actually pay the kind of premiums and bi biotech premiums are like 60 to a hundred percent on average, right? And that hasn't, that hasn't changed. Um, so for them to justify those models, they were really struggling. And what we were seeing is the deals that were getting done is basically just one buyer. So there'd be some buyer who would've a differentiated view, and they could get themselves comfortable that this product was gonna work for them and they could commercialize it and they get a deal done.
(08:15):
What we started to see over the last, you know, six months or so I would say is that's shifting. You're now seeing more competitive processes. And I think the reason is that the valuations have actually come down to where more people can say, Hey, even at these very robust premiums that haven't changed, we're now off of a lower level where more buyers are able to actually make the numbers work. And so you're not seeing the premiums change, the absolute values are down, um, because you're down off of a lower base and you're getting it driven in some cases more by competition rather than it just being a one-off for the particular buyer who's saying that it makes sense. And I'm not saying that's in every case, but it's been noticeable that there's been more competitive processes than there have been over the last handful of years.
Cal (09:01):
And I would add, if you look back to 2000, 2001, a lot of companies were waiting for those value inflection points, looking to see their stocks trade up meaningfully thereafter, and then think about transaction, and now perhaps they're thinking about doing something sooner.
David (09:16):
I, I totally agree, Cal, I mean, you, you've got a situation now with really tough financing markets for companies, and as you were saying earlier, that's changing how people are thinking about what the strategic alternative landscape is for them. It was easy before to just say, Hey, when financing's available that, you know, quote unquote standalone option, we'll just keep financing and doing everything on our own. You would just play it to the next place or value moving milestone or catalyst. That was an easy decision for them. Now that's a much tougher decision, uh, for people to make because financing's so much harder to get. And so I agree with you, I think there's a, a shift in the boardroom on the other side where people are perhaps a bit more realistic about taking an opportunity to, uh, capture some real value through, uh, an m and a deal.
Ahmed (09:57):
And the valuation, uh, question I would say is a threshold question, but it varies by sub-sector. So if you look at MedTech as an example, valuations today for the public companies in the space versus two years ago are down about two turns in healthcare it about a turn and a half. But in some sectors like pharma services, you look at the public companies today, they're doing just as well as they did two years ago. Uh, so I think as was mentioned earlier, it's really a tale of two cities when it comes to valuation, which is if you have a differentiated business, you have a scaled asset that's de-risked on multiple dimensions, whether that be regulatory or commercial, those businesses continue to command very, very strong multiples. And David, to your point about the competitive tension, the competitive dynamic, at the end of the day, you just need an N of one.
(10:44):
And if you can orchestrate a scenario where there's multiple bidders that are willing to explore an asset, those businesses are commanding premium valuations. And we've seen that with large deals, medium size deals of small deals across different sub-sectors. And, and Cal to the point you made earlier, some of the smaller, maybe more challenged businesses that have a financial constraint, those have board dynamics where they're willing to accept maybe a lower premium than what would be otherwise required just because of the macro backdrop. But again, we've seen a lot of, uh, you know, really, really strong businesses command that premium valuation and we expect that trend to continue.
Vito (11:19):
And are you seeing the clients on the buy side realize that if they're seen as a consolidator in the marketplace, that they're gonna receive a premium from evaluation perspective? Or is that not a consideration?
Ahmed (11:30):
I think that's absolutely correct. I think the reality is the deal chess board is active and the larger players recognize that their competitors likely are gonna zone in on the same, same assets that are in market. Because what we're seeing as well is the number of quality businesses over the last two, three years that are available and are actionable is actually a bit lower than what it used to be many years ago. Because you've seen, you've seen consolidation, again, I'll touch on the pharma services space. We probably had double the number of public companies in the sector four or five years ago than where we have today. So to the extent people are thinking about, you know, unique assets, there's, there's a limited set, and that's to some degree driving that valuation. And Vito, back to your point about c e o confidence, the market continues to reward companies that have scale, as we talked about, the pillars that are driving activity.
(12:21):
It's, you know, looking for that top line growth, looking for the scale. And what what's interesting is we've seen it across every sector. When you think about some of the deals that CVS has done, you know, in particular when you see some of the tech disruption in terms of Amazon buying one medical, you know, unique situation, but you're seeing multi-billion dollar deals on the services side, and then we see j and j do a, uh, you know, 16 billion plus transaction for AED that, you know, commanded a premium not even factoring in some of the contingent consideration. So a lot of these drivers, I think are, uh, you know, being evaluated and considered as people look at opportunities. Uh, and, and we think that trend will continue
Vito (12:57):
As you're talking to clients about potential transactions. We've noticed in the market in general during the first quarter of this year where we have statistics, about 27% of the time clients are considering sizable transactions where they're at least 20% of their existing market cap. And that is a peak. Historically. There's been one other period in history where we've seen that increase. And so are you seeing more sizable transactions considered? Are there more fill-ins? Cal, why don't we have you step in first?
Cal (13:27):
Sure, thanks, Vito. Look, I think it depends on the size of the potential acquirer. I think on the large cap side, it's really a bolt-on story. The FTC risk is real, and I think at this point, large caps are simply looking for baskets of products or perhaps even a single product. Whereas in the mid-cap universe, I think they are looking for scale and they are looking at situations that are merger of equal type of transactions. So in my mind, it's really all about the size of the, uh, the potential buyer.
David (13:59):
Cal, I I agree with you completely there. And I, you know, I think what's been interesting, you know, we talked about the confidence and access to capital in need in terms of driving m and a demand from the large caps earlier, but the mid-caps have actually shown some real activity this year as well. You know, when you look back to the beginning of the year, we had multiple deals getting done, you know, north of a billion dollars by mid-cap pharma players. And in our dialogue with, uh, those clients, they are looking to do deals and as Cal said, you know, for them that fits your, your metric vita where they're looking to do, you know, really big deals, whether that's Moes or, you know, things that are 50% of their size, you know, but there's, there's, you know, real interest in doing some, some meaningful m and a at, at midcap. So the, the pockets of demand between both, um, are are quite strong right now.
Vito (14:49):
Yeah, it's interesting, David, I mean, I think we've talked about the fact that when you look at the size of transactions in the marketplace, there are very few mega deals, obviously some notable ones that you talked about before. But in terms of 10 billion plus deals, we've seen that decline quite a bit, especially in terms of the timeframe of getting from signing to closing and regulatory review and, and is that gonna impact things? Let's pivot a little bit and we'll start with Amed. You had talked a little bit before about the different levels of activity across the various sub-sectors in healthcare. Give us some perspective on where you've seen the most activity and, and better yet, as we're going into the third and fourth quarter and really expecting a fair amount of activity, where do you think the, the sectors are that, uh, will really be driving that?
Ahmed (15:35):
It's interesting, Vito, we've seen in MedTech an increase in activity to the point we spoke about earlier in terms of, again, building scale. We saw a, uh, all stock m OE type of transaction where, uh, Globes effective, effectively merged with NU evasive, uh, and proforma for that deal, essentially the globalist shareholders are gonna own roughly 72% of the business, nu evasive, the balance. And that was all about really creating and benefiting from a complimentary global commercial organization and creating a comprehensive procedural solution set by both businesses. And that really is a theme that we're seeing more and more of in MedTech. You also saw Stryker, uh, do a very interesting deal with Vocera. That was a $3 billion transaction, which basically is gonna enable Stryker to leverage some very differentiated technology that Serra has in terms of digital care coordination and communication, uh, overall. And that really touches on another theme in MedTech where I, I do believe we're gonna see more of this convergence between MedTech, uh, as procedure volumes go up, as the focus on continuum of care increases or seeing MedTech oriented businesses think about the next frontier and how software digital platforms can basically improve patient care.
(16:51):
And so that sector is actually ripe for more activity because of the valuation reset to some degree, but also as a function of a lot of different proprietary opportunities coming to Mark, I do believe in, uh, uh, services broadly, uh, which we can bifurcate into H C I T pharma services and traditional services. We're also gonna see a good amount of activity. Again, you look at what C V S has done with two very sizable deals in terms of signify in terms of oak, where the sector had really been a little bit muted from an m and a standpoint and all of a sudden, you know, voila, we've got multi-billion dollar deals being announced every week and people thinking about how do I ensure that I will survive and be relevant in 10, 15 years from today just given the disruption that's happening in healthcare services broadly.
(17:38):
So that's more on the traditional services side. Acit has been interesting. I think there's convergence, as I mentioned, across all sectors, but we're finding, given the euphoria and the public marketplace has abated, we are down to the companies that are gonna, uh, have the right to win going forward. And they wanna be very proactive in terms of, uh, building capabilities to basically tackle the marketplace. One very specific and an interesting deal that, that I'll touch on in H C I T cuz I think this type of deal may be in vogue in terms of thinking about H C I T capabilities as a platform. So we worked with a company called Enquire Solutions that we sold for, for our client, uh, which was a leader in the C R M space for the post-acute sector. And we fundamentally pulled a triple Lindy, which was very interesting, where we simultaneously combined enquire with a business called Sherpa, uh, and with another business that was a subsidiary of a larger, uh, player in the space called Glenys.
(18:38):
And essentially our client with, uh, Rubicon, who's a financial sponsor, kind of focused in the middle market, created a very unique differentiated player that is going to, uh, create a really good position for themselves as they think about a highly fragmented market. And so that was a unique tri merger that happened in one instance, but I think it speaks to parties both sponsor strategics, thinking about businesses in H C I T as platforms where they can basically, uh, build a lot of m and a opportunities around them. And then, uh, finally with respect to pharma services, we are bullish that that space will continue being highly active. Baxter is considering, and this is in the public domain, a carve out of their C D M O business today. We have seen a lot of investments that have been made by financial sponsors over the last 3, 4, 5 years. A lot of those businesses, once the market rebounds will come to market, we've seen large players such as Danaher with their acquisition of aldevron, we've seen Thermo with what they've done in terms of C R O C D M O convergence. We expect the strategics will be very active, the sponsors will be very active and that's really gonna drive a lot of activity in the sector.
Cal (19:49):
So Ahmed, there's obviously been a strong correlation for years between revenue growth and valuation multiples in MedTech. Is growth starting to wane in MedTech and will that be a real driver for m and a activity in the space?
Ahmed (20:03):
Yeah, Cal, the, the growth is still a key driver for the large cap companies and what they need is growth that's actually gonna move the needle. That's why we've seen, you know, j and j do the Abio med deal. That's why we've seen St. Striker do VO for the big cap met tech companies, m and a has been in their d n A from from day one. Uh, when we think about the Boston Scientifics of the world and how active they've been across all their different verticals, growth still remains a key pillar. Ka I do think you're right, there is a little bit of a shift in focus on profitability in the bottom line. And essentially what we're seeing is a very interesting dynamic, which is in many instances the larger players would prefer to pay more for emerging companies once they've de-risked from a commercialization standpoint.
(20:51):
And really what that implies is that they're looking for profitability or a line of sight in the near term for outsized EBITDA margins, uh, so that they can make the case in terms of, you know, R O I C can make the case in terms of e p s, uh, accretion dilution as these are variables that the market is, uh, valuing more and more, albeit the last 10 years, the focus was absolutely on revenue growth. Uh, and now the pendulum is swinging a little bit, but still growth is still a key driver in terms of m and a. And
Vito (21:22):
David maybe be turning to the life science aside, what are you expecting to see there as we, you know, head into the second half of the year? I mean, what, what portions of it? We've certainly seen some, some green shoots with some very large transactions in your space in the first half of this year, but, uh, what are you expecting in the second half and as we see a, an uptick in m and a volume,
David (21:41):
Maybe I'll break it into two sub pieces within life sciences. So on the pharma side, and for that I'm talking more about, uh, specialty pharma, generic side of the world. There's been more limited activity there so far. Um, you know, we, we did a meaningful transaction last year, uh, sponsor transaction working with SK Capital on their acquisition of, of Aptex. But you know, we haven't seen a lot of activity this year, but I think we'll see some activity start to pick up there. You know, one of the bigger situations out there is, uh, endo is publicly going through a bankruptcy and trying to see if they can sell some pieces or the company through that process. So really interesting to watch what happens there. But I do think the bulk of the activity will continue to follow what we've seen so far starting this year, which is more on the biotech side and the big cap pharma as we've been talking about, you know, still continue to have a, a need to do deals.
(22:35):
The mid-cap guys we're seeing, um, have a need to, uh, do deals and drive their own growth. So I think both of those will be drivers of demand for activity. Um, and you know, the thing with the life sciences activity is it, it often follows catalysts, uh, so, you know, clinical milestone event or some other factor that triggers the activity. So it can be a little bit episodic, but I think what we've seen at the start of the year, uh, we'd expect will continue as we work our way through the year, even if there may be some stops and starts to it, uh, as those fundamental demand drivers haven't changed. Um, and we are seeing some, uh, interesting developments come through, um, on the, uh, the clinical side from biotech perspective.
Vito (23:17):
Well, I would say it's been great to to hear your perspectives in terms of where we're expecting activity in the second half of this year. And it sounds like there's a robust set of transactions that are planning to come to market or you, we are positioning for as we head into the third and fourth quarter. And each of the sectors and each of the sub-sectors within healthcare all seem to be primed for some level of activity, uh, especially where we've always talked about a significant amount of pent up demand. And you know, it's keeping us quite busy right now. So thank you for that recap. Thanks for having us. Thank you. You've been listening to Strategic Alternatives, the R B C M and a podcast. Join us for more analysis about what's moving the m and a market in our next episode. Until then, thanks for joining us and if you'd like more information on any of the topics discussed today, please contact us directly or visit our website@rbccm.com. This podcast was recorded on May 1st, 2023.
Speaker 5 (24:26):
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