Vito (00:05):
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, Vito Sperduto, global head of m and a. In the second part of our healthcare and a conversation, we cover strategic activity with special guests, Andrew Calloway, global Head of Healthcare Investment banking, David Levin, co-head of us m and a, and Amed, aia, managing director in m and a. One area that we always see a lot of activity across all sectors is consideration of divestitures and carve outs. It certainly has been a type of transaction that generally leads the way for corporates. It's always a strategic alternative we're considering with some of our larger clients in terms of portfolio shaping. And so we would love to get a sense in terms of how you're seeing it in the dialogues that you're having with your clients. And maybe Ahmed, why don't we start with you in terms of, uh, what you're seeing in terms of portfolio optimization?
Ahmed (01:08):
Healthcare portfolio optimization has absolutely been a, a key theme, and I would say it's been a key theme across many sectors. And in our conversations with boards, as they think through some alternatives, many are aiming to focus on areas where they have substantial market share. And as a result, we've seen spinoff activity, we've seen divestitures, we've seen carve outs and all in the spirit of trying to help create an improving focus on core businesses of all these enterprises, and really shedding either underperforming units or shedding units that others could obviously optimize from a growth and profitability standpoint. Corporate car routes have absolutely been in vogue. Uh, as people think about divesting, you know, different businesses, and we see this across a range of businesses. You saw GE spin out its healthcare business. 3M spun out its healthcare business. You've seen other larger corporates pursue carve out transactions as well as spinoffs.
(02:10):
We've seen, uh, a lot of our corporate clients try to optimize their portfolios and, and actually getting rewarded pretty pretty nicely for it. Recently we saw via, which is a portfolio company of Apex, they sold their consumable products business to another strategic, and we're seeing that type of activity with businesses both large and small. Medtronic, as an example on the MedTech side, recently announced a review of their, uh, respiratory and monitoring business as an example. We, uh, recently worked with Apex to divest their clin supplies business out of health m really good transaction at the end of last year, K K R growth was the ultimate acquirer of that business. So it's interesting you're seeing businesses both large and small, uh, consider carve outs.
Vito (02:54):
And as you're making these decisions with your clients and you're sitting there in the boardroom, are they choosing to divest because they think they're gonna achieve a better multiple than where the overall enterprise is trading and therefore there's a valuation opportunity for them? Or are they seeing it as a time in the market where the market will allow them to shape their portfolio and maybe they're selling a less performing asset?
Ahmed (03:17):
Vito, it's actually split evenly 50 50. There's one element where the multiple arbitrage is definitely a topic that's on the board's minds, given how they've invested in businesses and in other cases, fundamentally, it's all about optimizing the core business and putting the divested assets in the hands of someone that could drive growth for those businesses and create more value over time.
Vito (03:41):
And as you think about being on the buy side of the, some of these divestitures, are buyers waiting for the divestitures to actually be, um, ring fenced and the process to start? Are they more one-on-one situations or are you seeing buyers be aggressive in this marketplace? God, I think we've seen some notable examples of that in terms of the buyers initiating the process.
Ahmed (04:03):
Great question. And what we're seeing in this marketplace is people being very aggressive about businesses. They like assets, they like, we have seen a material increase in the level of unsolicited activity across healthcare broadly, uh, in services in MedTech in particular, where the inbound interest and the value that select buyers are able to put on the table ultimately gets the sellers excited about thinking through unlocking different assets. And I think that's a theme that's gonna continue in healthcare broadly. And that activity and the inbounds are a function of, uh, larger corporates that, again, that have their business development teams humming aggressively about opportunities that can create shareholder value. The sponsor community, uh, that's flush with capital in terms of, you know, over a trillion dollars that have to get deployed in assets. Uh, and healthcare is a, is a key focus area for, for many both large and small. Fundamentally veto, it's interesting, we're seeing that unsolicited approach, uh, become a catalyst for a lot of the m and a that's been taking place over the last year in particular, and that's definitively gonna be a trend going forward.
Vito (05:12):
David, why don't we pivot to you and maybe talk a little bit about the conversations we're having with some of our large cap clients, especially around regulatory concerns and how those are coming into play as they're making decisions on transactions today?
David (05:24):
There's no question that antitrust and the current environment we're operating in with the FTC is, is on everybody's mind. Um, and it's a frequent topic of conversation with our clients, you know, so sometimes the the question will come up, look, are, are we expecting to see big cap, big cap deals? Um, and the answer is not really. I actually think that, um, that's not where large cap pharma heads are at right now. And I think that this antitrust environment, uh, is putting any thought of, you know, a large cap, large cap merger, really out of play. You know, I I think as they're thinking about deals, it's more bolting on products and platforms, uh, that can fit and drive their growth forward. Now, a Bolton for a large cap pharma could be, uh, Seattle genetics is 40 plus billion deal, but you know, still it's, it's more of that ilk than the the large cap, large cap, uh, type merger.
(06:21):
But even with those bolt-ons, the current environment, and I, I think the current political environment, which, you know, makes pharma an easy target, uh, is definitely on people's minds. And, you know, they're recognizing that it is gonna be harder to get deals through, but at the end of the day, while it's taking longer for deals to get done, and sometimes you're needing to litigate, uh, to get there, it's not stopping deals from happening. So I do think while it's on people's minds, and I do think a lot of other large caps are probably watching Pfizer Cgen, for example, to see how that goes and, uh, whether or not they, they run into trouble, it doesn't really seem to be stopping activity. It's, it's something people are talking about, they're thinking about. They're, I think recognizing, uh, the additional time, effort and cost it is gonna be to get deals done, but it's not gotten to a place where people are feeling like they, they can't get, uh, deals that are, you know, more product platform oriented deals. Um, uh, through,
Vito (07:19):
I think that's a great way to put it. I think there's a recognition of that time, effort and cost increase on all those three points, and certainly having to make sure that you've got a really strong team around you with regards to your advisors, because it's gonna take a longer time and there's gonna be more work to needs to be done with the, with the regulators
Ahmed (07:38):
From a healthcare services perspective. It's been, it's been very interesting if we go back in time to some of the horizontal, uh, integration that was happening in managed care and how the government put the kibosh on that. To some degree, Greg and I worked on the Anthem Cigna transaction that the regulators ultimately two years later, uh, did not have go through. You've had a theme in services where the horizontal integration is, is a thing of the past. In MedTech, you had really big deal six, seven years ago, Medtronic obvi as an example, where big businesses came together, built a lot of scale, and now the scrutiny, frankly is, is across the board. So we saw United, uh, acquire change. Ultimately they had a bit of regulatory scrutiny with the ftc, but that transaction went through similar vein to Amazon One Medical, where that deal had a second request from the ftc.
(08:29):
And yet we see a, a smaller, uh, healthcare services deal where H C A attempted to acquire a handful of hospitals from Steward Healthcare Systems. So on a relative basis, you know, a smaller type of a transaction. And ultimately there was regulatory pressure and scrutiny, and the parties decided to part ways as a function of that scrutiny. So the, the, the regulatory topic, I think is top of mind as we have conversations with our clients and boards as they think about specific deals as they think about counterparties. And it's a, it's a topic I think just given the regulatory regime that's here to stay.
Vito (09:02):
Yeah. And I think the UnitedHealthcare transaction is a great example of where the parties need to be prepared for an extended timeframe and need to have the resources available to live through that timeframe to get the closing because I, we have seen the Justice Department in that case and the FTC elsewhere actually lose once they take it to court, but they're more willing to go that step at this point. And so it's just become part of the environment as we're thinking through it.
David (09:28):
Yeah. And, and Vito, just to follow up on that, I mean, I thought it was really interesting, you know, conversation we had recently with, um, some antitrust experts around that topic and trying to understand why are so many things going to court e even when it seems like the government is losing, uh, regularly. And it was interesting to hear them talk about the political dynamics of what's going on. And that part of what's happening is that the FTCs trying to make the point to Congress that if they want a different antitrust regime, they're gonna have to change the laws because the courts aren't working, right. So in some ways, they're going to court to prove <laugh> that when they lose, um, see we can't get it done on our own. You, you need to do something congress to, uh, to act. And that was a, a really surprising and interesting piece of insight to hear that that's part of what's driving them to go to court even when they know they're gonna lose.
Vito (10:23):
Cal maybe turning to you, we've certainly seen some of the largest participants in the healthcare space benefit from the government support funding the purchase of vaccines and and so forth. And it's created an incredible surplus in terms of performance on their side. How are they using that from an m and a perspective to maintain their positions? And as you think about the I R A from a government perspective, how are your clients thinking about that?
Cal (10:49):
There's no question that it was a huge benefit to many large cap companies who participated in not only code vaccines, but also in therapeutics. And I think, you know, with growth beginning to wane now, you're gonna see those participants use that cash that's sitting on balance sheets to aggressively chase, you know, new opportunities really across the board. And that's true not only in therapeutics, but also in true in in MedTech as well, uh, with a lot of the diagnostic players as it relates to ira. You know, this is something that's obviously new to us and something that everybody's still in the process of digesting, but what I will tell you on the therapeutic side is people are really modifying how they think about, you know, the long term for many of these programs with a thought that small molecules could have meaningful impact from a pricing perspective nine years out and biologics 13 years out, you know, there's a real question as to how to model the terminal value of many of these assets. And I think large cap pharma is, you know, still doing their work, but it's really changing how, uh, large companies are thinking about, you know, the tail for many of these assets that in all candor, they probably would've ascribed a fair amount of value to.
Vito (12:03):
Well, look, I think in terms of wrapping up on the strategic side, I think we're, we're seeing a fair amount of activity in the second half of the year, whether it's carve outs in certain areas, bolt on transactions, maybe a little bit of a limiter in terms of very large merger transactions, especially with some of the regulatory headwinds that we're seeing across the board. But as we talked about, it is a topic of conversation in the boardroom, so certainly no, uh, no slowing down from your client's perspective on the strategic side. So why don't we dig into what we're seeing in terms of sponsor or private equity activity. Talk a little bit about some of the trends you're seeing with some of our financial sponsor clients.
Ahmed (12:44):
There is a ton of ample capital that the financial sponsor community has to deploy with over a trillion dollars, uh, of capital across both larger cap financial sponsors, middle cap, and, and there's a whole slew of, uh, firms that focus on healthcare specifically that I would characterize as the, the middle market. And they're anxious to deploy that capital. What we're seeing is a few interesting dynamics. One is the capital raising exercise has been very robust for some of the bigger names. So Advent, as an example, raised the 25 billion fund, uh, last year. And we're seeing some of the leading private equity firms raise even more capital in in this environment, which I think is interesting. We're also seeing another dynamic where sponsors with portfolio assets are deploying a lot of capital in m and a from a bolt-on perspective to basically build scale for their assets so that when the time comes to, uh, uh, think about monetization and exit, whether that be via I p O or m and a, the businesses are on solid foundation and solid footing in terms of, uh, those, those exit events.
(13:48):
And we, as an example, you know, worked with Novo Capital on their acquisition of a very large C D M O in the blow fill seal space, uh, business called Right Dose. And we're seeing that capital get deployed in very creative ways across the whole ecosystem within healthcare. What's interesting is sponsor volume has actually declined between 21 and 22 by roughly 60%, yet the capital that they have to deploy has gone up. So that really speaks to why we believe there's gonna be a lot of activity in H two of this year, particularly with sponsors that have had portfolios in their investments for three to four years that, you know, the time horizon has come for them to monetize.
Vito (14:30):
So with that increase in dry powder, the recent decline in deal activity, are you expecting larger deal sizes, which we've seen in, in some of the take private activity? Or is it just more bolt-ons, like more number of transactions? What are you seeing? Vita?
Ahmed (14:45):
We we're gonna see larger deals cuz that capital has to get deployed in larger deals. So if you go back a couple years ago when we saw a consortium of sponsors acquire Medline, that was a very large 30 billion transaction. We saw the similar dynamic with Athena Health where a couple sponsors came together and deployed billions and billions of dollars of capital. So I do think we're gonna see sizable deals, especially as some of the bigger, uh, public company corporates are dealing with headwinds from the public markets. Uh, we're gonna see, uh, sponsors pursuing some of those assets. But I do think we're still gonna see, you know, a lot of middle market size deals because of the following trends. One is we're seeing sponsors get very aggressive in situations where they have an angle. We are seeing an increasing desire by financial sponsors to try to preempt processes.
(15:37):
So there's situations where they like sub, uh, divisions or subsidiaries of larger corporates. They like businesses that are owned by, uh, other financial sponsors that they've developed, businesses that are owned by their peer financial sponsors where they've developed a theme around specific sectors. And fundamentally, we do think that the number of high quality assets has been declining over time, given a lot of the m and a that took place in 2021, uh, the m and a that took place in 2022. So we believe we're gonna see a lot of competition around assets that in particular are kind of, of the, of the medium size, uh, you know, over the course of the next six months to a year.
Vito (16:18):
Amad, just following up on, on the conversation, as you think about the competitiveness in a process, certainly historically, you know, the the rule of thumb is always strategics are going to easily be able to beat sponsors, but with that large pool of capital and how aggressive they're being, are you seeing any change in that dynamic today?
Ahmed (16:35):
What's interesting is the financial sponsor community has been able to outcompete strategics for assets and select sectors. So for example, you had cord and pharma in the C DM O space straight to a sponsor. And what we know is there were strategics in the mix that were not willing to get to those levels. And we're seeing that dynamic, you know, across the board, especially in pharma services around C R O assets, C D M O assets and in some cases select H C I T assets that could be very compelling on, on large platforms because of that capital, because of in some cases the desire of management teams to basically have another, uh, another value inflection point. In some cases, businesses actually have a preference to sell to financial sponsors so they can grow under a, a private setting before exploring, uh, transactions with a strategic. So it's been a very interesting dynamic over the last three or four years and we expect that'll continue purely as a function of the capital that's out there to get deployed.
Vito (17:38):
And David, maybe turning to you, give us a sense of what you're seeing in terms of the sponsor activity in the life sciences sector. I mean, I I know they've been doing some more creative things. Yeah, no, absolutely.
David (17:48):
Vita, I mean, sponsor activity in healthcare more broadly, very active in the sectors, uh, AMED was just talking about is generally lived a little bit less active in life sciences, but you know, traditionally where there's been more activity has been on the specialty pharma and, and generic side, given the, the challenges there, there's still been activity. For example, we, we did a sizable deal for SK Capital on the generic side buying Tex's a large, uh, Canadian generic manufacturer, but it's been fewer and, uh, farther between those deals. And the sponsors who've been focused on that activity have had to shift their focus a little bit elsewhere. And so we've seen them in some cases look at consumer health otc, some cases look at, uh, C D M O, which is, you know, uh, got some similarities from a manufacturing standpoint. So we're still seeing sponsors there, but you know, less activity than we had previously.
(18:38):
But, but there's actually a new pocket of activity, which is really interesting on the life sciences side. So historically, you hadn't seen sponsors really look to play more on the, the biotech end of things, but they've seen that as a, a real opportunity to find opportunities to, to capture value. And they've put expertise now onto their teams to build these life sciences funds. And it's less of a traditional m and a, you know, acquisition model and more of a creative financing model. So, so they're doing deals like synthetic royalty deals and other things like that to help, uh, fund companies. But you know, there's, there's definitely a real increase on that side of things, even though it's less traditional m and a.
Ahmed (19:20):
What's also interesting is you're seeing sponsors looking for very specific creative angles to unlock opportunities. So a, a deal that was recently announced, which is very interesting, you saw AmerisourceBergen partner with TPG to buy a business called One Oncology, uh, in the healthcare services space. And essentially what they put as a construct and framework where TPG is gonna be the majority owner day one, but as a function of a put call option over the next, you know, three to five years, the ownership could, uh, pivot. And what we're finding is sponsors are increasingly looking for that angle via the lens of not necessarily businesses that they already own today, but they are engaging a lot of the public company strategics to be a source of capital given the dislocation, broadly speaking in the, in the, in the financing environment, but really to find differentiated angles where they could ultimately own a bigger enterprise and partnership with strategics. And I think that'll be more of a theme going forward, uh, you know, as well to enable the sponsors to deploy the capital that we've spoken about that they have.
Vito (20:22):
And Cal, I mean, given some of the volatility as, as Amage has highlighted, you know, sponsors are trying to be more creative in terms of how they're providing financing alternatives, uh, to some corporates and the like. But as you think about some of the traditional private equity transactions, the LBOs, the volatility in the financing markets has created some dislocation. Some of the private debt providers have stepped in now, although I would say they're probably more focused on the tech, the tech space and software in particular, if you look at the largest deals. But what are you seeing in terms of financing trends right now as we're trying to bridge to a more typical financing market?
Cal (21:01):
Vito, there's no doubt that private equity is benefited from having access to direct lenders as they think about existing portfolio company additions or smaller transactions where large cap private equity is struggling is accessing the institutional market. And as the institutional market begins to open up, I think we're gonna see a wave of pretty sizable transactions. To me, that's something to really watch as we look into back half of this year and into 24 because given the amounts of capital, uh, that Ahman mentioned, there's no doubt that we're gonna see 10 plus billion dollar type transactions in the private equity world.
Ahmed (21:41):
And there is, uh, cal there is a bifurcation too in the sponsor community in terms of how to think about leverage in the sense that half a billion dollar deals and above, they need financing. Yes, the leverage is going down relative to last year, but the markets trending positively, which is a positive rates per se are not a deterrent, but obviously impact returns. But when we think about the half a billion dollar plus equation financing is definitely a critical piece, uh, of the calculus. When we think about deals, however, that are 300 million and below, what we're finding is sponsors are willing to go in all equity. And we have recently sold a couple businesses where that was a dynamic, and it wasn't just with the prevailing party, but it was with multiple parties that we had in our, in our processes in both situations. And that I think is gonna continue being a theme because people realize that over time they'll be able to recapitalize the balance sheet, et cetera. But I think that's what's also gonna drive middle market and bolt on m and a deals, as we talked about before, because the financing challenges and headwinds are a little bit less relevant with the smaller deals that we're beginning to see more of over time.
Cal (22:52):
And look, there's no question that over the last 12 months leverage for most companies has been in sort of that three to four times zip code and that it's gonna creep and we're gonna get back to five to six times leverage hopefully, uh, as we end the, uh, this calendar year.
Vito (23:08):
Cal, what advice are you giving clients today as they're thinking about how to get from here to the second half of the year where we expect a more open and robust m and a market?
Cal (23:18):
Be prepared and know what you want to do, because I think these opportunities are gonna come fast and furious and you need to make sure you have your ducks in a row from a management and a board perspective.
Vito (23:29):
Am I would
Ahmed (23:30):
Add think creatively about m and a in terms of structure to bridge valuation gaps in terms of backend mechanisms to address the topic of valuation and also think creatively about financing. Do we think about seller paper in specific instances? Do we think about direct lending? How do we package a, uh, a fulsome proposal that addresses buyers on all fronts?
Vito (23:54):
Great. David, I
David (23:55):
Think the, the activity is still happening. Life sciences in particular is a little bit less cyclical on m and a activity than a, a lot of our other areas. And so, you know, take advantage of the opportunities that the environment presents, think about which deals make sense for you and figure out how you can go pursue them
Vito (24:15):
All. Great advice. And I think, uh, as we always talk about being prepared, knowing what you want, uh, certainly thinking of creative solutions and don't wait for the transactions to happen. Activities going on right now, all things that I think make sense for any of our clients. So thank you so much for being with us today. Thank you. Thank you. Thank you. You've been listening to Strategic Alternatives, the RBC 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 (25:08):
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