Life Sciences and Healthcare Sector Forecast

Life Sciences and Healthcare Sector

Forecast

BioPharm InsightLeading Insight and Intelligence

In affiliation with:

Life Sciences & Healthcare Sector Forecast

2 www.mergermarket.com

Contents

Contents 2

Foreword 3

Methodology 3

Survey Results 4

Life Sciences and Healthcare M&A Robust in 2011, Trend Expected to Continue in 2012 17

About Epstein Becker Green 18

About IntraLinks 20

About mergermarket 22


3www.mergermarket.com

Foreword

Welcome to the 2012 edition of the Life Sciences & Healthcare Sector Forecast, published by mergermarket in association with Epstein Becker & Green, P.C. (Epstein Becker Green) and IntraLinks. Based on interviews with over 75 US-based healthcare investors and corporate executives, this report offers insight into emerging trends in investment activity, as well as a detailed forecast for specific subsectors, including biotechnology and pharmaceuticals, medical device, healthcare providers and payors, and healthcare services.

Expectations for the overall level of life sciences and healthcare M&A activity over the next 12 months are positive, according to a 65% majority. Respondents expect all segments of the sector to increase, with the medical device subsector rated highest by a slight margin. Most of the activity will take form as acquisitions and private equity buyouts.

Strategic buyers will be most active throughout the sector, particularly in biotechnology and pharmaceuticals due to the long-term nature of the investment, according to over three-quarters of respondents. Private equity and other financial buyers will look to the healthcare services subsector as hospitals and providers are impacted by healthcare reform and budget cuts.

Patent litigation and implementation of the healthcare reform bill are expected to drive consolidation through the life sciences and healthcare sector. In healthcare services, the need to cut costs and adapt to potential entitlement program changes are the

primary factors forcing consolidation, according to 34% and 21% of respondents, respectively. An approaching wall of patent expiration is likewise affecting the biotechnology and pharmaceuticals and medical device subsectors.

In cross-border activity, US-based investors will target China and the Asia-Pacific region excluding Japan and China, according to 45% and 21% of respondents, respectively. The area’s rapidly growing middle class, as well as government initiatives to provide national healthcare, has kept investors’ focus since last year’s report where China was similarly the respondents’ top choice.

Of the numerous provisions of US healthcare reform, the employer mandate is expected to have the most impact on M&A-related decisions. Changes to Medicare and Medicaid will have the biggest affect out of possible congressional budget segments, according to 42% of respondents. Just over half of respondents agree, the most likely development of regulatory and budget changes will be industry consolidation.

In addition to the above findings, this report offers insight into financial trends, due diligence issues and a wide range of factors influencing deal flow in the healthcare sector over the next 12 months. We hope you find this report both interesting and informative, and as always, we welcome your feedback.

MethodologyIn the fourth quarter of 2011, mergermarket interviewed over 75 life sciences and healthcare investors and corporate executives in the US on their outlook for the industry over the next year. Respondents are anonymous and results are presented in aggregate.



Survey ResultsWhat do you expect to happen to the overall level of M&A activity in the life sciences and healthcare sector over the next 12 months?

The majority of respondents expect M&A activity will increase in the life sciences and healthcare sector over the next 12 months. Nonetheless, overall positive expectations are somewhat muted from last year’s report where no respondent predicted any decrease in activity, compared to 13% in this edition. Research by mergermarket shows that in 2011, life sciences and healthcare M&A in the US totaled 527 deals worth a reported US$149.3bn, surpassing 2010 figures in both value and volume.

To surpass 2010 and 2011 numbers, corporate executives and private equity practitioners believe consolidation will be driven by implementation of the Patient Protection and Affordable Care Act (PPACA) and possible reductions in reimbursement payments. Additionally, one finance manager uses patient population growth to explain his expectations, adding that in the long term, the requirement of better medical facilities will continue to grow.

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Healthcare services

Healthcare providers/payors

Medical devicemanufacturers/suppliers

Biotechnology/pharmaceuticals

53%12%35%

31% 12% 57%

51%15%34%

32% 12% 56%

What do you expect to happen to the overall level of M&A activity in the following subsectors over the next 12 months?

The medical device industry will see the largest increase in M&A activity among healthcare subsectors, according to the 57% of respondents expecting an increase. Medical device grew from 159 deals in 2009 to 226 in 2010, according to mergermarket data. In 2011, the subsector’s activity settled in at just over 200 deals, including Thoratec Corporation’s acquisition of Levitronix for a reported US$110m. The deal aims to broaden Thoratec’s product line while significantly adding to the firm’s portfolio of intellectual property.

21%

44%

22%

10%3%

Percentage of respondents

Increase significantly Increase slightly Remain the same

Decrease slightly Decrease significantly

Remain the same Decrease Increase



In each of the following subsectors, which transaction type do you expect to be most common over the next 12 months?

Respondents expect acquisitions and private equity buyouts to be the most common transaction type through the healthcare subsectors. Healthcare services will lead in private equity buyouts as respondents consider new cost-cutting initiatives within the subsector to offer attractive returns. While 23 IPOs in all healthcare and life sciences subsectors raised US$5.7bn in 2011, public offerings have slowed. Respondents expect the IPO market to remain weak in healthcare as well as all sectors.

In each of the following sectors, where do you expect to see the most consolidation over the next 12 months?

Consolidation will be focused in the drug manufacturer space within biotechnology and pharmaceuticals, according to 48% of respondents. The drug manufacturing industry naturally tends toward heavy consolidation, says one respondent, due to the benefits of large scale production. Illustrating the trend, the joint venture that created McNeil Consumer Pharmaceuticals Co in September 2011 combined assets of major drug manufacturers and will go on to market popular brand name over-the-counter products.

Biotechnology/pharmaceuticals:

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Healthcare services(IT support, management,

EMR, telemedicine)

Healthcare providers/payors:

Medical devicemanufacturers/suppliers:

Biotechnology/pharmaceuticals: 42%16%7%4%4%

1% 3% 3%

11%9%

7% 5% 7% 8% 23% 42%

41%14%11%21%6%

9% 25% 45%5%4%4%

1% 3%

3%1%

3%

3%3% 1%

48%

15%

37%

PIPE Licensing Other

Joint venture Divestiture Merger of equals

IPO Distressed merger Private equity buyout

Acquisitions

Drug manufacturers Drug suppliers Biotechnology research/development

The biopharmaceutical space will continue to seek product and service diversification in order to strategically respond to known and, as much as possible, unknown legal and regulatory challenges, as well as evolving delivery and payment models. Diversification strategies will vary among manufacturers based on numerous factors including, but not limited to, product portfolios, research and development agendas, and strategic alliances. Some players will seek to diversify into complimentary business lines and ventures that support product portfolios and revenue growth. Others will expand with new offerings, and still others will consider market diversification by geography to address the domestic unknowns.

Wendy Goldstein, National Healthcare & Life Sciences Steering Committee Chair and Member, Epstein Becker Green, New York, NY




Medical device manufacturers/suppliers:

Manufacturing will also lead in the medical device industry, according to 40% of respondents. Unlike many of this report’s results, the subsector resembles last year’s survey where respondents are similarly distributed. Rapid growth in emerging markets continues to drive the sector as the large populations of developing countries improve healthcare increasing the demand for equipment. Within the US, many of the 228 deals (worth US$62.4bn) in 2011 through the third quarter are aimed at integrating technologies and intellectual capital.


In another repeat of the previous report, hospitals and health systems will likely witness the highest level of consolidation over the next 12 months. Remaining respondents are relatively split among managed care, physician groups and long-term care facilities. An executive with a venture capital firm specifies that outpatient surgery centers are in-line for a coming wave of consolidation.

Hospitals have been a common target for private equity and investment banks. Indeed, one-fourth of hospital deals in 2011 in the US have involved a financial services firm, including KKR, Blackstone and Brazos, among others.

Survey Results

40%

37%

23%

33%

23%

17%

16%

6%4% 1%

Medical device manufacturers

Consumer medical products

Medical device suppliers

Hospitals/health systems Managed care Physician groups

Long-term care facilities Ancillary providers Outpatient surgery centers Other

Predictions of further consolidation in the US provider market are not unexpected, as health systems continue to suffer from the economic downturn, reductions in reimbursement, and the challenges of healthcare reform. This is also an incredibly dynamic market, as antitrust regulators have stepped up their enforcement efforts at a time when public policy and market pressures are creating new thinking about efficiencies and competition. In addition, fresh thinking in the accountable care era has created some fascinating potential transactions - linking payers and providers, and further integrating physicians with other healthcare resources.

Dale Van Demark, Member, Epstein Becker Green, Washington, DC

In each of the following sectors, where do you expect to see the most consolidation over the next 12 months? (Continued)



Healthcare services:

As stages of the PPACA continue to be implemented, respondents believe EMR services and IT systems will grow increasingly important as many hospitals and healthcare providers will have to adapt.

In the biotechnology and pharmaceuticals industry specifically, which of the following therapeutic areas is likely to see the most interest from investors over the next 12 months?

The majority of respondents continue to predict that oncology will garner the most interest from investors, in line with last year’s results. Demand for treatment from oncology clinics is exceeding supply, the Financial Times reported earlier this year, causing shortages for drugs that have few or no alternatives.

40%

30%

20%

6%4%

52%

31%

12%

4% 1%

Electronic medical records (EMRs)

Healthcare IT (hardware and software)

Hospital/practice management

Telemedicine Data analysis

Oncology Cardiovascular Inflammation

Neurology Other



In the medical device industry specifically, which of the following areas is likely to see the most interest from investors over the next 12 months?

Diagnostic equipment is the focus for hospitals to achieve efficiency and properly treat patients, a healthcare sector CFO comments. As a result, investors are most likely to show interest towards investing in diagnostics within the medical device segment of the industry.

In which of the following foreign countries/regions do you expect US-based life sciences and healthcare investors to be most active?

Global investors have been in a race heating up for market share in China’s growing healthcare sector, where 45% of respondents agree. One respondent mentions the competitive drug manufacturing market in India.

Survey Results

45%

21%

17%

8%

7%2%

China Asia-Pacific (exc. China and Japan)

Western Europe

South America Eastern Europe Japan

Diagnostic equipment Laboratory equipment Therapeutic/surgical equipment Monitoring/life support

equipment

42%

25%

18%

15%

Stagnant growth in Europe and North America makes the continued interest in the Asia-Pacific region unsurprising. However, investors face stiff competition from well-financed and active sovereign funds, for example, funds such as Khazanah in Malaysia, which owns significant stakes in many of the region’s healthcare providers, including Singapore-based Parkway. Another example of this are private companies, such as Fortis, one of the largest health systems in India that has been making acquisitions in the region at a blistering pace.

Dale Van Demark, Member, Epstein Becker Green, Washington, DC



In each of the following subsectors, do you expect to see more M&A activity from strategic buyers or financial buyers over the 12 months?

Financial buyers will avoid subsectors that typically focus on product development like biotechnology and pharmaceuticals, according to the majority of respondents. Risk associated with biotech firms naturally favor strategic investors, says one senior private equity investor. Conversely, changes to healthcare services made by healthcare reform will attract private equity firms to enter and adapt companies to a new business model.

In each of the following industries, which of the following factors will be the most prominent driver of M&A over the next 12 months?

Healthcare reform is now considered to have the greatest impact on M&A in biotechnology and pharmaceuticals, according to a third of respondents. Products and technology, considered the main factor of M&A in last year’s report, remains strong as the core of biotech, as well as an approaching patent expiration wave in 2012.

Biotechnology/pharmaceuticals:

33%

25%

23%

9%

5%

1%4%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

Healthcare services

Healthcare providers/payors

Medical devicemanufacturers/suppliers

Pharmaceuticals

Biotechnology 82% 18%

25%75%

57% 43%

51%49%

39% 61%

82%


Strategic buyers Financial buyers Healthcare reform Access to new markets Access to new products/technologies

Patent expirations Generic competition Changes to patent laws Distressed opportunities



Medical device manufacturers/suppliers:

Respondents are not decisive on any one factor impacting medical device M&A with a close split among reimbursement opportunities, healthcare reform, access to new markets, and access to new products and technology. Interestingly, patent expirations received only 4% of respondents’ answers, though it is highly considered to drive consolidation within the subsector through 2012.


Recent budgetary initiatives by the US have put reimbursement opportunities and changes to entitlement programs at the head of healthcare provider and payor M&A drivers. Automatic cuts to government healthcare programs, the result of a failed congressional budget committee, are set to trigger at start of 2013 if federal officials do not take action beforehand.

Survey Results

24%

24%

23%

21%

4%4%

43%

24%

19%

5%

5%

4%

Reimbursement opportunities versus cost-cutting initiatives

Healthcare reform Access to new markets

Access to new products/technologies

Patent expirations Distressed opportunities

Reimbursement opportunities versus cost-cutting initiatives

Changes to entitlement programs

Access to new markets


Other, please specify Distressed opportunities

The US medical device regulatory environment continues to be more challenging. Over the last year, the FDA has proposed changes to the device regulatory scheme at a dizzying pace, leaving many manufacturers wondering ‘who’s on first.’ The FDA continues to heap new clinical trial requirements on manufacturers and push more technologies into higher regulatory classifications, arguing that the new products are not truly substantially equivalent to anything on the market today. Unfortunately, this makes it not only difficult to start new, innovative medical technology companies, but it drives existing companies into the arms of larger companies with deeper pockets. Further, more companies are focusing on overseas markets and not just the traditional favorites, such as Europe and Japan. There is far greater interest in tapping emerging markets, which requires companies of a larger footprint.

Bradley Merrill Thompson, Member, Epstein Becker Green, Washington, DC and Indianapolis, IN

Im each of the following industries, which of the following factors will be the most prominent driver of M&A over the next 12 months? (Continued)



Healthcare services:

Cost-cutting initiatives will lead healthcare services M&A, according to just over a third of respondents. Not far removed are the 21% of respondents citing changes to entitlement programs as a primary factor, which many predict will reduce reimbursements and could lead to new cost-cutting operations. The 17% who view access to new markets as the primary driver highlight the growing economies in India and China as the main source of targets.

What do you expect to be the key strategic driver of the biotechnology and pharmaceuticals activity in the next 12 months?

The cost of R&D in the biotech and pharmaceuticals industry has far exceeded all other industry standards (38% of total firm assets to 3% over the past 25 years, according to the National Bureau of Economic Research). While successful innovation comes highly rewarded, the financial risk associated with research-intensive firms is equally high and is driving initiatives to limit costs through a sluggish economy. Additionally, drug makers are experiencing larger regulatory obstacles for new drugs in the US diverting many former and potential investors.

34%

21%

17%

13%

4%

9%

2%

Cost-cutting initiatives Changes to entitlement programs


Expansion of insurance coverage


Other, please specify

Limit risk & R&D cost through JV/alliances

Expansion into new regional territories

Growth/speed to market through licensing

Other

54%

24%

20%

2%

Investors continue to understand that the manner in which healthcare services are paid for by the federal healthcare programs, most specifically, Medicare and Medicaid, will have a tremendous impact on the healthcare industry. As such, investors must not only understand how items and services are currently paid for but also be mindful and monitor how Congress and the applicable regulatory bodies are looking to modify these payment formulas in the future.

David Matyas, Member, Epstein Becker Green, Washington, DC

Distressed opportunities



In which of the following areas are risks and liabilities identified during due diligence most likely to affect the outcome of potential M&A transactions in the life sciences and healthcare sector?

Intellectual property is the top risk and liability identified during due diligence by 42% of respondents. Many patent expirations are quickly approaching and intellectual property litigation is growing in importance for large firms.

In which of the following areas are potential risks and liabilities most likely to be overlooked during due diligence in the life sciences and healthcare sector?

Overall, respondents do not identify risks and liabilities that will be overlooked during diligence as easily as they will be uncovered. Interestingly, many respondents (26% of the total) who do not believe intellectual property is most likely to be identified find the opposite to be true. This is in contrast from 2010’s sector forecast where intellectual property was least likely to be overlooked.

Survey Results

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Other

Benefits

Environmental

Employment and labor

Antitrust

Fraud and abuse

International policy

Accounting

Compliance

Intellectual property 42%

40%

26%

21%

20%

20%

17%

15%

7%

1%

0% 5% 10% 15% 20% 25% 30%

Benefits

Accounting

Antitrust

Environmental

Employment and labor

International policy

Compliance

Fraud and abuse

Intellectual property 26%

26%

25%

25%

22%

18%

16%

15%

12%

Percentage of respondents Percentage of respondents

Not only is intellectual property a top risk/liability as well as an area that may be overlooked, but so is compliance. Healthcare investors are recognizing that more efforts and resources need to be expended as part of the due diligence process in order to determine whether the target entity (or joint venture partner) may have engaged in wrongdoing.

David Matyas, Member, Epstein Becker Green, Washington, DC



What are the biggest challenges of co-development/alliances?

Challenges relating to contracts and negotiations are the toughest aspects of co-developments and alliances, according to the plurality of respondents. Partnerships are often agreed upon early in development of drugs and medical devices and often the biggest hurdle to overcome, according to respondents.

Which yet-to-be implemented provisions of the PPACA, if any, will most impact future M&A decision making?

Just over a quarter of respondents agree that the PPACA’s section penalizing businesses with more than 50 employees that fail to provide health coverage to all employees will have the greatest impact on future M&A decision making. A corporate executive suggests that the law will force many companies to consolidate as a result of costs incurred. A similar cost issue is new IT standards that will need to be implemented to comply with the new system of data.

0% 5% 10% 15% 20% 25% 30% 35% 40% 45%

Other

Agreeing on systemresponsibility (which company

will maintain after deal)

Scientific evaluation

Establishing project milestones

Agreeing on system ofrecord for all documentation

Commercial assessments

Legal/Negotiation 43%

25%

13%

13%

11%

7%

3%

0% 5% 10% 15% 20% 25% 30%

Other

Sunshine Laws(manufacturers’reporting

requirements)

Removal of annualdollar limits

Insurance provider exchange

Prohibition of preexistingcondition exclusion

Individual mandate

New IT standards

Accountable CareOrganizations

Employer mandate 28%

23%

17%

16%

16%

11%

9%

3%

3%

Percentage of respondents Percentage of respondents

The effect of the Health Reform Legislation from 2010 should be even more evident for providers in 2012, as hospital transactions will be propelled by a quest for scale to sustain in the face of reimbursement reductions and new challenging payment methodologies. Scale will also be sought to handle the reverberations in the physician community from, among other things, practice debt, costs associated with electronic medical record technology, new reporting requirements, and fears associated with Sustainable Growth Rate (SGR).

Mark Lutes, Member, Epstein Becker Green, Washington, DC



Which businesses will feel the greatest impact from reimbursement reductions?

For-profit hospitals will be affected the most if major cuts to Medicare and Medicaid appear in the next congressional budget, according to 32% of respondents.

Which potential budget/regulatory change will have the greatest impact on the healthcare industry over the next 12 months?

Among possible changes to legislation in the near future, the healthcare industry stands to be most impacted by cuts to Medicare and Medicaid.

Survey Results

0% 5% 10% 15% 20% 25% 30% 35%

Other

Nursing/home care

Primary practice physicians

Non-profit hospitals

Specialists

For-profit hospitals 32%

30%

28%

24%

12%

3%

42%

31%

12%

11%

3% 1%


Changes to Medicare/Medicaid

Automatic cuts to Medicare payments

Individual mandate upheld

Individual mandate repealed

Changes to Social Security

Other

Over the past 30 years, hospitals have been more willing to collaborate with other providers and have done so more effectively, while physician groups have tended to proceed with caution and collaborate less with their competitors. As a result, it certainly comes as no surprise that, in 2011 and over the coming year, hospitals and health systems are taking the lead in consolidation efforts, while physician groups continue to take a wait-and-see approach. Moreover, when physician groups seek to consolidate, they tend to get more bogged down on cultural issues, while hospital systems seem better able to concentrate on economic issues, synergies, etc., thus leading to more hospital consolidation than physician group consolidation in the short run.

Robert Berg, Member, Epstein Becker Green, Atlanta, GA



How do you expect these proposed changes to affect the healthcare industry?

With an increased focus on value in healthcare, comparative effectiveness research (CER) is just beginning to impact reimbursement for medical technologies and services. Payors, providers, and manufacturers are appreciating both the strategic threat and opportunity with CER. Many are redoubling their efforts to engage the research community and government agencies that are at the forefront of CER, such as the Agency for the Healthcare Research and Quality (AHRQ) and the National Institutes of Health (NIH). In addition, the healthcare industry is still working to understand how they will intersect with the quasi-governmental Patient-Centered Outcomes Research Institute (PCORI) that was created by the PPACA and is evolving day by day. Ultimately, the impact of CER on reimbursement could be profound and may serve as another market and regulatory driver towards consolidation, diversification, and other strategic activity.

Jason Caron, Member, Epstein Becker Green, Washington, DC

52%

7%

15%

26%

Cost-cutting initiatives Changes to entitlement programs


Expansion of insurance coverage


Other, please specify



Life Sciences and Healthcare M&A Robust in 2011, Trend Expected to Continue in 2012

The year 2011 was marked by an approximate 33% increase in life sciences and healthcare M&A deal value in North America from the prior year. According to mergermarket, in 2011 there were $122.7 billion worth of mergers, acquisitions, and takeover activities in the region, compared to $92.4 billion in 2010.1

Deals in 2011 involved the consolidation of hospitals and doctor groups, insurance companies, pharmaceutical companies, and medical device manufacturers. In addition, a number of deals exemplify how some healthcare providers observed the need to further diversify their portfolio of service offerings in order to respond to the changing healthcare environment as a result of the adoption in 2010 of the Patient Protection and Affordable Care Act (referred to herein as “Health Reform” or “PPACA”). However, other factors contributed to this surge of activity, such as providers responding to decreases in reimbursement from various federal healthcare programs (e.g., Medicare and Medicaid), a continuing trend of patents held by pharmaceutical and biotechnology manufacturers coming to their expirations and the development of new medical device technologies.

As these factors will continue to exist in 2012, we believe that this year will carry on the trend of there being a high volume of transactions within the healthcare and life sciences sector. A few of these factors are discussed below.

Expiring Patents and Introduction of Biosimilars Will Continue Momentum for Transactions Among Pharmaceutical and Biotechnology CompaniesMajor pharmaceutical companies continue to face losses as a number of lucrative drug patents have begun to expire. As a result, the end of 2011 and the beginning of 2012 have already shown a flurry of activity by and among pharmaceutical and biotechnology companies.

For example, in November 2011, Gilead Sciences Inc. announced its intention to expand its business from HIV treatment after acquiring a hepatitis C-focused drug provider in Pharmasset in a deal valued at approximately $11 billion. Pharmasset currently has three clinical-stage product candidates for the treatment of the chronic hepatitis C virus (HCV) advancing in trials in various populations. According to the press release announcing this transaction, the Gilead Chairman and CEO notes that the “acquisition of Pharmasset represents an important and exciting

opportunity to accelerate Gilead’s effort to change the treatment paradigm for HCV-infected patients by developing all-oral regimens for the treatment of the disease. ”2 Another example of this strategy of diversification is that, in January 2012, Amgen and Micromet, Inc., announced that the companies entered into a definitive merger agreement under which Amgen will acquire Micromet, a biotechnology company founded in Germany in a transaction that values Micromet at approximately $1.16 billion.3

Another factor that will impact the biotechnology segment is that, in early February 2012, the Food and Drug Administration (FDA)issued three draft guidances concerning the abbreviated approval pathway for biological products that are demonstrated to be highly similar (biosimilar) to or interchangeable with an FDA-licensed biological product. These guidances were issued as a result of a provision included in the PPACA that amended the Public Health Service Act to create this abbreviated approval pathway. Specifically, the FDA published three separate draft guidances intended to assist companies in demonstrating that a proposed therapeutic product is biosimilar to a reference product for the purpose of submitting an application, called a “351(k)” application, to the FDA.4

Rise in “Accountable Care” Resulting in Further Provider IntegrationOne of the many priorities included in the Health Reform package was the development of financial incentives to encourage the development of accountable care organizations to unite doctors, hospitals, and other care providers to improve healthcare and provide incentives to keep costs low with potential government bonuses.

However, instead of simply entering into contractual arrangements with hospital systems or payors in order to develop methods to coordinate patient care, many physicians and physician groups have decided to sell their practices to hospital systems or physician practice management companies due to the accelerating costs of operating their practice and continued threats at further decreases in government reimbursement. As such, a rush of transactions involving hospitals, clinics, doctor groups, and even managed care payors has ensued.

Moreover, a number of health systems have recognized that in order to improve overall financial performance, it is necessary

By David MatyasEpstein Becker Green, Washington DC



to further diversify the systems’ product offerings and not simply provide care in the hospital or traditional physician office setting. Instead, these health systems are seeking ways to further integrate their systems in order to ensure that there is the appropriate mix, continuum, and geographic distribution of services being offered to the members of their patient population.

Medicare Payment Reductions In the midst of a budget crisis, changes to Medicare payments were approved in order to appease deficit hawks. Moreover, the failure of the Congressional Super Committee to reach a consensus in November 2011 will result in even further cuts being expected in future years. Although these cuts may discourage certain investors from entering those segments of the industry facing the largest cuts, these changes in reimbursement also present unique opportunities for strategic buyers looking to expand into new markets and spread overhead costs onto a larger number of healthcare operations. As such, any and all changes to the Medicare program continue to serve as a significant driver for the volume of healthcare transactions. For example, following changes in 2011 to the payment structure for dialysis treatment, Fresenius Medical Care announced in August 2011 its intention to purchase Liberty Dialysis and Renal Advantage for $1.7 billion.5 Furthermore, amid modifications to reimbursement to the home care industry and the Medicare program increasing its requirements of home care providers, 2011 was marked by there being a large number of transactions involving home care and hospice.

The Impact of the Medical Loss Ratio RuleAmong the provisions in the PPACA is a requirement concerning the medical loss ratio (MLR) in which insurers are required to spend a certain proportion of premium revenue on patient care and quality-improvement programs. As the MLR requirements begin to take effect, major US insurance companies have been active in M&A operations. Aetna, the American provider of various consumer insurance products, announced plans to withdraw from the individual insurance markets of several states, but it also acquired the smaller Medicare provider, Continental Life Insurance, in June 2011 for $290m. Larger insurance deals were announced in the following months, including Cigna’s acquisition of Healthspring for $3.5bn and CVS Caremark’s purchase of Universal American for $1.3bn.

Amidst the apparent consolidation of US insurance companies, direct action to preempt the MLR is somewhat less clear. As the rule’s opposition has been turned away and the rule is effective at the start of this new year, the health insurance industry looks to undergo significant changes.

ConclusionThe life sciences and healthcare sector is up for another busy year in M&A surrounding the challenges in adapting to adjusted budgets and regulations. The market’s tolerance for uncertainty will be further tested as elements of Health Reform will be challenged in the US Supreme Court and a stalled Congress is expected to agree on deficit reduction and prevent (or allow) automatic Medicare payment cuts before the 2013 trigger date set by the Super Committee’s November 2011 failure.

Pharmaceutical companies will lead the sector in seeking new business through acquiring R&D firms, new patents and cross-border expansion in emerging markets. The remainder of hospital and doctor groups, insurance providers, and the medical device industry are sure to see greater consolidation. Whether these drivers will accelerate or slow down deal flow in the sector appears to rest on Washington regulators’ shoulders.

1 See Deal Drivers Americas Full-Year 2011: http://www.mergermarket.com/pdf/Americas_Deal_Drivers_FY2011.pdf

2 See November 21, 2011, Gilead Press Release at: http://www.gilead.com/pr_1632335

3 See January 26, 2012, Amgen Press Release at: http://www.amgen.com/media/media_pr_detail.jsp?year=2012&releaseID=1653062

4 See February 9, 2012, FDA Press Release at: http://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm291232.htm

5 See August 2, 2011, Fresenius Medical Care Press Release at: http://www.fmc-ag.com/3807.htm



About Us

The FirmEpstein Becker Green (also “EBG” or the “Firm”) is uncompromising in its pursuit of legal excellence and client service in its areas of practice: Healthcare and Life Sciences, Labor and Employment, Litigation, Corporate Services, and Employee Benefits.The Firm was founded to serve the healthcare industry and has been at the forefront of healthcare legal developments since 1973. The Firm is also proud to be a trusted advisor to clients in the financial services and hospitality industries, among others, representing entities from startups to Fortune 100 companies. Our commitment to these practices and industries reflects the founders’ belief in focused proficiency paired with seasoned experience.

EBG’s national practices regularly share and access each other’s knowledge and resources to provide clients with tailored solutions to their legal and business issues. Understanding the complex evolution and critical trends within these areas enables EBG practitioners to provide clients with focused insight and deliver high-quality service and results.

The Healthcare and Life Sciences PracticeEpstein Becker Green was founded as a law firm dedicated to the healthcare industry. Today, among our approximately 300 attorneys, there are more than 100 attorneys in the Healthcare and Life Sciences Practice. We have been consistently ranked as one of the nation’s largest healthcare law firms by Modern Healthcare.

For nearly 40 years, the Firm has been at the cutting edge of healthcare law, taking the lead in understanding, interpreting and shaping the laws and regulations that affect every institution involved in healthcare and life sciences. We have the critical mass of knowledge needed to help healthcare organizations deal effectively with legal issues small and large—from day-to-day decisions to core business strategies.

To us, it’s more than a business. It’s a mission. EBG’s Healthcare and Life Sciences Practice serves a wide spectrum of healthcare organizations, including academic medical centers, ambulatory care facilities, biotechnology and life sciences companies, health plans and other healthcare insurers, hospitals and health systems, investment banks and venture capital firms, pharmaceutical and medical device manufacturers, physician group practices/management companies, post-acute and long-term care providers, and suppliers and distributors.

Mergers, Acquisitions, and DivestituresEpstein Becker Green attorneys regularly structure, negotiate, document, and assist in implementing complex business transactions for healthcare companies. Such transactions include mergers, acquisitions, and divestitures of a wide variety of regulated and non-regulated healthcare companies; joint ventures; affiliations, including nonprofit/for-profit healthcare entity affiliations; conversions of nonprofit healthcare entities to for-profit healthcare entities; the creation of licensed healthcare entities; the creation of management services organizations; commercial lending transactions involving healthcare entities, including advice concerning securitization issues and venture capital transactions; and private placements and public offerings of securities.

In addition, as one of the prominent healthcare law firms in the country, Epstein Becker Green is often asked to work alongside regular corporate counsel to provide specific healthcare advice when a client is considering or is engaged in a transaction that may involve or require examination of healthcare issues. The Firm’s involvement in such transactions may include the conduct of healthcare due diligence, review and/or creation of documentation to address particular healthcare issues, and compliance “audits.”

Since complex transactional work requires an examination of many issues, the Firm’s transactional healthcare attorneys work closely with other Firm attorneys in a variety of disciplines, including the areas of taxation (both for-profit and nonprofit), ERISA, securities, real estate, labor and employment, antitrust, reimbursement (including Medicare and Medicaid fraud and abuse), physician self-referral, government contracts, and state regulation and licensure. Such close interaction helps to ensure that all relevant issues have been examined, the client has been appropriately advised and protected, and the transaction has been concluded in the most efficient and effective manner.

David E. MatyasMember, Epstein Becker Green, Washington, DC 202.861.1833 | [email protected]

Jason B. CaronMember, Epstein Becker Green,Washington, DC 202.861.4190 | [email protected]

Philip D. MitchellMember, Epstein Becker Green, Newark, NJ973.639.8297 | [email protected]

We’ve been listening to yourchallenges for nearly 40 years.

Times change. The challenges faced by the health care industry remain.

Mergers, acquisitions, reorganizations, affiliations and joint ventures. ACOs. Debt and equity financing transactions. Antitrust. Real property purchase and lease transactions. Physician compensation. And beyond.

At Epstein Becker Green, helping you find solutions is what we do. And have done for nearly 40 years.

To learn more, contact Kristi Swanson at 202.861.4186 or [email protected].

EPSTEINBECKERGREEN HEALTH CARE AND LIFE SCIENCESThought Leaders in Health Law ®Attorney Advertising www.ebglaw.com

© 2012 Epstein Becker & Green, P.C.

Company FoCUS

1 866 INTRALINKS

New York + 1 212 342 7684

www.intralinks.com

“ IntraLinks’ system proved to be absolutely the right solution for our projects. As well as providing a user-friendly and robust solution that ensured the projects were completed seamlessly, IntraLinks backed us up with a level of customer service and support that was exactly tailored to our needs.”

— Anja Schott, Dataroom Manager, DuPont Europe

About Us The IntraLinks enterprise-wide solution provides a secure, online

environment where healthcare and life sciences deal professionals can

manage the entire life cycle of business development and licensing (BD&L)

and mergers and acquisitions (M&A) transactions. IntraLinks, the undisputed

market leader for deal management and virtual deal room solutions, enables

organizations to manage, share, and track information while accelerating the

deal process, improving efficiency, access, and professionalism during key

phases of the transaction.

In 1997 IntraLinks pioneered the use of software-as-a-service based solutions for collaboration between businesses, starting with the debt capital markets and M&A communities. In the process we transformed the way companies work. Our platform hosts the largest global community of dealmakers, and is the most commonly used platform in the M&A market.

Significant statistics include:

• 225,000,000 files and documents currently reside on our platform

• $19 trillion worth of transactions executed on the IntraLinks platform to date

• 2 million users across 90,000 organizations currently use IntraLinks worldwide

• Professionals at more than 800 of the Fortune 1000 currently use IntraLinks

• More than 82,000 projects have been completed on our platform

In the past year alone:

• 16 of the top 20 pharmaceutical companies in the world have used IntraLinks for M&A activities

• 7 of the top 10 pharmaceutical companies in the world managed their BD&L activity on IntraLinks

Our track record of success, market leadership, and strong industry experience uniquely position us to provide you with a solution that is built on best practices from industry leading organizations. Our platform hosts the largest global community of dealmakers, and is the most commonly used platform in the M&A market. Gartner, a leading research and advisory firm, named IntraLinks the best solution for Team Collaboration, for five consecutive years.

IntraLinks enables you to:

• Set up deals quickly

• Protect and view files in native format

• Analyze up-to-the-minute business intelligence

• Utilize Q&A capabilities

• International support available in 140 languages, custom support with translation of documents in 120 languages

For more information, visit us at www.intralinks.com.

Accelerate deal velocity.

Transform your business.

Powerful, end-to-end deal solution

Maximize value, mitigate risks

Manage, share & control critical deal information

Expedite due diligence — maintain link integrity in regulatory documents

For more information visit www.intralinks.com

IntraLinks for Collaboration, Business Developmentand Licensing

Deal Flow Indicator

IntraLinks

Deal Flow Indicator

Check out the IntraLinks Deal Flow IndicatorFor insight and perspective on deal flow trends in the market.Download the latest report at www.intralinks.com/dealflow



mergermarket is an unparalleled, independent mergers & acquisitions (M&A) proprietary intelligence tool. Unlike any other service of its kind, mergermarket provides a complete overview of the M&A market by offering both a forward-looking intelligence database and a historical deals database, achieving real revenues for mergermarket clients.

For more information please contact:

Matt LeibmanPublisher, RemarkThe Mergermarket Group

Tel: +1 212 686 6305Email: [email protected]

Remark, the events and publications arm of The Mergermarket Group, offers a range of publishing, research and events services that enable clients to enhance their own profile, and to develop new business opportunities with their target audience.

About mergermarket

BioPharm Insight is the definitive guide to the global biopharma community. BioPharm Insight provides clients with an information edge by combining the most comprehensive real-time database of companies, drugs, contacts, M&A and licensing deals, forecasts and clinical trial data with proprietary forward-looking intelligence uncovered by an independent team of investigative journalists months or even years before it breaks in mainstream media. To learn more, visit www.biopharminsight.com

About Infinata, Inc.Featuring a comprehensive BioPharm Solutions Suite, unique Wealth Prospecting tools and innovative Custom Data Services, Infinata provides personalized technology solutions to turn information into insight. Infinata is a part of Mergermarket, a Financial Times Group company and a division of Pearson plc. To learn more, visit www.infinata.com

BioPharm InsightLeading Insight and Intelligence

DisclaimerThis publication contains general information and is not intended to be comprehensive nor to provide financial , investment, legal, tax or other professional advice or services. This publication is not a substitute for such professional advice or services, and it should not be acted on or relied upon or used as a basis for any investment or other decision or action that may affect you or your business. Before taking any such decision, you should consult a suitability qualified professional adviser. Whilst reasonable effort has been made to ensure the accuracy of the information contained in this publication, this cannot be guaranteed and neither mergermarket nor any of its subsidiaries or any affiliate thereof or other related entity shall have any liability to any person or entity which relies on the information contained in this publication, including incidental or consequential damages arising from errors or omissions. Any such reliance is solely at the user’s risk.

Part of The Mergermarket Group

www.mergermarket.com11 West 19th Street,2nd fl.New York, NY 10011USA

t: +1 212.686.5606f: +1 [email protected]

80 StrandLondon, WC2R 0RLUnited Kingdom

t: +44 (0)20 7059 6100f: +44 (0)20 7059 [email protected]

Suite 2001Grand Millennium Plaza181 Queen’s Road, CentralHong Kong

t: +852 2158 9700f: +852 2158 [email protected]

Documents

Life Sciences and Healthcare Sector Forecast