Nov. 23 (Bloomberg) -- King Pharmaceuticals Inc., LifePoint Hospitals Inc. and Endo Pharmaceuticals Holdings Inc. may be buyout targets as private-equity firms seek companies battered by the economy and poised to gain from the U.S. health overhaul.

The three companies, with market caps of about $1 billion to $3 billion each, are steady cash producers with little debt and low share prices compared with their earnings potential, a profile sought by acquirers, according to Pali Capital Inc. in New York and Zurich-based Credit Suisse Group AG.

Buyout managers are sitting on $400 billion in unspent capital and finding easier financing as debt markets thaw, according to researcher Pitchbook Data Inc. They see opportunity in health care, where companies are trimming costs and spinning off units in response to the economy, even as the industry stands to gain from U.S. legislation that may expand care to more than 30 million Americans, said Karen Bechtel of the Carlyle Group, the world’s second-largest equity firm.

“The combination of health-care reform and the recession has forced companies to be more careful about running their businesses,” said Bechtel, who heads the Washington firm’s health-care unit, in a telephone interview. “That’s driving activity, and it will accelerate.”

King rose 26 cents, or 2.2 percent, to $12.06 at 4:01 p.m. in New York Stock Exchange composite trading. The Bristol, Tennessee-based company outpaced the rest of the 11-member Standard & Poor’s 500 Pharmaceuticals Index, which rose a half- percent as well as the S&P 500’s 1.4 percent rise.

LifePoint, of Brentwood, Tennessee, climbed 42 cents, or 1.4 percent, to $29.81 in Nasdaq Stock Market composite trading, its biggest jump since Nov. 10. Endo, based in Chadds Ford, Pennsylvania, gained 55 cents, or 2.5 percent, to $22.75, its largest increase since Oct. 5.

Most Attractive

Private-equity firms are most attracted to service-oriented companies such as hospital managers and medical-software suppliers, said Frederick Frank, head of life sciences at Peter J. Solomon & Co., a New York-based investment bank adviser. Biotechnology companies are less enticing, given the cost and risk of developing experimental drugs, he said by telephone.

“The happy hunting ground has been the service type of companies,” said Frank, who launched Solomon’s health-industry group in March. “They’re shying away from areas of health care that are very high tech.”

An acquisition announced Nov. 5 by TPG Inc., an equity company with about $45 billion in assets under management, fits the blueprint. The Fort Worth, Texas firm, in a partnership with the Canada Pension Plan Investment Board, said it would pay $5.2 billion to buy IMS Health Inc., a Norwalk, Connecticut company that provides prescription data to drugmakers and analysts.

‘Winter has Thawed’

In the deal, which broke an 18-month freeze in leveraged health-care buyouts, IMS said it would assume $1.2 billion in debt. A week later, German generic-drug maker Ratiopharm GmbH drew bids of about $3 billion from TPG, KKR & Co., Advent International Corp. and the private-equity arm of Goldman Sachs Group Inc., according to two people close to the matter.

TPG and Advent, of Boston, didn’t return calls seeking comment. Spokesmen for The Blackstone Group LP, the largest private equity fund, KKR and Goldman Sachs, all based in New York, declined to comment.

For buyers, new deals show “the nine-month nuclear winter has thawed,” said Grant Harshbarger, a managing director at New York-based investment bank Caris & Co. who has advised Aetna Inc. and Celgene Inc. during 20 years of arranging health-care acquisitions. “The guys who have fresh capital and are ready to put it to good use are letting us know they’re out there.”

Deals as big as $5 billion are likely, said Tracy Lefteroff, a national life sciences partner with PricewaterhouseCoopers LLP, in a telephone interview.

Aging Demographics

Equity firms “are looking at the aging demographics of the worldwide population and seeing health care as a much bigger piece of the pie,” said Lefteroff, based in San Jose, California. “Over the last couple of years you’ve seen an increased interest.”

In 2006, a group led by Bain Capital LLC, of Boston, and KKR bought hospital chain HCA Inc. for $31.2 billion, in the third largest leveraged buyout ever. Last year, Bristol-Myers Squibb Co. sold its wound products unit, ConvaTec, for $4.1 billion to equity groups Nordic Capital and Avista Capital Partners.

Buyers want targets with steady earnings that they can re- sell or take public in two to five years, said Caris’s Harshbarger. Drugmakers are on private equity’s radar only if they have products on the market or in the last stages of testing, Harshbarger said.

Endo Pharmaceuticals, a maker of pain pills, may be an attractive target, said Scott Hirsch, a New York-based Credit Suisse analyst, in a Sept. 17 note to clients.

$339 Million in Cash

Endo generated $339.2 million in free cash flow last year, a measure of money generated from daily operations excluding capital spending. The drugmaker’s shares trade for about third less than drugmakers with similar earnings, Hirsch said.

Endo had a market capitalization of $2.6 billion before today, and had $371.36 million in debt as of the quarter ended Sept. 30. Kevin Wiggins, a company spokesman, declined to comment.

King Pharmaceuticals’ Embeda, the first tamper-resistant narcotic approved by U.S. regulators, makes it another takeout candidate, Hirsch said. Embeda sales may reach $160 million next year, said another analyst, Gary Nachman, with Leerink Swann & Co. in New York.

King sells animal medicines and the EpiPen allergy-drug injector, “solid” cash producers that “would be attractive to a specialty pharma suitor looking to diversify,” Hirsch said. The company had a market cap of $2.93 billion before today, with $400 million in debt as of the quarter ended Sept. 30. It generated $433.9 million last year in free cash flow.

Jack Howarth, a King spokesman, didn’t return calls for comment.

Projected Earnings

Endo and King shares traded for 7.1 and 7.4 times their projected earnings in 2012, respectively, suggesting both may be bargains, Credit Suisse said in its September analysis. Before today, Endo had fallen 1.3 percent, while King rose 9.2 percent since the note was published.

Buyout firms want smaller drug or medical-device makers in established niche markets, said Jeffrey Greene, a partner at Ernst & Young in New York who advises clients on health deals.

“These guys are used to taking financial risks with leverage,” he said by telephone. “They’re not used to taking risks” on research and development.

LifePoint is another plausible target, with its concentration in rural markets where its medical centers face less competition, said Sheryl Skolnick, a Pali Capital analyst in New York.

‘Undervalued’

The hospital company, with a market capitalization of $1.6 billion before today, is “undervalued,” Skolnick said in a telephone interview. The company traded at about 12 times its projected earnings for 2010, based on a Bloomberg survey of analysts. It also may be a “risky” buy given the bad economy in LifePoint’s markets, Skolnick said.

All three companies have little or no debt relative to earnings, according to data compiled by Bloomberg. That’s a prerequisite for most leveraged buyouts, Skolnick said.

Diane Huggins, a LifePoint spokeswoman, declined to comment.

The debate in Washington has made leveraged buyouts easier, said Curtis Lane, senior managing director at MTS Health Partners, a New York-based equity fund.

Legislation in the House and Senate would spend almost $1 trillion to expand coverage to as many as 36 million uninsured Americans, while also putting new restrictions on insurers, adding taxes on drug and device-makers and cutting hospital funding.

Credit Ratings

While the proposals have depressed share prices in the industry, credit ratings haven’t suffered as much, Lane said by telephone. That makes it cheaper to buy companies and to pile debt onto the acquisitions to finance the transactions.

“The credit markets are saying the companies aren’t going out of business, so their price has held up, but the equity markets wonder what the prospects are for growth,” said Lane, a former head of health-care investment banking at Bear Stearns Cos. “There are more targets.”

To contact the reporters on this story: Alex Nussbaum in New York anussbaum1@bloomberg.net; Jason Kelly in New York at 2397 or jkelly14@bloomberg.net

Last Updated: November 23, 2009 16:18 EST