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Health Companies Sitting on Cash May Mean Bigger Deals

Health-care companies sitting on piles of cash may start doing more deals next year as they seek products that can bolster sales, said four top U.S. dealmakers.

Pharmaceutical companies in particular, which have led the industry in deals over the last 12 months, are ready to divert their focus from cutting costs to making agreements that can help build product lines, said Jennifer Jarrett, managing director of investment banking at Citigroup Inc. (C)

“Pharma is turning away from how many synergies they can squeeze out of a transaction and refocusing on how they can grow their pipeline,” Jarrett said today at Bloomberg’s Dealmakers Summit in New York.

Pfizer Inc. (PFE), the world’s biggest drugmaker, had $24.3 billion in cash, near cash and short term investment at the end of the second quarter, and will get more from the sale and divestiture of its nutrition and animal health businesses. UnitedHealth Group Inc. (UNH), the largest U.S. health insurer, had $14.4 billion, and Amgen Inc. (AMGN), the No. 1 biotechnology company, had $22.5 billion.

The large amounts of cash on hand may prompt an acquisition next year larger than New York-based Pfizer’s agreement in April to sell its nutrition unit to Nestle SA for $11.9 billion.

“I would not be surprised if in 2013 we see one or two transactions north of $10 billion,” Henry Gosebruch, managing director of mergers at JPMorgan Chase & Co. (JPM), said at the summit.

2,076 Deals

In the last 12 months, there have been 2,076 deals announced for health-care products, services and pharmaceutical companies valued at $166 billion, according to data compiled by Bloomberg.

U.S. companies have been the biggest buyers, with $90.6 billion in purchases. Drugmakers have been the top acquirers in the sector, with $37.1 billion, followed by insurers with $17.4 billion. The main targets have been biotechnology and genetics companies, with $22.2 billion in deals announced. Valeant Pharmaceuticals International Inc., based in Montreal, was the most acquisitive company, and announced 14 agreements valued at $4.12 billion in the past 12 months.

The number of acquisitions may increase next year, said Robert Glassman, Bank of America Corp. (BAC)’s managing director of global health care.

“What tends to drive that is the need, there’s clearly a need for larger companies who are facing patent cliffs and whose own R&D machines have not panned out, to find growth,” he said.

Generics Effect

Loss of market exclusivity on drugs to cheaper generic copies has driven down revenue at top pharmaceutical companies. Pfizer lost patent protection of its best-selling drug, cholesterol pill Lipitor, in November -- and along with it about $10 billion in annual sales. Plavix, the top medicine for Bristol-Myers Squibb Co. (BMY) with $7.09 billion last year, generated just $64 million in the third quarter after facing competition from generic copycats.

Companies may be held back from spending by the prices they can command for new products. Health insurers and U.S. government programs including Medicare and Medicaid, which insure the elderly and poor, respectively, have been pushing back on rising prices for drugs, services and medical devices, said the panelists.

“In the old days, all you worried about was clinical risk,” said Citigroup’s Jarrett. “Now there’s a lot more regulatory uncertainty and there’s much more commercial uncertainty. You don’t know whether payers are going to pay for the drug and you’ll get reimbursement. That’s impacted M&A.”

Those concerns have also meant less venture capital money going into startup companies that might eventually be acquired, said Jonathan Leff, managing director of health-care at private equity firm Warburg Pincus in New York.

The number of health-care companies getting venture capital money is at the lowest level in 17 years, Leff said. “Are we going to have enough new entrepreneurial companies delivering these new products?” he said. “The returns on investment in innovative R&D just haven’t been there.”

To contact the reporter on this story: Drew Armstrong in New York at darmstrong17@bloomberg.net; Jeffrey McCracken in New York at jmccracken3@bloomberg.net

To contact the editor responsible for this story: Reg Gale at rgale5@bloomberg.net

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