Mergers and acquisitions have been proceeding at a torrid pace, and the health care sector may be an especially active area for future consolidation. In the first half of 2018, the value of M&A deals hit all-time records both worldwide and in the U.S., up by 64% and 79%, respectively, from the first half of 2017, per data from Thomson Reuters cited by Axios.com. The number of deals were down by 10% and 13%, respectively, but their average values soared. Meanwhile, despite a recent slowdown in health care M&A, this sector has a history of being among the most active when it comes to business combinations, according to Business Insider

Per Business Insider, these are the top 10 takeover candidates that Morgan Stanley sees in the health care sector: IQVIA Holdings Inc. (IQV), BioMarin Pharmaceutical Inc. (BMRN), Seattle Genetics Inc. (SGEN), DaVita Inc. (DVA), Universal Health Services Inc. (UHS), Dexcom Inc. (DXCM), Neurocrine Biosciences Inc. (NBIX), Perrigo Co. PLC (PRGO), Nektar Therapeutics (NKTR), and Sarepta Therapeutics  Inc. (SRPT). The table below lists their current market capitalizations.

10 Takeover Targets

Stock Market Cap
BioMarin $17 billion
DaVita $12 billion
Dexcom $12 billion
IQVIA $25 billion
Nektar $7 billion
Neurocrine $10 billion
Perrigo $10 billion
Sarepta $9 billion
Seattle Genetics $9 billion
Universal Health $12 billion

Source: Investopedia

Significance for Investors

Morgan Stanley uses a proprietary quantitative model that predicts which companies are the most likely to receive tender offers during the next 12 months, excluding stocks for which takeover rumors are already circulating. As the table indicates, the market caps of Morgan Stanley's 10 stocks range from $9 billion to $25 billion, with 8 of the 10 at $12 billion or less, making them easily digestible by the biggest players in the industry.

Biomarin and Sarepta develop drugs to treat rare diseases. Sarepta has a particular focus, rare neuromuscular disorders. Neurocrine produces medications for diseases of the nervous and endocrine systems. Nektar specializes in pharmaceuticals that combat cancer, chronic pain and autoimmune diseases. Seattle Genetics also focuses on anti-cancer drugs. Perrigo manufactures generic prescription drugs, as well as a wide variety of over-the-counter medications, vitamins, nutritional supplements and infant formulas.

DaVita and Dexcom specialize in the treatment of chronic diseases. DaVita operates kidney dialysis centers, while Dexcom produces glucose monitoring devices for diabetics. Universal Health owns and operates acute care hospitals, outpatient treatment centers and behavioral health facilities. IQVIA offers cloud-based analytics to assist the development of new drugs and assess the effectiveness of those already on the market.

BioMarin has reported promising results from trials of vosoritide, a treatment for children suffering from severely impaired growth, according to PR Newswire. Vosoritide has been designated an orphan drug in both the U.S. and the E.U., which brings tax benefits and other incentives to promote its development. A treatment for hemophilia is on track for accelerated approval in the U,S., the company believes. BioMarin also has invested heavily in gene therapy, building oe of the largest manufacturing facilities of its kind. Revenue for 2Q 2018 was up 17.5% year over year (YOY).

DaVita stock received a boost on Nov. 7, after California voters rejected Proposition 8, which would have forced dialysis clinics to make refunds of up to $100,000 to insurers and patients, and limited their future earnings, per Investor's Business Daily. The stock was up by 8.4% at the open, and closed the day up 9.9% from the Election Day close.

Looking Ahead

The recent slowing of M&A action in health care, Morgan Stanley says, is the result of high valuations and ample funding available for biotech firms, removing some of the impetus to put themselves up for sale. Additionally, the pharmaceutical industry is marked by almost continual shuffling of drugs and divisions among competitors, in addition to acquisitions of complete companies. In fact, a study by Deloitte found that divestiture activity is likely to be a major theme across all industries, as companies seek to sharpen their strategic focus. Meanwhile, the same study indicated that the vast majority of respondents (88%) were deriving their expected rates of return from recent acquisitions, which should instill confidence in further M&A activity.

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