Interactive Investor

M&A activity fails to boost healthcare stocks

16th June 2014 12:19

Ceri Jones from interactive investor

Shares in Smith & Nephew fell by 2.5% to 1,044p on Monday, as its merger and acquisition (M&A) hopes were dashed.

The healthcare company slumped after medical device maker Medtronic acquired Irish rival Covidien for $42.9 billion (£25.28 billion), which put paid to rumours that Medtronic was considering a takeover of Smith & Newphew.

Despite press commentary to the contrary, this latest piece of consolidation in the healthcare sector has not boosted other related stocks.

In particular, AL Noor Hospitals and NMC Health were rumoured to be beneficiaries but in fact AL Noor Hospitals, the largest private healthcare service provider in Abu Dhabi, edged down by 0.2% to 992.50p in early trading, while NMC Health, a healthcare chain in the United Arab Emirates, also tumbled on Monday morning, down 0.2% to 441p.

Further M&A could come however from the purchase of healthcare and biotechs by the major drugs companies as the sector as a whole hit a trough in late spring and has not fully recovered, so deals would be cheap while the large drug companies have been amassing cash. Those that could benefit include Abbott Laboratories and Roche Holding.

In the US, Obamacare is expected to boost M&A and health maintenance organisations, which provide managed care on a prepaid basis, are likely to benefit, such as Aetna, Magellan Health Services and UnitedHealth Group.

The latest wave of speculation had been prompted by US medical devices group Medtronic's purchase of Covidien in a cash-and-stock deal, the largest deal in the sector this year.

The US group is paying $93.22 a share for Covidien, which is a 50% premium to Friday's closing price, primarily for the purpose of moving its tax base abroad, although there will be some synergies in terms of a comprehensive product portfolio and broad global reach, the company said.

The merged entity will generate annual revenues of $27 billion, including $3.7 billion from the emerging markets, and employ 87,000 staff in over 150 countries. The boards of both groups have approved the deal.

This is the latest deal employing a controversial tax inversion strategy, whereby US companies move their tax bases to the UK where they can enjoy lower tax rates. Pfizer's attempted deal with British-based AstraZeneca was designed to achieve just this.

Unsurprisingly, Congress has been trying to introduce legislation to close this loophole. Michigan senator Carl Levin called it "tax avoidance, plain and simple", when he introduced the Stop Corporate Inversions Act last month.