Grant Thornton Corporate Finance July 2012

Health care M&A snapshot

Reviewing the 2011 health care industry A dynamic climateThe past year has been exciting for health care M&A, with approximately 1,250 transactions reported during 2011 in a nearly 10% increase from 2010, making it one of the most active deal markets in history. Issues such as health care reform, rising costs of care, expiring patents and the move toward digital health records are fueling a lively deal market and have powered significant M&A activity. The aging of the U.S. population is another issue with widespread implications, though its impact tends to be a secondary factor in M&A trends. In the next few pages, we will delve into some of these issues, highlighting their impact on the deal market and commenting on how future M&A trends might be affected.

The Patient Protection and Affordable Care ActThe Patient Protection and Affordable Care Act (PPACA), signed into law on March 23, 2010, requires major changes to current health care legislation. The Supreme Court held the individual mandate, one of the most controversial aspects of the law and one of the major areas under consideration by the court, valid under the taxing power of the U.S. Congress.

The other major ruling partially upheld the Medicaid expansion under the PPACA. However, the penalty clause that allowed the federal government to withhold all Medicaid funds from states refusing to comply with the expansion was struck down. Compliance with the new Medicaid eligibility standards will now be decided on a state-by-state basis.

While some of the significant provisions in the PPACA do not take effect until 2014, the act has certainly influenced the M&A markets. Compliance cost concerns have driven many small organizations to consider selling to larger rivals, and we expect this trend to continue. As the ultimate impact of the legislation unfolds, M&A will play a key role as businesses take advantage of new opportunities and attempt to mitigate new risk factors.

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2 Health care M&A snapshot June 2012

Widespread cost pressureSoftening revenues and rising costs throughout the health care industry have put many smaller or less well-capitalized providers under significant financial stress. Many of these facilities face the stark choice of either joining a larger organization or risking financial distress on their own. In some cases, facilities that chose to weather the storm ended up in bankruptcy, with either a sale or closure as the ultimate outcome.

Health care facility M&A/bankruptcyHospitals and other health care entities have felt significant effects from both increased costs and decreased revenues due to a combination of reimbursement rate pressure and collections issues. In response, health care facility M&A activity has risen markedly as providers seek to take advantage of economies of scale by acquiring smaller or less well-capitalized organizations.

The number of health care facility M&A transactions increased 32% in 2011, as hospitals, clinics and other medical facilities combined in order to address financial and strategic concerns. Deal value declined by 11% from $15 billion to $13.3 billion as a result of two sizable deals in 2011: Ventas’ acquisition of Atria Senior Living for $3.1 billion and Universal Health Services’ purchase of Psychiatric Solutions for more than $3 billion. Excluding the impact of these two transactions, deal value increased 52% in 2011.

Going forward, health care facility M&A activity is likely to remain active. Despite the slight uptick in the U.S. economy, cost pressure will continue to affect health care facilities and fuel M&A transactions. While the PPACA is intended to address some of these issues, its ultimate effects are still in question.

One other notable recent development is the FTC’s recent ruling that ProMedica Health System’s August 2010 acquisition of rival St. Luke’s Hospital was likely to substantially lessen competition and increase prices for general acute care and obstetric inpatient hospital services sold to commercial health plans in the Toledo, Ohio, area. The ruling calls for ProMedica to unwind the transaction by selling St. Luke’s Hospital and supporting the transition to a new qualified owner. Whether this ruling signals a trend in FTC action or a one-time event, operators on either side of an M&A transaction need to be aware of the competitive environment and take steps to address potential FTC concerns proactively.

Further, in a somewhat less well publicized decision, the Supreme Court agreed to hear a case involving the acquisition of Palmyra Medical Center (PMC) by the Hospital Authority of Albany-Dougherty County (Georgia). As a state-run entity, acquisitions by the Authority are currently immune to FTC oversight. By agreeing to hear the case, the Supreme Court will set law on whether the FTC can intervene when a state-created entity is involved, potentially leading to expanded oversight authority for the agency.

Insurers quietly buying medical practicesInsurers have a vested interest in controlling costs, and some carriers are experimenting with acquiring physician groups in an attempt to align doctors’ incentives with their own. The concept is straightforward: A private physician group is financially motivated to maximize billings by performing large numbers of medically justified tests and procedures, while a group owned by an insurer can have an incentive structure that is focused on minimizing the use of diagnostic tests, albeit in a medically responsible way. Many people believe there is a gap between what patients actually need in terms of tests and what doctors often order. They believe bringing patient care under the same corporate umbrella as insurance can help close that gap and stem rising health care costs. Further, certain provisions of the PPACA have invigorated this trend and will likely continue to fuel M&A in this area.

Recent examples of insurers buying physician practices and hospitals include the following: • UnitedHealthGroup(NYSE:UNH),ahealthinsurance

company, acquired Monarch, an association of physicians in private practice in California, during 2011.

• InAugust2011,WellPoint(NYSE:WLP),a$60billionhealth benefits company, closed on its acquisition of CareMore Health Group, a senior medical group and health plan provider.

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Health care facility M&A activity

* Discounts two transactions that transpired in 2010Sources: GTCF research; certain financial information provided by S&P Capital IQ

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In what is perhaps an even bolder move, an east coast-based, independent licensee of the Blue Cross and Blue Shield Association, announced its intent in 2011 to purchase a large regional hospital system comprised of a financially distressed operator of five hospitals.

There are factors that might reverse this trend, however. The prospect of changing the incentive structure for physicians raises legitimate concerns about the quality of care. Patients don’t want cost to their insurer to be a factor in determining their treatment. If insurers can convince consumers that the current standards of care will be preserved and the expected cost savings actually materialize, the acquisition trend might continue; however, if patients resist these practices or costs do not decline as expected, insurers may abandon this strategy.

Cost pressure on insurers, care providers and other entities in the health care space is an ongoing issue that is exacerbated by the aging of the U.S. population (although the additional care associated with the aging of the boomers presents revenue opportunities). This is also a political hot-button issue, with widespread disagreement as to both causes and potential solutions. In the near term, it appears that costs will continue to increase, contributing to, among other things, strong incentives for companies to seek efficiencies and strategic partnerships through M&A activity.

The patent cliffPharmaceutical companies also face substantial strategic and financial challenges in the current market. For example, nine of the top 10 best-selling drugs have lost or are scheduled to lose patent protection in the next five to six years — a time period often referred to as the patent cliff. In response, pharmaceutical companies have stepped up R&D and implemented cost-efficiency programs. Further, many companies are embracing M&A as a way to supplement R&D during their quest for the next lucrative drug.

For example, Pfizer, which lost exclusivity on the underlying formulaforLipitorintheUnitedStatesduringNovember

2011, recently acquired King Pharmaceuticals, a specialty pharmaceutical discovery and clinical development company, for $3.6billionincash.Pfizerbelievestheacquisitiondiversifiesitsproduct revenue and expands its presence in pain management.

Another example is the Sanofi-Aventis acquisition of U.S. biotechnology company Genzyme for almost $20 billion. The deal is intended to help Sanofi rebuild its pipeline given its loss of patent protection on Lovenox in 2010 and its loss of protection on Plavix in 2012.

While this patent cliff is a somewhat extraordinary event, the motivation for M&A in the pharmaceutical sector remains strong because of the tremendous investment in R&D needed to bring a single drug to market. If they are acquired, smaller R&D firms with promising drugs can often recoup some of their investment and better the chances that their drug will make it through the onerous approval process. Likewise, larger companies with the capital to pursue acquisitions invest heavily in their courtship of up-and-coming firms. Given today’s economic pressures, we expect this trend to continue.

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Top 10 drugs for 2010 by U.S. sales

Rank Drug Treatments Marketers2010 U.S. product

sales ($MM)U.S. patent expiry

1 Plavix Blood clots Bristol-Myers Squibb + Sanofi $6,154 20122 Lipitor Cholesterol Pfizer $5,329 20113 Seretide/Advair Asthma GlaxoSmithKline $4,026 20164 Seroquel Mental disorders AstraZeneca $3,747 20125 Epogen/Procrit Anemia Amgen + Johnson & Johnson $3,594 20136 Actos Diabetes Takeda $3,582 20127 Abilify Mental disorders Otsuka + Bristol-Myers Squibb $3,348 20158 Enbrel Arthritis/ psoriasis Amgen + Pfizer $3,304 2028*9 Singulair Asthma/allergies Merck & Co. $3,219 201210 Remicade Arthritis/ psoriasis Johnson & Johnson $3,088 2018

* Enbrel was originally set to expire in 2012 in the U.S., but it has been extended for another 16 years.Source: EvaluatePharma

4 Health care M&A snapshot June 2012

Electronic health recordsDigitization of health records has been accelerating for a number of years as providers throughout the health care sector have sought ways to offer more efficient and effective care while maximizing the benefits to the patient and minimizing risk associated with incomplete medical records. In response, the health information technology (HIT) industry is expanding significantly as competitors vie to provide new applications within the lucrative and growing health care market. M&A activity has been a natural mode of competition, allowing companies to secure new technologies and capture additional market share.

Further, the American Recovery and Reinvestment Act of 2009, commonly known as the stimulus bill, includes approximately $27 billion in incentives for eligible institutions (including hospitals) that install and “meaningfully use” electronic health records (EHR). These federal subsidy payments commenced in 2011 and diminish in each subsequent year until 2015, when providers start facing penalties for noncompliance. While the inclusion of funds was in response to underlying care and economic factors, the stimulus money is driving increased growth in the HIT sector and fueling expanded M&A activity.

As depicted in the chart to the right, the number of U.S.-based HIT M&A transactions rose by almost 7% in 2011, while deal value increased 72%. The dramatic rise in value was partially due to the acquisition of Emdeon by private equity firms Blackstone Capital and Hellman & Friedman for nearly $3.5 billion. Emdeon offers payment cycle and revenue management solutions to thousands of providers and payers within the U.S. health care system.

Continued M&A activity is expected in this market as technology quickly evolves to provide better, faster access to patient records across a broader spectrum of care providers. Trends in the metricsM&A activityThe number of U.S.-based health care M&A transactions rose nearly 10% — from 1,141 transactions in 2010 to 1,248 in 2011 — which is not surprising given the improved economic outlook and credit markets. Deal value increased more significantly, rising almost 43% from $118 billion in 2010 to $170billionin2011;thisamountexceeded16%oftotalM&Avalue in the United States for the year. Taking a closer look at deals from an industry subsegment perspective, we see a sharp uptick in the number of health care facility transactions over the past two years.

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* Excludes two mega deals: Pfizer’s acquisition of Wyeth and Merck’s purchase of Schering-PloughSources: GTCF research; certain financial information provided by S&P Capital IQ

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Notabletransactionsannouncedin2011include the following: • ExpressScriptsHoldingCompany(Nasdaq:ESRX)

acquired Medco Health Solutions for $33 billion. This deal closed despite months of lobbying by pharmacy benefit managers who believed the merger would create a monopoly. The deal was ultimately approved because representatives from both sides of the deal convinced the FTC that the merger would create efficiencies, allowing the combined company to drive down consumer costs. This deal closed in April 2012.

• InApril2011,Johnson&Johnson(NYSE:JNJ)announceditsintenttoacquireSynthesInc.(SWX:SYST.VX), a medical device company, for approximately $20 billion. The combined company would have greater product development capabilities and a stronger global reach. Moreover,Johnson&Johnsonwouldgainasignificantshareofthetraumadevicemarket.ThedealclosedonJune14,2012.

Public company performanceThe Grant Thornton Corporate Finance LLC (GTCF) Health Care Index reflects data from health care participants that are broadly categorized as pharmaceuticals/biotechnologies; facilities; HIT; intermediaries (e.g., distributors, equipment and supply manufacturers, service providers); and health insurance companies. Reviewing the relative performance of these companies against a benchmark, such as the S&P 500, can provide insight into how the industry is perceived by well-informed investors and what is expected in terms of future performance.

The public market information indicates that all indices have generally increased since March 2009, with the HIT index growing at the strongest pace. The only index that has consistently underperformed the S&P 500 is the insurance sector. However, as shown at left, it has recently started to perform on par with (and even outperform) the broader market. Going forward, this sector will likely gain momentum. Corporate Research Group estimates steady profit growth of 8% for the insurance sector over the next year in its Outlook for Managed Care 2012 report. Managed care is an important driver of the overall health insurance market because a majority of people with private health insurance are covered by a preferred provider organization (PPO) or health maintenance organization (HMO) plan.

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U.S. target announced health care M&A activity by segment (Number of U.S. transactions)

Sources: GTCF research; certain financial information provided by S&P Capital IQ

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Grant Thornton Corporate Finance health care index

Sources: Public company filings; certain financial information provided by S&P Capital IQNote: The GTCF health care index reflects the average stock price for all companies in each category relative to 12/31/07.

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6 Health care M&A snapshot June 2012

As shown in the chart above, EBITDA multiples averaged 9.6xattheendof2011.OfthefivehealthcaresegmentsGTCFhas identified, HIT companies were trading at the highest multiple — almost 18x. ConclusionHealth care remains one of the bright spots in today’s economy, with strong performance across many segments. Rising costs continue to plague the industry, and while measures are being taken at the company, sector and federal levels to address this issue, cost pressure will remain problematic for at least the near term. Politics aside, health care companies that wish to stay in business must not only figure out how to mitigate the impact of rising costs, but also find ways to benefit from changes in the industry.

M&A can offer buyers and sellers a quick way to capture additional market share, secure a new technology or patent, or create economies of scale that set them apart from competitors. Furthermore, fundamental challenges in the industry suggest that significant changes must occur. Whether because of insurers seeking new business models that align incentives, pharmaceutical companies looking for additional financial backing as they chase the next big-money drug, hospitals balancing the desire to maintain their independence against the prospect (or reality) of budgetary distress, or HIT companies acquiring market share and technologies to meet evolving demand, M&A will continue to play a crucial role in this dynamic sector.

Average metrics

% of 52 week high Enterprise value ($mm) LTM EBITDA % LTM EV/EBITDAPharmaceuticals/biotechnologies 87.7% $49,203 32.1% 8.6xHealth care facilities/providers 62.3% $5,653 8.9% 6.2xHealth care information technology 73.2% $3,638 20.7% 17.9xHealth care intermediaries 69.6% $8,331 15.7% 9.4xHealth insurance companies 82.9% $10,784 6.9% 5.7xAverage 75.2% $15,522 16.8% 9.6x

As of 12/31/2011Sources: Public company filings; certain financial information provided by S&P Capital IQ

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Contact information

Erik EgererManager, Grant Thornton Corporate FinanceT 248.213.4227E erik.egerer@us.gt.com

Nisha RaghavaSenior Associate, Grant Thornton Corporate FinanceT 248.215.6029E nisha.raghava@us.gt.com