July 2018 Issue
Healthcare mergers and acquisitions (M&A) enjoyed a strong start to the year after a record-breaking 2017, up 13 percent compared to the previous year, according to KauffmanHall. The second half of 2018 augurs well thanks to climbing deal values and numerous big-name deals being completed in the space in H1. According to Bain, total deal value in the healthcare space rose 27 percent to $332bn in 2017, while deal count increased 16 percent, and the firm expects strong activity through the remainder of 2018.
“The industry is at a major inflection point, and as a result, we are seeing category leaders consolidate and the silos between sectors starting to blur,” says Dale Stafford, partner and leader of the Americas M&A practice at Bain. “While total corporate deal value in healthcare has not quite equalled its 2015 peak, average annual activity over the past four years has been strong, nearly twice the level of the previous four years. This activity is profoundly reshaping the industry.”
Deal drivers
The first quarter of 2018 saw strong dealmaking activity, making it the busiest start to the year in over a decade. Takeda Pharmaceutical’s proposed $45bn acquisition of Shire Plc will take activity above $200bn in the first half of 2018, and it is just one of the mega mergers announced in the first half of the year. GlaxoSmithKline announced a $13bn deal to buy Novartis AG’s stake in their consumer-health joint venture, and Cigna Corp agreed to acquire Express Scripts Holding Company for $54bn.
According to the 2018 HealthLeaders Media ‘Mergers, Acquisitions, and Partnerships’ survey, 71 percent of respondents expected their M&A activity to increase within the next three years, with areas such as dentistry, home care, pet care and revenue cycle management set to drive deals. This increased activity will be fuelled by the abundance of cheap debt which is still available to fund deals. A number of other factors are likely to contribute. The global population is growing and aging and there has been an increase in the prevalence of chronic diseases in recent years. Additionally, the pharmaceutical and medical device sector is mushrooming and the care delivery system, particularly in the US, is poised for disruption.
“When healthcare organisations merge, it is vital that companies have a clear plan to minimise disruption and prioritise patient wellbeing.”
Growth areas such as biotechnology are receiving significant investment. According to AngelMD, the biotech industry attracted $13.8bn in 2017, up from $6.3bn in 2016.
Hospital and health system mergers have become common. According to the American Hospital Association, the number of US hospitals that are part of a multistate system rose by nearly 20 percent between 2006 and 2016. Larger systems and regional groups are not only able to attract better medical practitioners, they can also negotiate better rates and terms with insurers. In December 2017, Ascension and Providence St. Joseph Health began negotiations around a potential merger, though the deal fell through in Q1. A number of other hospitals are still considering mergers, partly to cut costs and reduce unnecessary spending. Dignity Health and Catholic Health Initiatives, for example, are in talks over a potential merger. Jefferson and Einstein Health have also signed a non-binding letter of intent to merge.
While the December 2017 US tax reform is no guaranteed deal driver, since firms may reinvest the money saved from paying less corporation tax in other ways, or not spend it at all, the 15.5 percent one-off repatriation tax may encourage healthcare firms in the US to pursue acquisitions.
Competition and safety concerns
There are concerns, however, particularly in the US, that mergers between healthcare facilities may be detrimental to patients, leading to higher healthcare costs and insurance premiums, and reduced competition.
Industry consolidation also creates serious safety issues for patients, according to a study from Harvard. By allowing dealmaking to be driven by business considerations, rather than patient care, issues such as clinical care, safety and patient experience are often overlooked. When healthcare organisations merge, it is vital that companies have a clear plan to minimise disruption and prioritise patient wellbeing. Cultural issues must be factored into any merger discussions, as they would be in any other industry, in order to minimise disruption to a facility’s ability to care for its patients.
Looking ahead, dealmaking in the industry should remain popular. After a period of uncertainty, in the US, the tax landscape is improving and action on drug pricing seems increasingly unlikely. Among pharmaceutical companies, developing a robust product pipeline and delivering growth in an increasingly competitive market will continue to drive dealmaking.
Though there are some potential stumbling blocks on the horizon, particularly with respect to merger controls and foreign direct investment in the industry, as well as potential disruption if Amazon enters the industry for example, activity will likely remain strong throughout the second half of 2018. Amazon has already announced that it will enter a joint venture with JPMorgan and Berkshire Hathaway to provide cheap healthcare to 1 million employees, and this scheme could extend to the wider public in the future. The potential arrival of Amazon into the healthcare space could trigger a wave of consolidation.
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Richard Summerfield