The healthcare industry is facing many challenges. An aging population, increased bacterial resistance to antibiotics, new technologies, and adapting to the Affordable Healthcare Act (ACA) are all raising new issues for healthcare leaders to deal with. The US government last year projected that almost $1 in every $5 spent in the country by 2024 will be on healthcare, an average growth of 5.8% per year.
It is in this environment that we are seeing a huge increase in the amount of M&A activity in healthcare. According to 2015 data from Dealogic, the total announced deal value of M&A in the US healthcare sector last year was $448.2bn, up from $326.5bn in 2014. Last year also saw a new record high for M&A activity globally, with nearly $5tn in deals cut.
The signs so far this year are that M&A activity in healthcare is only going to increase. Financial Times’ analysis found that deal activity in January more than doubled to $56bn compared with a year ago - up from $20.5bn. We have already seen some massive deals. Shire and Baxalta announced a $32 billion merger, US healthcare giant Abbott Laboratories reached a deal to acquire Alere, a diagnostic group, for $5.8bn, and US medical device group Stryker spent $2.8bn on Sage, which makes products to prevent infections in hospitals.
The increase in M&A activity is the result of several factors, in the face of which M&A has become an avenue for growing revenue and market share growth. These factors include the increasing cost of doing business, as well as favorable credit markets and clarity surrounding the implementation of the ACA. ACA has changed the way that healthcare providers, such as hospitals, are reimbursed by insurers. That’s led to more consolidation among providers, who believe that the greater scale it brings will increase their bargaining power.
One of the key issues driving M&A in pharma is the loss of patent exclusivity, and companies are increasingly doing deals with a view to securing strategic assets. Pharmaceutical companies could lose around $44bn in sales due to patent expirations this year, according to an analysis by KPMG and investors have been supportive of deals in spite of some of the eye watering valuations because of the high returns available.
The question is how to prepare for M&A. For providers, there are a number of ways to approach it that largely depend on their size. For smaller providers - such as individual practices and cottage hospitals - it is important to focus on identifying potential acquirers that fit best with their geography, mission and continuum of care. They should also look to prepare for the financial and operational diligence that will help secure highest purchase price and optimal transaction structure. On the other hand, larger providers must understand that the health care sector is over-capitalized, and assets will soon leave the sector, so they should only focus on the very best acquisition targets.
Does all this mean that healthcare companies should be rushing to prepare for acquisitions? Not necessarily. There has been significant political opposition to this increased consolidation in healthcare, with some seeing it as destroying competition and arguing that it will allow the new companies to raise prices while eliminating choices for senior citizens on Medicaid programs. Hillary Clinton, for one, issued a statement recently which said: ‘As we see more consolidation in health care, among both providers and insurers, I’m worried that the balance of power is moving too far away from consumers.’