After a record-setting year of mergers and acquisitions in the healthcare sector for 2014, a recent survey by U.S. audit, tax and advisory firm KPMG LLP indicates 2015 will offer more of the same.
A number of considerations ranging from cash-rich balance sheets to changing business models driven by the Affordable Care Act to easier access to capital are expected to fuel the continued feeding frenzy for those looking to enlarge their corporate footprint. Conversely, for those facing increasingly tight margins and regulatory oversight, the timing could be right to take the money and run.
“We are seeing a convergence of factors facing providers, health plans, and drug and device makers that are forcing them to make tough decisions about strategy,” noted Bill Baker, the national partner in charge of transaction services for KPMG’s Healthcare & Life Sciences Practice. He added those hard decisions sometimes include selling their business or practice.
Texas-based Baker, continued, “Technology, regulation, consumerism and pushback from employers and government payers are reshaping all facets of healthcare, forcing companies to review all of their options. The capital markets – low interest rates and strong valuations – are creating favorable conditions for those considering selling or divesting assets.”
The Year That Was
The Associated Press recently reported 2014 was one of the most active years for healthcare M&A activity in the last decade. KPMG noted that through the first three quarters of 2014, deal value across all industry sectors reached nearly $1 trillion, returning the United States to pre-recession levels.
Irving Levin Associates, a leading healthcare market intelligence firm based in Connecticut, seconded the sentiment with data showing similar transaction increases specific to the healthcare industry. In nine of 13 healthcare industry sectors, there were an increased number of deals for 2014 in comparison to 2013. Through Dec. 19, 2014, Levin’s The Health Care M&A Information Source had captured 1,208 deals across healthcare, which was an increase of 17 percent over 2013. Spending also was up significantly for deals in 2014 v. 2013 at $386 billion compared to $163 billion.
Leading the way in transactions was eHealth (up 65 percent in 2014) and biotechnology (up 50 percent). Long-term care, managed care, pharmaceuticals, rehabilitation and other services also had double digit increases in deal activity for 2014 over 2013.
Behavioral health and medical devices had more modest gains at 6 percent and 4 percent, respectively. However, transactions are anticipated to be strong in the coming year. Nashville-based Acadia Healthcare led the way in the behavioral health market with a fourth quarter announcement the company would purchase CRC Health Group out of Cupertino, Calif., which has more than 140 programs treating 44,000 patients daily. The transaction, estimated to be valued at nearly $1.2 billion, is expected to close in the first quarter of 2015.
2015 M&A Outlook Survey
Looking ahead, KPMG, in collaboration with SourceMedia’s Research Practice Group (publisher of Mergers & Acquisitions), surveyed 738 M&A professionals in the United States last fall about anticipated activity across a broad spectrum of industries. Survey participants work in senior management at companies advising an array of industries including healthcare, energy, financial services, technology, manufacturing, and consumer products.
Of those surveyed, a full 82 percent said they were planning at least one acquisition in 2015 and 10 percent said they expected to do 11 or more deals this coming year. Perhaps not surprisingly, deals touching the healthcare industry, which is in the midst of transformative change, were predicted to lead the way with 84 percent of the experts saying they expected heavy healthcare activity.
Almost half of respondents (47 percent) expect technology companies, including those tied to the healthcare industry, to be the most active individual industry sector for mergers and acquisitions. Coming in second, nearly one-third of the professionals anticipate pharmaceuticals and biotechnology to be the most active M&A sector in 2015. Expiring patents for a number of leading drugs plus the need to hone product portfolios to build ‘franchises in key treatment categories’ are two factors behind the anticipated jump in activity for the pharma/biotech industry.
Additionally, 27 percent of the experts think healthcare providers are ripe for consolidation and cited forces tied to the ACA as being the primary driver of such moves. However, regulatory factors are expected to play an increasingly prominent role in decision-making on the front end considering the Federal Trade Commission’s scrutiny of several large deals last year.
Among those being surveyed, some due diligence issues were seen as a bigger factor within the healthcare industry than in other sectors. In addition to how a merger or acquisition might impact the competitive landscape, healthcare providers also are perceived as being more concerned about cultural shifts when joining forces. The experts cited the cultural assessment as being a larger factor for healthcare companies in comparison to all industries (32 percent v. 28 percent).
“Mergers and acquisitions are never easy for everyone involved,” Baker pointed out. He added that negotiating a favorable and mutually acceptable transaction is just the first step. “Managing the various stakeholders of ownership, employees, customers and vendors during an integration process can be daunting … and, if not executed properly, can destroy the very benefits the transaction was modeled on generating,” Baker said.
Another due diligence issue expected to factor prominently in healthcare transactions is volatility of future revenue streams, which was cited as a key issue among respondents for healthcare companies at a rate of 58 percent as opposed to ‘all industries’ at 51 percent. Interestingly, ‘quality of earnings,’ while still a key due diligence factor for the healthcare sector, trailed industry averages at 29 percent for healthcare companies compared to an average of 42 percent for all industries.