Healthcare, one would think, is among the sectors leading this year’s mergers and acquisitions boom. But early-stage M&A activity in the industry over the past few quarters has actually been relatively soft. Could this indicate that healthcare M&A is about to take ill? That would be most surprising, particularly now as worries abound over global economic growth, since healthcare is relatively immune from such cyclicality.
There’s been no lack of healthcare deals in the headlines. Every week, it seems, a major health insurer, provider, or pharma manufacturer is announcing a multi-billion dollar acquisition. But behind the headlines is data that paint a less than rosy picture.
On a year-over-year basis, early-stage global healthcare M&A activity, as measured by Intralinks’ monitoring of pending deals in due diligence, remained nominally flat through the first quarter of the year. Only this past quarter did we see a slight uptick in volume. And, the last six months compared to the same period last year are flat as well.
A closer analysis of the data helps explain the apparent dichotomy between the headlines and the numbers. First, early stage healthcare deal activity spiked around the globe in early 2014, creating a very tough comparison for Q1 of 2015. The comparison was especially challenging in North America where Q1 2014 due diligence M&A activity saw a dramatic uptick, eventually leading to over 2,600 announced deals in 2014, a strong showing for the sector.
Second, the dollar value of healthcare M&A typically ranks higher than the volume of deals. Some are blockbusters, such as the health insurance combinations,
This brings us to another point about healthcare. Segments of the industry have only so many players. Health insurance, for example, is a business with a high barrier to entry, meaning there are a limited number of major companies. As the big deals get done, there are fewer insurance companies without a dance partner. This is true in the hospital business as well, where administrators have sought to match up as they’ve been anticipating a shift in how they will be paid, from fee-for-service to population health management, in which they are compensated only a fixed amount to care for a given population. That means hospitals will be assuming financial risk for patient care, thus adding to their need for size and financial strength.
One other factor to consider, healthcare deals garner attention. Insurance combos grab the headlines; a pharma company paying up to buy a promising drug makes for hot copy; the impact of the controversial Affordable Care Act on the healthcare industry is news that reverberates far beyond the business pages. Many other industries, though, generate far less interest, partly because their products and services have little direct impact on our personal health. News headlines can leave a misimpression; it can seem that there are more deals in healthcare than other businesses, when that’s actually not the case.
The fact that there has been an easing in early stage healthcare M&A activity does not augur trouble for healthcare M&A. For much of Big Pharma, M&A is the new R&D. It is the quickest and often most cost-effective route to filling their drug pipelines. As small biotech companies continue to generate promising clinical trial results, we will see more deals between scientists seeking cash infusions, venture capitalists pleased to generate a good return on investment, and pharma executives in search of the next blockbuster to bring to market.
