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Healthcare M&A Activity Dips

April 29, 2013

While sections of the overall economy are on a slight upswing, the recent frenzy of activity in healthcare mergers and acquisitions has cooled a bit, at least for now.

Healthcare merger and acquisition activity was down in both deal volume and deal value in the first quarter of 2013 compared to the last quarter of 2012, says a new report from research and publishing firm Irving Levin Associates.

M&A deal volume was down 33% versus the previous quarter, with 204 deals announced, according to The Health Care M&A Report. Volume was down 31% compared to the first quarter of 2012.

Deal value also dropped in the first quarter compared to the fourth quarter of 2012, down 39% to $14.6 billion. Compared to the $29.4 billion committed by buyers in the first quarter of 2012, deal value in the first quarter of 2013 dipped by about 50%.

"Every sector in healthcare saw a drop in M&A activity from the fourth quarter of 2012 to the first quarter of 2013 with the exception of behavioral health and home health hospice," says Stephen M. Monroe, a partner at Irving Levin.

Behavioral healthcare was the only bright spot in the report, posting a 133% gain in deal volume against the previous quarter. Home health hospice was flat over the fourth quarter of 2012.

Other sectors did not do as well. Compared to the fourth quarter of 2012, M&A deal volume was down

  • 86% for rehabilitation facilities;
  • 67% for managed care; 66% for biotechnology;
  • 37% for physician medical groups;
  • 32% for hospitals;
  • 31% for medical devices; 28% for long-term care;
  • 27% for eHealth;
  • 27% for laboratories, MRI, and dialysis

The pharmaceutical sector was down 16% in deal volume compared with the fourth quarter of 2012 and remained flat compared with the first quarter of 2012.

Pharma Deal Activity
"On the pharma side, while there were several large deals in the first quarter—three over $1 billion each—large is all relative as there are not the mega deals of the past. I think it is partly that the big pharmas are trying to figure out what their platform really should be for the future, and that they are interested more in targeted acquisitions rather than the $15 billion deal where the return comes from synergies and cost cutting. [Buyers'] shareholders aren't really interested in those reasons anymore," Monroe explained.

According to the report, there were 1,063 healthcare M&A transactions in 2012 (the most since 2007), representing a dollar value of $143.3 billion (the lowest since 2003). The report concludes that healthcare reform is impacting the industry's acquisition environment and causing buyers to be less willing to invest in billion-dollar deals.

Monroe believes the heightened caution level is warranted.

"Although there is a lot of talk about accountable care organizations… I am still not convinced how successful they will be. I know I am a bit of the contrarian, but I was around when capitation and HMOs were the rage in the late 1990s, and that failed spectacularly. If hospitals, doctors, and the post-acute sector are all aligned to deliver effective, high-quality, and coordinated care, I still haven't figured out who is going to make the money and how it will be divided up," he says.

Despite the slump in healthcare M&A activity in Q1:13, Monroe does not anticipate that it is the start of a downward trend.

"We don't think the M&A activity will stay down for the rest of the year. We expect it to be slowly picking up and then [to see] another active second half of the year, but most so in the fourth quarter… Fourth-quarter deal volumes usually tend to be high because there is always a push to get deals done before year end, whether for tax reasons, reporting reasons, or league table reasons for the investment bankers," he says.

Monroe also notes that M&A activity was down in many industries in the first quarter of 2013, not just in healthcare, possibly due to investor burnout from the high level of activity in the fourth quarter of 2012 and to concerns over sequestration and the federal deficit.

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