Healthcare M&A Activity Hits Record Pace

Mergers and acquisitions in the healthcare industry surged in the second quarter of 2011, setting a pace to break all previous records in the sector as measured by dollars, according to Norwalk, CT-based Irving Levin Associates, Inc.

In the second quarter of 2011, a total of $73.5 billion was spent to finance 243 mergers and acquisitions in the healthcare industry, up 44% from the $51.1 billion spent in the first quarter of 2011, and up 61% from the $45.7 billion spent in the second quarter of 2010.

Medical devices ($33.1 billion), pharmaceuticals ($27.4 billion), biotechnology ($4.9 billion), and E-health ($639 million) accounted for $66.1 billion of the mergers and acquisitions in the second quarter.

Sanford Steever, editor of The Health Care M&A Report told HealthLeaders Media in an interview that the pace of mergers and acquisitions suggests that healthcare still remains a fragmented industry. 

"In pharma and biotech in particular, there are a lot of drugs facing patent cliffs right now -- 2012 is going to be a horrendous year for some of the big drug companies," Steever says. "If they can't develop new blockbusters internally, they are going to try to buy them by acquiring biotechs. At the other end of the spectrum some have glommed on to the 'if-you-can't-beat-them-join-them' bandwagon and they're buying generic drug companies."

Steever says drug companies feel the need to diversify. "With medical devices, for them there is definitely a spurt in technological innovation.

Companies, particularly in orthopedics, are trying to get complementary technologies and hopefully get cheaper so the products can be cheaper because Medicare often contracts and says we are only going to pay so much for an implant and no more," he says.

The remaining $7.3 billion was accounted to mergers and acquisitions of providers, including hospitals ($3.5 billion), managed care ($1.6 billion, long-term care ($985 million), and physician practices ($416 million). Steever attributes a lot of the activity directly to healthcare reform.

"It's accelerating as hospitals are trying to build up their accountable care organizations."

"So," he said, "I am seeing far more deals involving hospitals acquiring physician groups to meet the needs of the ACOs. Hospitals definitely want to beef up their local and perhaps regional provider networks. They see strength in numbers and you can get efficiencies and economies of scale."

Managed care companies are also anticipating the effect of healthcare reform and attempting to diversify, Steever says. "That is one area that has been thrown into confusion by the implications of healthcare reform," he explained. "You are getting a couple of deals where managed care companies buy other managed care companies. I am seeing more instances of managed care companies diversifying their risk by buying into other sectors. Some are in sectors of technology like E-health, and others are in areas like retail outpatient workers' comp clinics. They're looking to buy services that don't rely necessarily on a managed care model."

Steever says the only thing that could slow down the pace of the mergers and acquisitions is if the federal government defaults. "That is driving people nuts on many fronts," he says. "We should have this settled in the next week or so, but stuff like that is exactly what tends to slow up activity. People aren't sure what their revenues are going to be."

It was the same scenario in 2010 as Congress wrangled with the healthcare reform bill. "The acquisition activity was impossible to predict. It was very slow," Steever says. "Once healthcare reform passed it really picked up. That is because people finally figured that we know we have what our revenues are going to look like. That means we can place a valuation on companies that want to buy or sell."