Healthcare M&As: Volume Up; Value Down

The $2.6 billion acquisition of Boston Biomedical by Dainippon Sunitomo Pharmaceutical and the $2.5 billion acquisition of Inhibitex by Bristol-Myers Squibb were the largest mergers and acquisitions in the healthcare industry during the first quarter of 2012.

Despite those blockbuster deals, the dollar value of M&A activity in the first quarter of this year dropped by 47% to $28.9 billion compared to first quarter 2011 activity. However, the total number of deals increased by 9% to 274, according to Norwalk, CT-based Irving Levin Associates Inc.

The volume increase is good news because it demonstrates that strategic and financial buyers are in the market and willing to invest capital, explains Sanford Steever, editor of The Health Care M&A Report. He notes, however, that 2012 is an election year and that may slow activity.

The technology sector, including pharma and biotechs, accounted for 44% of the deals (121) and 70% of the dollar value ($20.3 billion) for the current first quarter. A dearth of blockbuster deals saw the dollar value of the services sector, which includes long term care and hospitals, fall by 63% to $8.5 billion.

Biotechnology ($10.5 billion), pharmaceuticals ($6 billion), medical devices ($3.2 billion), and long-term care ($1.7 billion) were the leading market segments in terms of dollar value. Biotechnology and pharmaceuticals captured 19% of the deal volume and 57% of the dollar value of first quarter M&As.

"The distinction between biotech and pharma is blurring," Steever told HealthLeaders Media. He says biotechs are looking for money to develop their products so they purchase mature pharma companies to tap into their revenue streams. In turn, pharma companies, faced with patent expirations on some of their best earners, are interested in the products being developed by biotechs.

Steever says medical devices continue to be an important part of the M&A market despite a 19% decrease in deal volume and a whopping 73% drop in dollar value. "It’s taking a breather but it’s still a very hot market for M&A."

Laboratories, MRIs, and dialysis ($395 million), hospitals ($129 million), and behavioral health ($94 million) were the bottom market segments in terms of dollar value. The 62% drop in the number of deals for labs, MRIs and dialysis that may reflect declining reimbursements. Dialysis clinics in particular are at the mercy of falling Medicaid reimbursements.

While the number of hospital mergers and acquisitions in the first quarter of 2012 kept pace with activity during the comparable period in 2011, a lack of big portfolio deals contributed to a 93% drop in their value to $129 million.

Healthcare reform continues to drive some M&A activity, especially for hospitals, physicians groups and managed care. Steever says the acquisition of critical access hospitals is on the rise. The small hospitals, usually around 25-beds, want to join larger systems to reduce their costs and improve their negotiating position with vendors and health plans.

He cautioned that increased Federal Trade Commission interest could make hospitals more wary of M&As. Hospitals continue to acquire physicians groups as part of their accountable care organization strategies.

Steever says managed care is looking to consolidate and diversify. The number of managed care deals increased from one in first quarter 2011 to six in first quarter 2012. The latest round of deals was valued at $488 million. Health plans are looking at Medicare Advantage and Medicaid companies. He adds that "insurers are more concerned about what the Supreme Court may do" so they are also buying into other sectors such as pharmacy benefit managers and e-health businesses to diversify revenues.

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M&A: Hospitals Take Control