Read our re­port on first-quar­ter merger and ac­qui­si­tion ac­tiv­ity

Firms bro­ker fewer first-quar­ter deals than ex­pected

Modern Healthcare - - THE WEEK IN HEALTHCARE - Beth Kutscher

Go­ing into the New Year, there was noth­ing but op­ti­mism that health­care com­pa­nies would con­tinue the buy­ing spree that col­ored 2012. But merg­ers and ac­qui­si­tions in 2013 opened with a whim­per. Both deal vol­ume and deal value came in be­low ex­pec­ta­tions, ac­cord­ing to Health­care M&A Watch, Mod­ern Health­care In­sights’ quar­terly re­port on health­care merger and ac­qui­si­tion ac­tiv­ity.

Across all sec­tors, health­care com­pa­nies forged fewer deals in the first quar­ter of the year than they did in the pre­vi­ous quar­ter and in the first quar­ter of 2012.

In to­tal, there were 247 an­nounced deals in­volv­ing a health­care com­pany, down 31% from the fourth quar­ter, when there were 358 deals, and 38.4% lower than in the first quar­ter of 2012, when there were 401.

Pub­licly dis­closed deal val­ues were also half of what they were in the fourth quar­ter—$ 11 bil­lion com­pared with $22 bil­lion. They were also about a third lower than the same pe­riod last year, when to­tal dis­closed deal value was $16.1 bil­lion.

There were also half as many block­buster deals, with only two trans­ac­tions above the $1 bil­lion mark, com­pared with four in the fourth quar­ter. How­ever, that num­ber was on par with the first quar­ter of 2012.

The two largest deals in the quar­ter were Car­di­nal Health’s $1.94 bil­lion bid for med­i­cal sup­ply dis­trib­u­tor As­sur­aMed, and My­lan’s $1.6 bil­lion pur­chase of Agila Spe­cial­ties Pri­vate, a generic in­jecta­bles com­pany, from Strides Acro­lab.

With 2012 in the books—and the fate of the Pa­tient Pro­tec­tion and Af­ford­able Care Act all but as­sured—bankers and an­a­lysts ex­pected con­sol­i­da­tion to heat up across the health­care in­dus­try. Com­pa­nies were sit­ting on large cash bal­ances, and the cap­i­tal mar­kets were wide open to would-be ac­quir­ers. But the rhetoric did not match the re­al­ity. In the provider sec­tor, com­pa­nies signed only 54 takeover agree­ments, a 25% de­crease from the 72 inked in the last three months of 2012, and a 33.3% drop from the 81 deals in the first quar­ter of last year, ac­cord­ing to the re­port. To­tal dis­closed deal value for the sec­tor came in at just $938.5 mil­lion, a de­crease from $1.2 bil­lion in the fourth quar­ter and $1.8 bil­lion in the first quar­ter of 2012.

Most of the in­ter­est sur­rounded post-acute-care providers, such as nurs­ing homes, se­nior-liv­ing fa­cil­i­ties and re­ha­bil­i­ta­tion cen­ters, which were at the cen­ter of 17 deals, or 31.5%. Com­pa­nies in the post-acute sub­sec­tor have re­lied on con­sol­i­da­tion to over­come mount­ing chal­lenges such as re­im­burse­ment cuts and de­clines in re­cer­ti­fi­ca­tions, or ap­provals for con­tin­u­ing ser­vices.

The two largest deals in the provider space were also in this sub­sec­tor and in­cluded TPG Cap­i­tal’s $278 mil­lion bid for As­sisted Liv­ing Con­cepts, and Brook­dale Se­nior Liv­ing’s $162.1 mil­lion roll-up of 12 se­nior liv­ing com­mu­ni­ties.

Of the seven pri­vate eq­uity deals in the sec­tor, the re­port found that four in­volved a be­hav­ioral-health firm, even as there were only seven be­hav­ioral-health deals over­all.

The fast-grow­ing be­hav­ioral-health mar­ket has been get­ting an­other look from fi­nan­cial in­vestors as more in­sur­ance dollars flow into the sec­tor, thanks to health­care re­form and the Men­tal Health Par­ity and Ad­dic­tion Act of 2008.

Pri­vate eq­uity firms—which signed a to­tal of 79 trans­ac­tions with a to­tal dis­closed deal value of $1.2 bil­lion—were ac­tive bid­ders in the quar­ter, but pri­mar­ily took an in­ter­est in health­care ven­dors, in­vest­ing in 49 com­pa­nies, 23 of which (or 46.9%) were med­i­calde­vice mak­ers.

Cross-bor­der deals ac­counted for 16.6% of trans­ac­tions, with 16 deals in­volv­ing a for­eign buyer and 25 in which a U.S. firm went scout­ing abroad.

On first-quar­ter earn­ings calls, med­i­cal-de­vice firms and their phar­ma­ceu­ti­cal and biotech­nol­ogy coun­ter­parts ex­pressed in­ter­est in ex­pand­ing glob­ally, par­tic­u­larly in emerg­ing mar­kets. And a to­tal of 16.7% of med­i­cal-de­vice deals and 13.6% of pharma and biotech deals in­volved an over­seas tar­get.

The phar­ma­ceu­ti­cal and biotech­nol­ogy sec­tor was also the only one to show any re­bound in deal value, at least quar­ter-over-quar­ter. Its $4.9 bil­lion in dis­closed deal value was 14% higher than in the fourth quar­ter, though still 21% be­low what it was dur­ing the same pe­riod the pre­vi­ous year.

Ex­ec­u­tives on earn­ings calls at­tested to a con­tin­ued im­pact of patent ex­pi­ra­tions on key prod­ucts as well as longer waits for reg­u­la­tory ap­proval at the Food and Drug Ad­min­is­tra­tion. They also said they are pur­su­ing smaller, “bolt-on” deals that fit into spe­cific ther­a­peu­tic ar­eas and are be­ing choosier about what they’ll buy.

Reg­u­la­tory un­cer­tainty might have also tem­pered deal vol­ume among pay­ers, which saw only eight trans­ac­tions, a 46.7% quar­terly de­crease and 26.3% drop year-over-year.

De­spite claims that pay­ers have been look­ing to di­ver­sify into other ar­eas, such as the provider space, all eight deals in­volved in­sur­ance com­pa­nies ex­pand­ing their core ser­vices.

In ad­di­tion, pay­ers con­tin­ued the pat­tern set last year of fo­cus­ing on buys that ex­pand their Med­i­caid man­aged-care and Medi­care Ad­van­tage of­fer­ings.

How­ever, the re­port sug­gests that the small num­ber of deals might have re­flected un­cer­tainty around Medi­care Ad­van­tage rates, which the CMS didn’t clar­ify un­til the sec­ond quar­ter.

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