It’s official. The first quarter of 2016 was well off the previous hot-and-heavy pace for health care mergers and acquisitions, which began in 2014. Preliminary data shows 348 transactions were announced in Q1:16, down 7% compared with the fourth quarter of 2015 (375 deals) and down 8% from the same quarter a year ago (377 deals).
Deal volume is the real measure, because deal value from month-to-month or quarter-to-quarter is so random. Take the fourth quarter of 2015, for example. Deal volume seemed on pace, but the largest deal in health care M&A history was announced in November, when Pfizer (NYSE: PFE) agreed to pay $160 billion to acquire Allergan plc (NYSE: AGN) for $160 billion, including debt. On top of an already outsized year for healthcare deal making (record 1,504 deals), the dollar value surged from $397 billion to $567 billion. Too good to be believed? Yes.
In early April, the federal government issued hundreds of pages of new regulations that targeted the tax inversion strategy that Pfizer and other pharmaceutical companies sought to employ to acquire a foreign company and thus pay lower taxes by moving their headquarters overseas. On April 5, the day after the new regulations were issued, Pfizer and Allergan agreed their merger wasn’t worth the fight they’d have to raise to keep it going, and so Pfizer called it quits.
The impact was immediate on revised fourth-quarter M&A statistics. Just as we prepared to dismiss the over-sized Q4:15 spending of $202 billion as a once-in-a-century quarter, the total fell to just $42.5 billion, once the Pfizer/Allergan deal is removed. Suddenly, 2015 seemed a lot less robust. Total spending, now standing at $397 billion, is still 2% higher than 2014’s annual total. Deal volume, at 1,504 deals, is still a record. But records are now targets, and made to be broken, it seems.
Here is the story now, comparing the spending in the first quarter of 2016 to the previous quarter (which should carry an asterisk forever), and to the year-ago first quarter, where true comparisons can be drawn.
Dollar volume was strong for the first quarter of 2016, at $79.4 billion. That total represents an 87% increase over the re-stated total of $42.5 billion in the fourth quarter of 2015. (That’s quite anemic for a fourth quarter in recent years and does not surpass the same of any year since 2012, when spending slumped to $24.5 billion.)
Even so, this year’s first quarter is quite anemic in its own right, when compared with Q1:15’s total of $106.8 billion. It’s fairly obvious that 2016 will not be a reprise of 2015’s record-breaking year.
The dynamics taking shape in 2016 are a combination of new and old. The new forces shaping healthcare investment are focused on the continuing push to reimburse hospitals, physicians and post-acute care providers on outcomes, or value. The result is a renewed interest in digital health, from companies that bridge the gap between acute- and post-acute transitions to those that monitor patients who are recuperating at home. Others are building revenue cycle management systems to keep track of patients, and how the bundled payments will be parcelled out.
How that is shaking out, and being standardized, is the subject of a webinar we will present on May 19, “The Ins and Outs of Post-Acute Care Reimbursement.” Visit our website and click the Webinars tab to find out how to register.
The old forces form the underlying current in this health care market. Joining larger networks to gain scale and, supposedly, cost efficiencies, continues to
drive sectors such as hospitals and physician medical groups. The need for scale is transforming previously fragmented sectors, such as behavioral health care, home health and hospice, ambulatory surgery centers, outpatient clinics and adult day-care centers.
Strategics aren’t the only ones shaping these market segments. Private equity firms such as Pamplona Capital Management are building eHealth platform. Pamplona paid $2.7 billion for MedAssets in November 2015, just to keep its revenue cycle management assets and sell the clinical resource management division to Vizient, Inc. (formerly the VHA-UHC Alliance) for an undisclosed amount. We could mention Madison Dearborn Partners’ acquisition of Walgreen’s infusion services division in January 2015, for an undisclosed but obviously high price.
The targets are still out there. It’s the price that counts.□
