The final month of the fourth quarter is typically a busy one for deal makers in all industries. Last year, some health care deal makers apparently got a rest. Deal volume in December 2016 was an anemic 119 transactions, compared with 131 deals in November and 148 in December 2015. The Services sectors accounted for 55% of the deals in December, which is on the low side. Consider that, in November, Services accounted for 69% of the month’s transactions, and even 70% of the total in December 2015.
Spending on those deals reached $15.4 billion, a relatively modest amount until it is compared with November’s $8.7 billion total (+78%) and December 2015’s $12.3 billion total (+26%). Suddenly, the end of 2016 feels almost robust. Here’s a look at how the healthcare M&A market ended the Year of Unexpected Elections.
SERVICES
Behavioral Health Care
Behavioral health care deals hit a rough patch, beginning in November, when a single deal was announced. There was a slight bounce-back in December, with three transactions.
The news that Universal Health Services (NYSE: UHS) acquired Cambian Adult Services Group in the United Kingdom for $479 million was overshadowed early in the month by an investigative piece on BuzzFeed that alleged bad behavior at some psychiatric hospitals in the United States. UHS stock dropped from $126 on December 6 to $101.55 on December 14, but had recovered to $111.54 in early January.
The UK target, formerly a division of Cambian Group plc, consists of 81 behavioral facilities with 1,193 beds. The facilities provide care to adults with mental health disorders, intellectual disabilities, autism, personality disorders and acquired brain conditions.
Following the acquisition of the Cambian Adult Group, UHS will have a total of 102 facilities with approximately 2,250 beds in the UK. The acquired division will be integrated into Cygnet Health Care Limited, a subsidiary of UHS.
Home Health & Hospice
Consolidation continued in the Home Health & Hospice sector. Epic Health Services, which announced four deals earlier in the year, became a target itself. Bain Capital Private Equity announced its acquisition of the pediatric home health company, albeit without a price. Webster Capital, Epic’s backer, hired Goldman Sachs & Co. back in April 2016 to shop Epic Health, which provides pediatric skilled nursing, therapy, developmental services and home medical solutions for medically fragile children, and also offers a range of adult home care services.
Hospitals
The eight hospital deals in December had a little bit of everything going on. The deal with the highest disclosed price was foreign-based, as NMC Health (LSE: MNC) in Abu Dhabi acquired the 137-bed Al Zahra Hospital from Gulf Medical Projects Company for more than $571 million. This deal follows last year’s $2.3 billion merger between NMC’s rival, Al Noor Hospital Group (LSE: AHN) with South Africa’s Mediclinic International (OTCQB: MCFFY).
Back in the States, Community Health Systems (NYSE: CYH) continues to divest unwanted hospitals in order to pay down debt. Last month it disposed of two hospitals in Washington State, the 214-bed Yakima Regional Medical & Cardiac Center in Yakima, and the 63-bed Toppenish Community Hospital in Toppenish. The price paid by not-for-profit, critical access hospital Sunnyside Community Hospital & Clinics was $45 million.
Hallmark Health System, the Boston-area not-for-profit system that spent much of 2015 waiting to join Partners HealthCare, until government pressure killed the deal, finally found a champion in Wellforce. That system was formed in 2014 as the parent organization to Tufts Medical Center in Boston and Lowell (MA) General Hospital. Hallmark joins as a third founding member of Wellforce.
Labs, MRI & Dialysis
Mergers and acquisitions in this sector have languished most of the year, and only two deals were announced in December. In one, Apax Partners LLP acquired the Switzerland-based Unilabs from Nordic Capital and Apax Partners France, for an undisclosed price. Despite its name, the target offers more than 2,500 diagnostic tests through its 112 laboratories and 43 imaging units.
The U.S.-based deal involved the divestiture of PerkinElmer’s (NYSE: PKE) medical imaging business, which supplies flat-panel x-ray detectors used in medical and dental x-ray imaging systems. Varian Medical Systems (NYSE: VAR) agreed to pay $276 million for the unit, which will become part of Varian Imaging Components division. Varian Medical plans to spin-off that division into an independent public company called Varex Imaging Corporation this month (January 2017).
Physician Medical Groups
The deals didn’t stop coming for physician practices, even as other sectors slowed down in December. Nine more transactions were announced, although none disclosed a price.
Envision Healthcare Corporation (NYSE: EVHC), which merged with AmSurg Corp. (NASDAQ: AMSG) last year, made two more acquisitions and they seem squarely targeted at MEDNAX’ (NYSE: MD) specialties, neonatology and anesthesiology. The first was Alabama Neonatal Medicine, P.C., a four-physician practice in the Montgomery, Alabama area, and then Desert Mountain Consultants in Anesthesia, a 14-physician practice in Phoenix, Arizona. MEDNAX didn’t announce any deals in December, but it has kept busy with 14 of its own announced acquisitions in 2016.
Rehabilitation
Like the Behavioral Health sector, the Rehabilitation sector had a fairly busy year in M&A, until December, that is. Just three deals were announced last month, and the only one to disclose a price was from U.S. Physical Therapy, Inc. (NYSE: USPH). As usual, the company declined to identify its target, except to say it was a practice with 12 clinics that saw approximately 90,000 patient visits per year. The $11.5 million price tag was for a 60% interest in the business.
Other Services
A rather unusual deal, even for a sector that is something of a “miscellaneous” category, was the nearly $830 million acquisition of China Cord Blood Corporation (NYSE: CO) by Beijing-based investment firm Yingpeng Juikang Fund. Golden Meditech Holdings sold the subsidiary, CCBC, the first and largest umbilical cord blood banking operator in China, for 8.4x revenue and 23.3x EBITDA.
As part of the transaction, Golden Meditech agreed to give three years’ performance guarantee for CCBC to Yingpeng. In case of an earnings shortfall, Golden Meditech agreed to compensate Yingpeng in cash in an amount to be calculated in accordance with the formula set forth in the profit compensation agreement.
TECHNOLOGY
Biotechnology
Twenty deals in December doesn’t seem like a lot, but when compared with the eight deals announced in December 2015, they represent a 150% increase year-over-year. The biotech industry is busy with acquisitions, collaborations and mainly, licensing deals that help even smaller and mid-sized drug companies to compete for promising drug candidates. Eleven of the 20 deals were for licenses to specific compounds, antibodies or drug candidates.
The month’s largest deal, based on disclosed prices, was the $1.85 billion sale of Hologic’s (NASDAQ: HOLX) blood screening business to the Spanish biopharmaceutical company, Grifols, S.A. (NASDAQ: GRFS). The two companies have been commercial partners in the NAT blood-screening business since 1998, through their predecessor companies. This transaction is part of Grifols’ consolidation and growth strategy, and strengthens its position in transfusion medicine.
eHealth
The eHealth sector picked up the pace in December, logging 13 transactions compared with just three in November and nine the year before. With or without the ACA, it’s obvious that data analytics, revenue cycle management and electronic medical records are critical to success in the healthcare industry. (Cybersecurity is, as well, but it isn’t considered a healthcare-only solution.) The dollars spent in this sector last month were small—just $44 million disclosed on five deals—but the list of acquirers shows the breadth of interest.
For example, Indian software company 8K Miles Software Services (NSE: 8K MILES) paid $10.2 million for Georgetown, Connecticut-based Cornerstone Advisors, a healthcare information technology company focused on population health and ACO enablement, integration of physicians and post-acute care and electronic medical record selection and implementation. Meanwhile, TPG Capital L.P. acquired medical Saas-provider Mediware Information Systems from Thoma Bravo for an undisclosed price.
Medical Devices
The Medical Devices sector ended the year with a billion-dollar blow-out, logging two mega-deals out of the seven announced transactions. The largest was Allergan plc’s (NYSE: AGN) $2.9 billion takeover of Acelity L.P.’s LifeCell business unit. The unit is a regenerative medicine and reconstructive surgery company known for its applications in plastic and reconstructive surgeries and abdominal wall procedures. It will be combined with Allergan’s portfolio of aesthetics and breast implants and tissue expanders.
Pharmaceuticals
Deal volume in the Pharma sector has slowed this year, as the attention has gone to biotech companies. Fourteen deals in the month of December doesn’t seem like a lot, but the $6.3 billion in spending on those deals isn’t small.
The largest December deal was for $5.5 billion, made by the Swiss Lonza Group Ltd. (SIX: LONN), a specialty pharmaceutical maker, for Capsugel S.A., which designs, develops and manufactures a wide range of dosage forms. KKR & Co. (NYSE: KKR), the seller, acquired it for $2.4 billion in 2011 from Pfizer (NYSE: PFE). The price represents 15.1x adjusted EBITDA, this time around. No word on multiples from back in the day. □
