Twice a year, Meridian Capital publishes its Healthcare M&A Snapshot, which focuses on key trends in middle market healthcare M&A. In addition to covering general healthcare industry trends, the Summer 2016 Snapshot provides a more in-depth analysis of the medical device and healthcare analytics segments.
As we progress through 2016, the economy continues to drive an attractive landscape for healthcare companies. Momentum from a record-breaking 2015 is expected to endure the otherwise hesitant penumbra cast by an particularly unconventional election year. Favorable market conditions have driven an upswing in M&A activity with both private equity and strategic buyers paying record multiples for middle market acquisitions. Buyers are seeking quality targets with adaptable technologies and/or capabilities, specific geographic/market reach, and strong synergistic opportunities. Given the persistence of favorable valuations in M&A markets, we believe 2016 is an opportune time for shareholders to review growth, financing and/or ownership transition objectives.
Current Industry Pulse
The healthcare M&A market continues to be an attractive arena for industry participants as they think about the future of their businesses and consider growth or consolidation opportunities. Two subsectors have been highlighted in this snapshot, illustrating case studies of recent transactions and discussion around how these sectors are dealing with an evolving healthcare landscape.
– Consolidation toward larger, bigger participants has driven a flurry of M&A activity.
– Political sensitivities are playing a large role in how medical device companies are regulated and taxed.
– Companies have turned to M&A to develop foundational capabilities for analyzing healthcare data.
– Healthcare analytics is poised to unlock innovation, research, and the use of artificial intelligence.
Looking Toward 2017
Executives and key industry participants continue to express appetite for M&A in 2016. In an annual survey performed by KPMG, 91% of respondents said they expect to participate in at least one acquisition this year and 53% said they expect to do more than four. The majority of respondents expect pharmaceuticals, biotechnology, and healthcare providers to be some of the most active sectors citing adherence to the Affordable Care Act as a main motivator.
Legislation and policy disquietude will receive a particularly inflated level of attention through the end of 2016 as the U.S. prepares for changes to the Presidential administration. In recent months, many of the ‘mega merger’ announcements of 2015 have experienced backlash by the federal government. In July, the DOJ filed lawsuits trying to block Anthem’s $54 billion acquisition of Cigna as well as Aetna’s plan to purchase Humana for $37 billon on anti-trust concerns. Earlier in the year, Pfizer walked away from their $150 billion merger with Allergan due to current administration officials proposing changes to foreign tax advantages. Despite this regulatory complexity and political uncertainty, the first part of 2016 has yielded attractive dynamics for healthcare M&A. Notable transactions include Shire’s acquisition of Baxalta, Abbott’s bid for both St. Jude Medical and Alere, and Stryker’s purchase of Sage Products. Recent developments in regards to healthcare payments have also triggered transactions such as McKesson’s acquisition of value-based payment vendor, HealthQX. It is expected that this payment-focused activity will continue as we move toward year end and enter 2017.
Medical Device Industry Spotlight
Medical Device M&A and Industry Trends
Consolidation, scale, and market share have been three common sound bites within recent activity in the medical device industry. Announcements such as Abbot’s acquisition of St. Jude Medical and Stryker’s purchase of Sage Products, are representations of the sector’s accession to customer pricing pressures and the idea that fewer, larger constituents are better equipped to navigate the changing industry. Favorable relationships with increasingly large hospital groups are becoming more and more competitive as cost considerations play a lead role in the value-based pricing model. Hospitals are looking for ways to lean out supply chains by reducing vendors, in turn, causing device makers to fight to maintain negotiating power by way of size and scale. These dynamics help fuel a ripe environment for M&A activity and the emergence of strategic partnerships.
PE Exits in the Middle Market
While many of the record mergers steal the spotlight, the middle market is also experiencing increased levels of activity. Strong public valuations and elevated trading multiples have created a choice environment for private equity exits over the past year.
Given the current strategic focus on scale and negotiating leverage, corporate M&A appetites are strong. According to PitchBook, corporate acquisition has made up more than 60% of healthcare investment exits by PE funds over the past four quarters. While many of the best portfolio companies have been sold already, opportunity will continue to present itself as strategic plans are solidified and executed.
Precarious Political Panorama
As is common in election years, a heightened sense of uncertainty and thoughtful consideration permeates through the economy, the capital markets, and among decision makers. Regardless of the unique circumstances of the 2016 election, policy changes developed on both sides of the aisle and will bring significant implications for medical device industry participants. In recent months, House Republicans have unveiled an alternative healthcare policy that includes a repeal of the 2.3% medical device excise tax that went into effect in 2013 as part of the Affordable Care Act. Following an underperformance of the tax to raise the anticipated funds, it was placed on a two-year suspension which is scheduled to end next year. Promoters of the tax have cited its importance in providing federal funding for existing programs while critics, including the Chairman of the MDMA, have argued the economic benefits observed during the suspension have included an increase in innovation among existing products, the creation of more skilled manufacturing jobs, and more resources available for exploring additional therapies. A recent survey conducted by the Medical Imaging and Technology Alliance found that 69% of executives were more likely to hire U.S-based employees and 77% said they were likely to invest more in R&D as a result of the tax suspension. As the Presidential race nears the finish line and a new term begins, it will be important for business owners and investors in the space to continue to monitor these pertinent policy decisions and the subsequent repercussions they will have on the industry.
Medical Device: Public Valuations and Transaction Activity
Healthcare Analytics Spotlight
Healthcare Analytics M&A and Industry Trends
The Affordable Care Act and the evolution of the healthcare ecosystem in recent years has created a large opportunity for technological advances in how industry participants collect, analyze, and utilize healthcare data. In response to pricing model changes, providers and payers alike are needing to understand where cost saving opportunities, inefficiencies, and trends are developing in order to maximize value, adhere to regulations, and compete efficiently. M&A within the healthcare analytics sector has ignited over the past twelve months with notable acquisitions including IBM Watson’s acquisition of Truven Health Analytics and McKesson’s purchase of HealthQX. As future industry expectations become more clear, M&A activity is expected to remain robust.
Establishing the New Foundation
Currently, most of the investment and acquisition activity is focused around building a foundational level of analytical abilities to monitor and improve operational effectiveness, patient experience, and to navigate the transition toward population health. In a survey performed by Gartner of 27 leading academic medical centers, specialty hospitals, and medical institutions, 63% of respondents cited the motivation of current investment was to establish this base functionality. McKesson’s acquisition of HealthQX in July serves as a cardinal example of this movement to meet the shift toward bundled payments. In speaking about the transaction, McKesson VP Carolyn Wukitch said, “The growth of bundled payment is something payers and providers can’t ignore. These new value-based payment analytics, reconciliation, and automation capabilities complement our value-based reimbursement suite because they give our customers the capabilities to prepare for bundled payment.”
In addition to the growing strategic interest in analytics, private equity participants are also competing for assets in bidding processes that are pushing valuations to elevated multiples. As highlighted in Thoma Bravo’s majority acquisition of MedeAnalytics in late 2015, many private equity investors are setting their sights to a middle ground somewhere between the large, developed focus areas of strategics and the smaller, unproven niches of the venture capital space.
The Future of Healthcare Analytics
Once the foundation is established and companies have engrained the use of retroactive data analytics into existing operations, the next phase will be the use of analytics in advancing innovation, research, and discovery. While it is still in its infancy, this movement is being aggressively led by IBM’s Watson program. With four major acquisitions in the past year alone, Watson Health has had an insatiable appetite for data. The $2.6 billion acquisition of Truven Health Analytics in February added more than 200 million “lives” to its data pool, bringing total patient records under the Watson Health umbrella to roughly 300 million. The collection of these data points combined with added capabilities from the $1 billion acquisition of medical imaging company, Merge Healthcare, and the purchase of health management software company Phytel, positions Watson to be the global leader in health data, analytics, and insights. Watson’s already renowned artificial intelligence software provides a established platform in the healthcare space to become a dynamic, highly specialized digital assistant to physicians and healthcare administrators in improving the quality of care and compressing costs. As this type of technology matures and develops, increasing IT budgets and resource allocations are expected to fuel M&A activity across all sizes of providers.