Healthcare M&A volume dropped in the first quarter of the year, but the deal value tripled from the previous quarter driven by the Centene-WellCare deal, valued at $17.4 billion. That deal made up more than half of the quarter’s value, according to a new PwC report. Centene/WellCare was also the largest managed care deal since the CVS/Aetna merger in 2017.
PwC said first quarter 2019 deal volume declined 21.2% from a year ago and 28.3% compared to the previous quarter. The quarter's 231 deals were 8.2% below the quarterly average since 2014.
The one megadeal drove value. However, even if you remove the megadeals in the first and previous quarters, deal value increased 33.5% over the fourth quarter of 2018 and 122.8% over the first quarter 2018.
Despite the volume decline, PwC doesn’t think it’s the beginning of a trend. The healthcare sector witnessed a similar deal decline in 2017 and then rebounded. High levels of private equity capital could lead to higher deal volume in the coming quarters, the consultancy said.
The drop is not steep. More than 200 deals were announced in the quarter, making it the 18th consecutive quarter where over 200 deals were announced.
“Deal interest is likely to continue, given regulatory uncertainty, high costs, increased consumer-centricity, capital availability and cross-industry trends,” PwC said.
Meanwhile, long-term care remained a popular sub-sector for M&As. Long-term care was the only subsector to increase in deal value — a 19.5% increase. Four sub-sectors grew in the number of deals — physician medical groups, hospitals, labs, MRI & dialysis and long-term care.
On the hospital side, one major deal was Brookfield Business Partners' acquisition of Healthscope for $4.1 billion. Though well below the Centene deal, the Brookfield purchase was the second largest healthcare M&A in the first quarter.
The PwC report follows a Kaufman Hall analysis from earlier this week that said hospital and health system M&A was down in 1Q with just 27 deals, compared to 30 a year earlier. Kaufman Hall added that total revenue also plummeted from $12.7 billion a year ago to almost $5 billion in Q1 2019.
Despite the slowdown, healthcare executives remain focused on consolidation. A Definitive Healthcare survey of more than 1,000 healthcare officials ranked consolidation as the most important industry trend they're thinking about. More than one-quarter ranked it as number one.
One reason for the decline could be the change in health systems' focus. A Kaufman Hall analysis earlier this year said healthcare deals are now more about strategy than an opportunity. For example, fewer deals last year involved financially distressed sellers.