- As M&A activity continues across the healthcare industry, a new report by Mergermarket and West Monroe Partners looks at how companies are using consolidation to stay competitive in a rapidly changing marketplace.
- More than a third of respondents (41%) said a company’s preparedness to respond to regulatory changes is a key concern for operations and personnel issues, and four in 10 cited management’s willingness and ability to adapt to market trends as a top priority.
- Increasing complexity of technologies and aggressive deal timelines are two of the biggest hurdles buyers face. Roughly half of respondents had concerns with the cybersecurity due diligence in recent healthcare deals, up from 16% in 2017 and just 3% in 2016.
M&A is all over the healthcare space, whether horizontal or vertical. Some announcements are blockbuster megamergers and others are consolidations or acquisitions that strengthen regional presence. Despite the haste to get ahead of the competition, however, companies want to make sure they find they right deal with the right partners.
The shift to value-based care and a more data-driven environment are pushing buyers to look for prospects that can evolve along with those changes, according to the report. Nearly 80% of respondents said they expect to pursue more joint ventures and alliances over the next year to year and a half.
But finding attractive targets isn't easy. A quarter of respondents reported a shortage of companies with the right products and price tag, typically $100 million or less.
The biggest challenge facing healthcare companies today is technological change, the report says. This is fueling M&A interest in companies with strong intellectual property portfolios and up-to-date IT systems.
Among recent deals are CVS Health’s $69 billion bid for Aetna and UnitedHealth subsidiary Optum’s purchase of DaVita Medical group. There is also the Amazon, J.P. Morgan and Berkshire Hathaway joint venture to create an independent healthcare company to tackle rising employee health costs. That alliance has the potential to disrupt the market dynamics in the private insurance space.
Hospitals and health systems are in the game as well, as last year saw 115 transactions totaling more than $60 billion. Advocate Health Care and Aurora Health Care completed their merger, which created the 10th largest nonprofit system in the country, about two months ago. Community Health Systems alone had 10 deals in 2017 involving 23 hospitals.
About half of respondents (48%) said they seek targets with disruptive technologies that give them an edge over competitors. However, just 10% were satisfied with IT due diligence and 26% said failure to take stock of outdated IT infrastructure was the worst oversight during due diligence in their latest healthcare deal.
In all, there were 579 healthcare deals in 2017, the second highest on record, according to the report. Behind M&A is the desire to leverage innovation to cut costs.
“Everything is about cost take-out, given the amount of competitive pressure in the industry,” Brad Haller, a director in West Monroe’s M&A practice and a co-author of the report, said in a statement. “All of the different stakeholders are trying to outdo each other on price.”
Private equity firms are primarily interested in digital health and healthcare IT, while strategic buyers are focused on contract research organizations and biotech acquisitions.