Healthcare M&A drops in volume, value for Q3, PwC says

Dive Brief:

  • Healthcare deal activity in the third quarter of this year continued the streak of at least 200 deals each quarter since the end of 2015 and at least 250 quarterly deals since Q3 of last year, PwC said in a new report.
  • However, the quarter saw the fewest number of deals in a quarter since Q1 2017. There were also declines in value compared to both the previous year and quarter.
  • Long-term care remained the most active sub-sector with 102 deals. Payers have increasingly seen potential in long-term care companies.

Dive Insight:

Healthcare M&A activity saw a dip in Q3, but that doesn’t mean it’s the start of a downward trend.

Thad Kresho, U.S. health services deals leader at PwC, told Healthcare Dive on Thursday that interest remains high among “historical acquirers.” Those purchasers are looking to “further their connection points with their constituents,” Kresho said.

“Further buoyancy is fueled by increasing private equity interest (with their available capital) as well as non-traditional entrants, such as retail and tech-enabled companies. Interest of these participants range across many sub-sectors,” he added.

There were 261 healthcare deals in Q3 of 2018, slightly lower than the average of the past seven quarters (264). Deal volume increased 0.4% compared to a year ago, but dropped almost 11% compared to Q2 2018.

The total deal value plummeted to $15.9 billion, which is a drop of nearly 36% compared to the previous quarter and 10.1% year over year. It’s also a far cry from Q4 2017 ($100 billion) and Q1 2018 ($72.6 billion). Of course, one or two megadeals, such as the proposed CVS-Aetna and Cigna-Express Scripts deals, can be the difference between an OK quarter and a blockbuster, so quarterly value isn’t always the best gauge.

Kresho said volumes remain strong across multiple sub-sectors. PwC expects that to continue through the rest of this year and into the next.

“The industry’s major ongoing themes of regulatory uncertainty, income pressure, technological innovation and consumer-centricity continue to drive interest in deals,” PwC said.

The largest deal of the quarter was the RCCH HealthCare Partners purchase of LifePoint Health. The $5.6 billion transaction continued the hospital sub-sector’s average of one megadeal per quarter, which stretches back to 2015.

Another billion-dollar transaction in the hospital sector was HCA Healthcare’s purchase of Mission Health for $1.5 billion. Hospital deal volume overall dipped about 12%, but its value increased by 4,711% thanks in large part to the billion-dollar deals.

A different recent quarterly report by Kaufman Hall also found that M&A activity is down for hospitals and noted 18 deals in the quarter. The total was a 38% decrease from a year ago. Transactions for the first nine months of the year were also down, though value was up, according to that analysis.

Meanwhile, in the PwC report, another notable transaction over $1 billion was UnitedHealth Group’s purchase of 80% of Genoa Healthcare. The deal will help OptumRx’s behavioral offerings.

The sub-sector that saw the most deals was long-term care with a volume increase of about 33%, but value fell by 35%.

On the other end, PwC saw the largest value declines in physical medical groups and managed care. Physician medical groups volume dropped 30% and value fell by 97%. The sub-sector saw its fewest deals since Q4 2016. PwC doesn’t think the slow quarter is the start of a downward trend in that sub-sector, though. It’s likely an outlier.

Managed care volume, meanwhile, dropped 25% and value plummeted 95%. The slowdown in managed care purchases come as health insurers explore vertical integration rather than merging with other payers. Regulators have been leery of horizontal mergers over the past couple of years, but there are fewer roadblocks for vertical deals.

The managed care M&A activity will likely be in growth areas, such as Medicaid and Medicare Advantage. Otherwise, expect insurers to continue to look beyond their sub-sector and seek out opportunities in areas like pharmacy benefit management and long-term care companies.



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