Investors expect healthcare M&A uptick through 2Q 2011

Merger-and-acquisition (M&A) activity across the entire healthcare industry is likely to become even more frenzied--or at least sustain its current increased pace--over the next year, according to the "Life Sciences & Healthcare Sector Forecast" from the M&A intelligence service mergermarket, the law firm Epstein Becker & Green, P.C., and the investment bank Rodman & Renshaw. The forecast is based on second-quarter 2010 interviews with more than 75 U.S.-based healthcare investors.

Of the four sectors included in the survey--biotechnology/pharmaceuticals, medical device manufacturers/suppliers, healthcare providers/payers and healthcare services (e.g., information technology, hospital and practice management, telemedicine)--investors identified biotechnology/pharmaceuticals and healthcare services as the hottest, with 87 percent and 83 percent, respectively, expecting to see an increase in M&A activity. Fewer investors believed the medical device sector or healthcare providers/payers will experience accelerated M&A growth (74 percent and 67 percent, respectively). However, between 13 percent and 25 percent of investors expected M&A activity in all four sectors to maintain the increased pace established over the previous 12 months. Few investors thought that mergers and acquisitions will decrease in any sector. For example, only 8 percent anticipated a decline in M&A activity in the healthcare providers/payers sector.

Among healthcare providers and payers, investors thought that the hospitals and health systems subsector will face the most consolidation (31 percent), followed by long-term care facilities (21 percent), physician groups (18 percent), managed care and outpatient surgery centers (both at 13 percent), and ancillary providers such as pharmacy (4 percent).

Not surprisingly, government healthcare reform initiatives will be the biggest driver of M&A activity, according to 65 percent of investors. The Patient Protection and Affordable Care Act's "clear intent ... is to spur provider collaboration," said Robert Berg, an Atlanta, Ga.-based member of EpsteinBeckerGreen. "From hospital acquisitions of physician practices (with physicians then becoming employees of the hospitals), at one extreme, to the formation of large accountable care organizations [ACOs] comprising a wide variety of independent health care providers and provider groups, at the other extreme--and all manner of provider mergers and joint ventures in between--we are likely to see an unprecedented era of collaboration and consolidation among those who provide health care services."

Case in point: Last week, two Michigan hospitals--Marquette General Hospital and Bell Hospital in Ishpeming--announced the formation of a new ACO called Superior Health Partners, reports Healthcare Finance News. A brief search of Google News indicates that such affiliations are being reported on an almost weekly basis nationwide.

Only 5 percent of investors cited opportunities to acquire distressed companies as an important reason for M&A growth in this sector. However, 14 percent (each) of investors cited reimbursement opportunities and expansion strategies as key drivers, and obviously opportunities in both areas could be increased by the high concentrations of distressed companies throughout the sector.

In the healthcare services sector, 61 percent of investors overwhelmingly chose healthcare IT as the subsector most likely to experience an increase in M&A activity. Hospital/practice management came in a distant second at 14 percent. Here too, most investors (59 percent) think healthcare reform will be the primary impetus for M&A activity.

Among healthcare providers/payers, investors expected private-equity buyouts and mergers of equals to be the most common types of transactions, with both coming in at 33 percent. Those two types of transactions also should lead the healthcare services sector. However, investors believed there will be more private-equity buyouts (46 percent) than mergers of equals (26 percent).

To learn more:
- read the press release
- access the report here
- read the Healthcare Finance News article