Healthcare Deals – Reshaping the Landscape
The health-care industry is in the throes of a major shake-up and is creating a situation in which companies face a greater risk by standing pat than possibly overpaying for an acquisition.
Amazon.com Inc., Berkshire Hathaway and JPMorgan Chase have all announced in January that they would start their own nonprofit company aimed at lowering medical costs for their employees. Separately, The Wall Street Journal reported that Amazon has designs on expanding its hospital-supplier business.
Historically, health care has been one of the best industries in which to invest for years as industry spending became a steadily larger share of the economy. Now, though, the specter of new, well-capitalized competition, coupled with growing public scrutiny of ever-higher spending, raise many questions about the sustainability of competitive channels in the industry over the long term.
Those changes won’t happen overnight since health care is a tightly regulated, opaque industry, and can disrupt high-margin businesses. This means that a good manager should be preparing for that long-term threat today. This dynamic has industry executives scrambling for deals to maintain their competitive advantage.
Recent Transactions & Overtures
– The Walgreens Boots Alliance is in early-stage talks to combine with distributor Amerisource Bergen
– Walgreens’s pharmacy rival, CVS Health, has agreed to purchase the health insurer Aetna in a deal valued at $69 billion.
– Insurer UnitedHealth Group has purchased surgical care centers and medical practices, with an apparent aim to reduce hospital spending.
– Several large nonprofit hospital systems have moved to start their own nonprofit generic drugs company.
So far, pharmaceuticals companies haven’t joined the vertical integration trend, but they are not idle. Drug
companies Sanofi and Celgene each have started the year off with two large biotech purchases, and Bristol-Myers Squibb announced it would pay nearly $2B upfront for a cancer drug collaboration with Nektar Therapeutics.
The effect sees asset prices trending higher. Health-care transactions so far this year sport an average enterprise value of 17 times earnings before interest, taxes, depreciation, and amortization, according to experts. That’s up from 15 times last year.
Some companies are bound to overpay for assets in this environment while others enter tie ups that are doomed to fail. Given the industrywide scramble, though, the real risk might be doing nothing. That applies to buyers and sellers alike.
See National Health Expenditures as a Share of Gross Domestic Product chart above.