Be it dwindling drug pipelines or changes from the Affordable Care Act, mergers and acquisitions in the healthcare and life sciences industries are expected to continue unabated in 2015 as favorable credit markets and cash-rich balance sheets feed deals, according to a survey from KPMG LLP, the U.S. audit, tax and advisory firm.
"We see a convergence of factors facing providers, health plans, and drug and device makers that are forcing them to make tough decisions about strategy and those decisions sometimes entail selling the business," said Bill Baker, an advisory partner who oversees transactional services in the healthcare & life sciences practice at KPMG. "Technology, regulation, consumerism and pushback from employers and government payers are reshaping all facets of healthcare, forcing companies to review all of their options. The capital markets – low interest rates and strong valuations – are creating favorable conditions for those considering selling or divesting assets."
In the KPMG M&A Outlook survey of 738 U.S.-based finance officers and M&A professionals covering a variety of industries, one-third said pharmaceuticals/biotechnology will be the most active industry for mergers and acquisitions in 2015, trailing only technology companies (47 percent). In addition, 27 percent saw healthcare providers as being ripe for consolidation, trailing only technology, pharmaceuticals and the oil & gas industry.
Large cash reserves and available credit are the biggest factors driving M&A overall and healthcare is no exception, according to KPMG survey respondents, who work as senior management at companies in an array of industries or as advisors in those sectors, including energy, consumer products, technology, manufacturing and financial services.
Among payers and providers, the biggest driver for M&A in 2015 is the response to the Affordable Care Act. Consolidation of core businesses and competition was also seen as a driver for M&A. Among pharmaceutical companies, the biggest drivers of M&A are patent expirations for many leading drugs and the need to hone product portfolios to build "franchises in key treatment categories."
The biggest hurdle to healthcare transactions next year is the identification of suitable targets and regulatory factors, among the providers and payers, the survey said.
Despite an apparent eagerness to do deals, due diligence issues still arise, according to the survey. The assessment or volatility of future revenue streams was a larger issue for healthcare companies (58 percent) versus all industries (51 percent) and the cultural/HR assessment was a bigger factor for healthcare companies (32 percent) than industry averages (28 percent). While the quality of earnings was the third leading due diligence issue in the healthcare sector, it trailed the industry average for all sectors at 29 percent, compared with 42 percent.
"Mergers and acquisitions are never easy for everyone involved. Executing effectively on due diligence – while negotiating a favorable yet mutually acceptable set of transaction terms – is just the beginning of a successful acquisition process," Baker said. "Managing the various stakeholders of ownership, employees, customers and vendors during an integration process can be daunting and, if not executed on properly, can destroy the very benefits the transaction was modeled on generating. Fundamentally, merging two companies can create tremendous upheaval affecting governance, finances, IT, operations, tax and human resources. It is imperative that the process is managed to make the transaction smoother and less disruptive."