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The Keckley Report

My Take: More Big Deals in Healthcare Likely

By April 28, 2014March 1st, 2023No Comments

The healthcare industry’s dependence on capital for technology and growth was on full display this week, particularly in the biopharma and medical device sectors where major deals were the focus. The headline-grabbers were these:

  • Zimmer Holdings (#2nd in orthopedic device manufacturing) agreed to acquire Biomet (#4th in orthopedic devices) for $13.35B—the biggest device deal since the 2012 Johnson and Johnson acquisition of Synthis for $21.2B. Note: Biomet was acquired by Private Equity firms Goldman Sachs, KKR, Blackstone and TPG in 2007 for $11.7B. The deal represents a 1.5X return to the group’s $5B investment.

  • Novartis and Glaxo Smith Kline announced a $20B deal to swap assets strengthening the core businesses in each organization.

  • And Valeant’s $45B hostile bid to acquire Allergan and its Botox franchise financed in part with Pershing Capital continued to get attention.

The healthcare industry is accustomed to big deals. In our communities, consolidation of physicians with hospitals is standard fare. Hospitals are integrating with long-term care providers, and merging with peers to achieve scale in regional systems.

But at a national level, like banking, retail, and other industries, big deals are becoming the norm. Consider…

  • 20% of US hospitals are now owned by investor owned multihospital systems and only one in three hospitals is independent. Big deals are accelerating i.e. Community Health System’s pending acquisition of HMA; Tenet’s acquisition of Vanguard; the recent merger of Trinity Health System and Catholic Health East and so on. 

  • Among the nation’s 397 health insurance operators, big deals are frequent: Examples: Aetna’s acquisition of Coventry, Cigna’s acquisition of Health Spring and efforts by the Blue Cross Blue Shield Association to more closely coordinate national efforts by its 37 member plans.

But stepping back, we remain largely a fragmented industry in the U.S: 4000 biotech companies, 6000 medical device manufacturers, 5200 hospitals with more than a third independent/non system affiliated; 880,000 physicians with the majority in small independent solo specialty settings and so on.

What to these deals mean?

1-Scale in the industry is a key to sustainability. The Congressional Budget Office forecasts health spending will increase 5% this year and for the foreseeable future—good news! Healthcare is a growing market! But margins across the board will be under pressure as employers, Medicare, Medicaid, and health insurers negotiate lower payments to providers, and as access to the provider supply chain and tougher negotiations in pricing for drugs, devices, technologies, disposables and facilities intensify. It’s not just a matter of “go big or get out”. It’s a matter of achieving a critical mass that sustains access to capital and management talent adequate to adapting to tighter regulation, workforce shortages, medical inflation and intensified competition in core and adjacent business lines. Most important, it’s about leveraging scale to grow. The U.S. market represents half the market for the worldwide sales of devices and drugs: investments to outperform competitors domestically while strategically expanding globally are C suite imperatives for most of the major players in the U.S. system today. So the big deals in the device and biopharma sectors are part of a larger story about the pursuit of scale in the U.S. health system.

2-Private equity is a key player in the mix. Private equity-backed deals will be a permanent part of the healthcare picture going forward. It’s a $3 trillion industry. Four of the biggest names have gone public—KKR, Carlyle, Blackstone and Apollo. Their capabilities and methods in deal financing, restructuring, management and acquisitions are central to the industry’s transition from fragmentation to scale and growth. While many in the industry will continue to depend on borrowing as their primary capital source, the solvency, liquidity, and costs for debt will increase. Thus, through strategic relationships including private equity-backed deals, the health industry’s appetite for capital will increasingly include the role of private equity. The skillsets, therefore, of our Chief Financial Officers and the experience, independence and expertise of each Board’s audit committee must be closely examined by leaders.

3-Regulators will pay closer attention. The US Department of Justice and U.S. Federal Trade Commission are particularly keen to monitor deals in healthcare. As stewards of the public’s demand for fair competition and limits on monopolistic behavior, their enforcement efforts will be sharply focused on healthcare. And the federal government has a second lever to police the health system: spending for Medicare, Medicaid, CHIP, FEHP, and military health is 28% of the federal budget. As a result, the federal government can leverage its role as a major purchaser of the system’s services through policies and laws that change its structure and performance. The Medicare Prescription Drug Act (2006) and Affordable Care Act (2010) are prominent in our current regulatory landscape; others laws or regulations will follow. Fraud, conflicts of interest, unnecessary care, comparative effectiveness of drugs, inducements, predatory pricing, workforce rules, access to personal health information, medical tourism, scope of practice, accelerated transition to value-based reimbursement and many other issues on the horizon will likely be marked by federal legislation that change how we operate. The net effort of the industry’s consolidation is a steady transition to a bigger federal role. And with it, enormous new importance to the roles of the Chief Compliance Officer, Legal Counsel, and Board leadership.

4-Profit, executive compensation, and board competence will be in the spotlight.  The U.S. health system has had enormous success in being profitable for the past four years: among the S&P’s 10 industry sectors, healthcare and energy stand out for impressive profits during the 75 months since the economic downturn. The spotlight will be on the healthcare industry’s profitability: the adequacy of operating margins to fund indebtedness and credit-worthiness. And with it, a sharp focus on how management is compensated and boards composed. Profit remains a sticky issue in healthcare: all expect the latest technologies, modern facilities and best drugs; most understand that it takes capital to fund these, but a vocal and growing number question whether our profits are a means to an end or an end in itself. This month’s release of the Medicare Physician Database adds fuel to the fire. Profit that’s purposeful and transparent is a business imperative for every player in the U.S. system, whether comfortable or not.

I try to understand how industries operate and their market leaders sustain their positions. The $35B deal pairing of cable operators TimeWarner and Comcast was a response to growing competition from non-cable operators like Netflix. The combination of advertising giants Omnicom and Publicis is a response to competition from online advertising giants like Google. WalMart recently announced it was entering the banking industry launching its own cash wiring business sending its vendor, Moneygram , packing. Facebook, Apple and Zynga announced impressive first quarter 2014 results calling attention to their mobile market opportunities. And Barnes and Noble’s operating losses for the third year in a row resulted in additional store closures as the company deals with the Amazon factor. The common threads to all these: big players executing strategies in light of changes in their competitive landscapes.

I have no doubt the healthcare industry’s on the brink of massive consolidation. The notion that ‘all healthcare is local’ will be replaced by  ‘most healthcare is delivered locally’.

Access to capital, leaders who are competent to manage complexity and confident to recruit talent that’s unafraid to bring new competencies and ideas, and boards prepared to understand the organization’s future objectively are as essential to this industry as any other.

Yogi Berra says “It’s hard to make predictions, especially about the future!.” In healthcare, it’s not hard to see that we have to change. And more big deals are likely.


Sources:;;;;;;; Morningstar; Standard and Poors: Paul Ziobro“WalMart Dives Deeper into Banking” Wall Street Journal April 18, 2014; Elzabeth Harris “Walmart will enter Cash Wiring Business” New York Times April 18, 2014 “; Jeffrey Trachtenberg“What’s Barnes and Nobles Survival Plan?” Wall Street Journal