It’s Time for Corporate Buyers in Healthcare to Refocus on the Fundamentals

It’s Time for Corporate Buyers in Healthcare to Refocus on the Fundamentals

With capital market volatility and economic slowdown on the horizon, doing the right deal in healthcare will be more important than doing any deal. Corporate acquirers will need to focus on a few fundamental activities to succeed.

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It’s Time for Corporate Buyers in Healthcare to Refocus on the Fundamentals

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Healthcare M&A, led by corporate buyers, is flourishing at record levels worldwide. Now deal makers face capital market volatility and the stronger possibility of economic slowdown, which will add risk to investments previously thought to be immune to macroeconomic effects. As a result, doing the right deal will be even more important than doing any deal—and corporate acquirers will have to sharpen their focus on a few fundamental activities to succeed.

The latest numbers are impressive. Healthcare deals reached $546 billion in announced value in 2015—a 2.5 times increase over the previous decade’s average annual value, according to new analysis by Bain & Company. Corporate buyers likewise accounted for a majority of this activity, setting a new record at $523 billion.

Megamergers fueled much of the increase in value: Five deals more than $20 billion were announced during the year. But even without these megamergers, corporate M&A in healthcare would have been well in excess of the average annual deal value of the previous decade, as corporate buyers pursued deals of all sizes.

Other industries joined healthcare in setting records, and global M&A deal value reached a new high of approximately $5 trillion in 2015. Yet growth in healthcare deals significantly outpaced growth in overall M&A deals from 2012 to 2015. While overall M&A grew at a compound annual growth rate (CAGR) of 24%, healthcare M&A grew more than twice as fast at a 50% CAGR.

What is driving all of this healthcare activity? The macro environment has favored M&A for several years. Tepid economic growth has made organic growth more challenging, spurring many firms to turn to M&A to fuel meaningful revenue improvements. The wide availability of inexpensive debt and strong equity values (albeit with more volatility beginning in the second half of 2015) made M&A an attractive option. And in some cases, financial benefits like tax inversions also spurred M&A activity, though the value of that lever has been significantly reduced.

Beyond these macro conditions, several industry-specific trends fueled the boom. Demand for healthcare is surging with the rise of chronic and lifestyle diseases, aging populations in many developed markets and a growing middle class in many developing regions. As a result, there is continued pressure to contain healthcare costs, which have consistently outrun GDP growth in many countries. Innovation is bringing new drugs, devices, technology and analytics to market. And new government regulations aim to improve quality and increase access to healthcare. Taken together, these trends are shifting the way that healthcare is delivered across the globe, triggering consolidation along the value chain as firms position themselves to emerge as winners.

Corporate buyers pursued many of the recent healthcare deals to advance their category leadership strategies, aiming to build or bolster leadership positions across their portfolios. Corporate customers’ desire for vendor consolidation and more sophisticated procurement practices clearly favor the category leaders.

Consider the strategic rationales of two corporate acquirers in 2015. Drugmaker Shire recently made three acquisitions to build its leadership position in rare diseases. And Dentsply, a leader in dental consumables, announced that it would acquire high-tech dental equipment manufacturer Sirona. The value of these mergers will come from building scale in specific customer-defined categories, rather than building scale broadly across the biopharma and medical technology markets. Category leaders have deeper relationships with their customers, key opinion leaders and even regulators, which gives them better insight into the dynamics and evolution of the category. As a result, category leaders can better direct their R&D efforts and product portfolios to meet market needs, and they often attract the best talent and assets available.

Shire’s acquisitions, for example, do not simply broaden its portfolio of drugs; they also deepen the company’s expertise in the rare disease market, including important capabilities like navigating the orphan drug approval process and managing targeted population clinical trials. And the combined Dentsply Sirona will have a more comprehensive product offering for its dental customers, as well as the right expertise to lead the charge as the equipment and consumables markets become more connected.

Looking ahead, it is not clear how long the M&A bonanza will last, especially in light of the capital market volatility and strong possibility of a recession in the next few years. But M&A will continue as an important avenue for growth in healthcare, regardless of the economic cycle. In fact, a downturn often turns up attractive buying opportunities. All healthcare companies, then, can benefit by focusing on five fundamentals for their acquisition strategies:

  • Craft a clear strategy for leadership. In a downturn, category leadership helps to maintain preferred vendor relationships with customers and provides resources to invest when competitors falter. Define the categories in which you want to play and articulate which moves are required to win.
  • Link deal diligence to your strategy. Good targets that don’t support the strategy distract management and waste time and resources. Have a clear thesis for how any acquisition will support your strategy—and validate it with due diligence. Start planning for integration early to anticipate likely challenges that could derail the strategic value of the deal. Also, make sure that the due diligence case flows through to become the budget case to avoid surprises during annual budget planning.
  • Build a repeatable M&A capability. Organizations with an institutional M&A capability have greater deal success. Build a team that can identify the right deals, tailor the integration to focus on the most critical sources of value and learn from any missteps along the way.
  • Simplify your organization for growth. Mergers can create a unique “unfreezing” period to reduce complexity throughout the organization, as employees already expect change. Identify products, geographies and capabilities that deliver profitable growth and pare back or even carve out the rest.
  • Be creative in deal making. Creative deal structures like asset swaps and partnerships with private equity firms are on the rise for a reason: They match up assets with the right expertise. Don’t be afraid to bring in deal partners or use creative structures to get access to the assets that help you execute your strategy and to divest assets that don’t fit in your strategy.

Companies that excel in these activities raise the odds of over-delivering results from their M&A endeavors.

Tim van Biesen, Josh Weisbrod and Dale Stafford are partners in Bain & Company’s Healthcare, Private Equity and Mergers & Acquisitions practices.


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