Beating the Odds in Healthcare M&A

For anyone working in Healthcare M&A, 2018 is set to be an interesting year. Widespread predictions of a buoyant 2018 are already holding true, with the sector demonstrating its strongest start for deal making in more than a decade. A myriad of factors are set to fuel 2018 Healthcare M&A. These include healthcare acquirers targeting:

  • More effective patient outcomes
  • Operating cost efficiencies
  • Opportunities for continued innovation
  • Digital health

In the US, recent tax reforms have put more cash in buyer’s hands - combined with a limited supply of target companies, valuations in the sector are expected to be at a premium across 2018. According to Dealogic, buyers of healthcare companies will be paying an average premium of 81% in 2018, which is significantly higher than the ~42% premium paid in 2017. 

The Numbers

Screen Shot 2018-03-05 at 4.59.54 PM

Data Source: MergerMarket
Note: Data includes Healthcare, Pharmaceutical and Biotech M&A.  

While healthcare M&A by value has dropped marginally over the past 3 years (2015-2017, above) a few more “mega deals”, such as the recent transformative $69 billion merger of CVS and Aetna could more than reverse the trend. CVS is known for its ~9,700 retail pharmacies and 1,100 walk-in clinics across the US. Aetna is the third-largest health plan provider in the US. The transaction demonstrates the increasing convergence of previously separate industries but with an overarching healthcare focus.  Commenting on the merger, The New York Times outlines that the CVS/Aetna business combination should make both companies “more appealing to consumers as health care that was once delivered in a doctor’s office more often reaches consumers over the phone, at a retail clinic or via an app.”

Summary Sector Outlook

  • Increased spending in the sector is expected to be driven by aging and growing populations – making it an attractive focus of M&A activity;
  • Consolidation is driving M&A activity in the sector – e.g. CVS/Aetna. Other examples include the convergence of health care plan and health care providers in pursuit of economies of scale;
  • An increase in transactions around smart health care and digitization are expected (e.g. electronic patient records, robotics, tele-health, wellness monitoring and big data, etc.) – these are aimed at reducing costs, improving profit margins, increasing access, and improving care.

M&A Trends

In the US, with the Affordable Care Act (ACA) in flux, hospitals and physicians face continued pressure to improve the quality of care and operate more efficiently. Regulations, such as the ACA, encourage hospitals to deliver quality healthcare at lower cost, which could force hospitals to focus more on capturing transactional cost synergies and achieving operational efficiencies – rather than on improving the strength of their networks. For pharma companies, drugs going off patent could drive M&A. According to the PharmaLetter, drugs that represent an estimated $17 billion in annual sales are set to lose patent protection over the next decade. This creates an incentive for pharma companies to seek out smaller companies, which show promising drug development potential so as to safeguard revenue. For consumers, the loss of patents promotes competition and should drive down prices. 


Historically, healthcare M&A has focused on increasing the scale and reach of healthcare offerings. A recent Accenture study outlines that health acquirers were only able to realize 3-5% of potential cost synergies between the years 2000-2010. If M&A activity in the sector can begin to capture some of the unrealized synergy potential, the average health acquirer could add anywhere from $6-$25 million of upside value to a transaction.

Health acquirers could deploy cost synergies to expand service offerings and grow organically to benefit patients. In 2016, health-related mergers were down in terms of deal volume but up in value – this trend is attributed to larger players pursuing acquisitions of smaller providers via consolidation. This acquisition strategy has allowed acquirers to improve their healthcare offerings and expand their networks. While this does add a marked benefit for potential consumers of healthcare (i.e. improvement in quality and accessibility of care) consolidation eliminates competition and choice. 

Most of the M&A activity seen over the past few years has been orientated around companies in the same sphere of the healthcare sector coming together. Commenting on this, Forbes outlines:

“Providers merge with other providers, health plans with other health plans, and pharmaceutical companies with others in pharma. There are large graveyards full of great companies that naively believed that normal business models work in health care.”  

Beating the Odds in M&A

In a sector like healthcare, where the market is highly matured, inorganic growth quickly becomes a priority. The sector is more competitive than ever, and many healthcare leaders will be turning to acquisitions to consolidate the market, drive revenue growth, achieve operational efficiencies and access innovative technology. Given the competitive landscape and the frequently cited acquisition failure rate of around 70%, how are serial healthcare acquirers maximizing their deal ROI?

Digitalization: By digitalizing their M&A playbooks, ambitious acquirers are able to easily flag, track and mitigate risks, increase transparency and plan resources accordingly. By leveraging dedicated M&A tools, such as deal management software, teams maximize their chance of success, improve organization and move faster than their old-school counterparts. Philips, the Dutch technology giant, is an example of a company using a digitalized approach to M&A to great effect (see here for How Philips Utilizes a Digitalized Playbook for M&A and More in Midaxo). In the past five years, Philips has been laying the foundation to becoming one of the world’s most innovative and widely respected providers of healthcare technology. 

Philips has successfully teamed up with hospital and health systems to understand their needs, provide integrated solutions, and engage in multi-year cooperation to drive improvements in terms of patient outcomes, quality of care delivery and cost productivity. The repositioning of Philips' health-focused strategy is centered on four key themes:

  1. Global resource constraints on health systems are driving a shift to value-based healthcare to reduce cost, increase access and improve outcomes;
  2. Aging populations across the globe and the rise of chronic conditions are driving a shift of care to lower-cost settings and the home;
  3. More and more people are looking for new ways to proactively monitor and manage their health;
  4. The digitalization of healthcare is shifting value from devices to software and services. 


Systematic & Repeatable Processes: Serial acquirers are implementing systematic and repeatable M&A processes to ensure that they are not losing time reinventing the wheel when executing transactions. A repeatable and scalable transaction process allows teams to act on good opportunities faster than their competitors and kill bad deals early on to minimize wasted time and effort. 

Centralization & Collaboration: In traditional M&A, fragmented tools (Excel, email, VDRs, CRMs, sourcing tools, process management tools, etc.) result in missed, duplicate or redundant communication. Taking an “analogue” approach to M&A, initial analysis, due diligence, and integration processes are disconnected – furthermore, where deal life-cycle stages are managed by separate teams, information can easily slip through the cracks during project hand-offs. By centralizing the process through M&A software and reducing the potential for miscommunication, serial acquirers like Philips are able to cultivate better relationships across an M&A project and foster far greater internal collaboration.

Culture & Communication: Culture is often overlooked in deals – this is a huge oversight and can have severe consequences. Steven Immergut, VP & Head of Communications, Pharmaceuticals at Bayer (the German pharmaceutical and life-sciences company) outlines the importance of communication in evaluating targets from a cultural standpoint: “no deal will work long-term if there aren’t meaningful pre-acquisition conversations to ensure that each entity truly understands what makes the other tick on a cultural level”. Additionally, Tony Russo, chairman and CEO of Russo Partners (healthcare communications experts) asserts: "once you understand the other’s culture – is it a deliberate culture, an organic one, one that emphasizes science, patients, technology – then you could begin to tackle the issues of how you will merge it into your organization.”  To learn more about the human side of M&A listen to our webinar – hosted by HR expert Klint Kendrick of Oracle. 


As long as incentives to acquire (i.e. limited government intervention, patient demand for more innovative healthcare, etc.) are present, M&A activity within the industry will likely persist. This increase in deal flow will generally increase the scope and scale of healthcare offerings, which could have a mixed impact for consumers depending on the amount of competition in the resulting marketplace. Ultimately, as M&A trends, political landscapes, and economic factors continue to shift in 2018 and beyond, only the best equipped acquirers will succeed.

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