Wait and See: Investors Yearning to Break Out on Healthcare Deals in 2017
As evidenced by the mood at the 2017 JP Morgan Health Conference in January, a number of uncertainties in the healthcare market are on the minds of investors — uncertainties that are impacting the availability of private equity funding and the potential for new deals in 2017.
The most obvious uncertainty, of course, swirls around the new Trump administration and its intentions with regards to the Affordable Care Act (ACA). Though investors anticipate changes, overall, the feeling is that any such change may not be as monumental as originally anticipated. In light of the historical threat to the ACA by the Republican Party and the recent pushback from the public on keeping certain facets of the plan, the administration may in fact simply tweak the ACA in order to claim a victory over “Obamacare.”
Investors are also concerned about the quality of 2016 deals. Last year saw a slight slowdown in the volume of deals (939, a 1.4% decline) compared to 2015, but value was way off ($71.7 billion, a 59.6% decline). In addition, some high profile deals were met with outright opposition (see item 4 below). When you consider the high multiples being paid and high debt leverage applied over the past several years in a heated market, the status of 2016 deals, and the uncertainties on the minds of investors, we may be in for a wave of restructuring and bankruptcy filings soon.
Finally, as Q1 of 2017 unfolds, investors are concerned about the high price of doing deals. For that reason, private equity funds may flow more toward a “build versus buy” approach than roll-ups for instance, and, elsewhere, toward the acquisition of non-core assets from larger entities in “carve outs.” Additionally, distressed or “stressed” assets that can be turned around may be attractive.
Below is a deep dive into the concerns investors have in the healthcare market as this most unusual year rolls out.
1. M&A Market Lagging
While there remains much interest in doing deals, uncertainty in the wake of the new administration’s mixed messages regarding deregulation and the ACA has stalled traditional M&A activity. From the business side, there is muted optimism following Trump’s announcement at a late January meeting with Pharma executives that he wants to speed up FDA review, scale back regulations, cut taxes and reform the tax code is reason for optimism. Those moves could rev up the merger market again. From the policy side, however, the ongoing discussion around the ACA — whether it is repealed and replaced quickly as President Trump demanded shortly after taking office, or simply repealed, as has been discussed by the Republican majority in Congress, is a sticking point. As noted above, however, changes to the ACA may not be as monumental as anticipated.
2. Where the Deals Are
While traditional healthcare service deals lag (see item 1 above), investors are looking towards companies that help reduce costs and drive efficiencies. Such companies include outsourcing and tech firms including telemedicine, revenue cycle management, risk management, pharmacy, and pharmaceutical outsourcing. This is a continuation of a trend that has heated up in the wake of the slowdown of traditional deals.
3. Pressure on Pharma Pricing
Early in his campaign, candidate Trump broached the subject of lowering prescription medicine pricing. On January 11, in his first news conference as President-Elect, Trump brought up the subject again, declaring, “We’re the largest buyer of drugs in the world, and yet we don’t bid properly.” The government is prohibited by law from negotiating with drug companies to lower drug prices for seniors who use Medicare, however. Though he did not propose a plan to address the issue, Trump has talked about ending the policy before, something Democratic lawmakers have favored as well. On February 7, Trump reiterated his intention to drive prices down through renegotiation of Medicare. Whether that comes to pass or not, the anticipation of a Trump meeting with Pharma to discuss prescription prices is inhibiting the investment in properties that could be negatively impacted by the slowing or reduction in pricing.
4. Mega Mergers Die on the Vine
A review of antitrust measures in the wake of a class action lawsuit filed in December against six generic pharmaceutical companies in 20 states concerns investors. Additionally, the coincidental announcements on February 14 by Aetna and Humana and Cigna and Anthem calling off their respective mergers after being blocked by federal judges in January may suppress the appetite for such mega deals going forward. Whether the U.S. Department of Justice under new attorney general Jeff Sessions will eye such deals more favorably is yet to be seen.
5. More Cross-Border Deals Coming?
Questions have yet to be answered about how major trade pacts such as NAFTA may change under the new administration. However, given the prevailing protectionist environment, it’s possible that U.S. companies may consider acquiring more non-U.S. companies to bolster supply chains.
© Copyright 2017. The views expressed herein are those of the author(s) and not necessarily the views of FTI Consulting, Inc., its management, its subsidiaries, its affiliates, or its other professionals.
Senior Managing Director, Leader of U.S. Transactions