Tempered buying

Going into the new year, there was nothing but optimism that healthcare companies would continue the buying spree that colored 2012.

But mergers and acquisitions in 2013 opened with a whimper. Both deal volume and deal value came in below expectations, according to Healthcare M&A Watch, Modern Healthcare Insights' quarterly report on healthcare merger and acquisition activity.

Across all sectors, healthcare companies forged fewer deals in the first quarter of the year than they did in the previous quarter and in the first quarter of 2012.

In total, there were 247 announced deals involving a healthcare company, down 31% from the fourth quarter, when there were 358 deals, and 38.4% lower than in the first quarter of 2012, when there were 401.

Publicly disclosed deal values were also half of what they were in the fourth quarter—$11 billion compared with $22 billion. They were also about a third lower than the same period last year, when total disclosed deal value was $16.1 billion.

There were also half as many blockbuster deals, with only two transactions above the $1 billion mark, compared with four in the fourth quarter. However, that number was on par with the first quarter of 2012.

The two largest deals in the quarter were Cardinal Health's $1.94 billion bid for medical supply distributor AssuraMed, and Mylan's $1.6 billion purchase of Agila Specialties Private, a generic injectables company, from Strides Acrolab.

With 2012 in the books—and the fate of the Patient Protection and Affordable Care Act all but assured—bankers and analysts expected consolidation to heat up across the healthcare industry. Companies were sitting on large cash balances, and the capital markets were wide open to would-be acquirers.

But the rhetoric did not match the reality.

In the provider sector, companies signed only 54 takeover agreements, a 25% decrease from the 72 inked in the last three months of 2012, and a 33.3% drop from the 81 deals in the first quarter of last year, according to the report. Total disclosed deal value for the sector came in at just $938.5 million, a decrease from $1.2 billion in the fourth quarter and $1.8 billion in the first quarter of 2012.

Most of the interest surrounded post-acute-care providers, such as nursing homes, senior-living facilities and rehabilitation centers, which were at the center of 17 deals, or 31.5%. Companies in the post-acute subsector have relied on consolidation to overcome mounting challenges such as reimbursement cuts and declines in recertifications, or approvals for continuing services.

The two largest deals in the provider space were also in this subsector and included TPG Capital's $278 million bid for Assisted Living Concepts, and Brookdale Senior Living's $162.1 million roll-up of 12 senior living communities.

Of the seven private equity deals in the sector, the report found that four involved a behavioral-health firm, even as there were only seven behavioral-health deals overall.

The fast-growing behavioral-health market has been getting another look from financial investors as more insurance dollars flow into the sector, thanks to healthcare reform and the Mental Health Parity and Addiction Act of 2008.

Private equity firms—which signed a total of 79 transactions with a total disclosed deal value of $1.2 billion—were active bidders in the quarter, but primarily took an interest in healthcare vendors, investing in 49 companies, 23 of which (or 46.9%) were medical- device makers.

Cross-border deals accounted for 16.6% of transactions, with 16 deals involving a foreign buyer and 25 in which a U.S. firm went scouting abroad.

On first-quarter earnings calls, medical-device firms and their pharmaceutical and biotechnology counterparts expressed interest in expanding globally, particularly in emerging markets. And a total of 16.7% of medical-device deals and 13.6% of pharma and biotech deals involved an overseas target.

The pharmaceutical and biotechnology sector was also the only one to show any rebound in deal value, at least quarter-over-quarter. Its $4.9 billion in disclosed deal value was 14% higher than in the fourth quarter, though still 21% below what it was during the same period the previous year.

Executives on earnings calls attested to a continued impact of patent expirations on key products as well as longer waits for regulatory approval at the Food and Drug Administration. They also said they are pursuing smaller, “bolt-on” deals that fit into specific therapeutic areas and are being choosier about what they'll buy.

Regulatory uncertainty might have also tempered deal volume among payers, which saw only eight transactions, a 46.7% quarterly decrease and 26.3% drop year-over-year.

Despite claims that payers have been looking to diversify into other areas, such as the provider space, all eight deals involved insurance companies expanding their core services.

In addition, payers continued the pattern set last year of focusing on buys that expand their Medicaid managed-care and Medicare Advantage offerings.

However, the report suggests that the small number of deals might have reflected uncertainty around Medicare Advantage rates, which the CMS didn't clarify until the second quarter.

Follow Beth Kutscher on Twitter: @MHbkutscher