Provider deals jump

When Tenet Healthcare Corp. recently agreed to pay $4.3 billion to acquire Vanguard Health Systems—after being relatively quiet on the acquisition front—it wasn't the only healthcare provider coming off a transactional dry spell.

That deal—the first blockbuster merger between two major, investor-owned hospital companies in several years—came at a time when healthcare providers as a group stepped up their dealmaking activity and put more money on the table for desirable targets.

In total, providers announced 106 takeover transactions in the second quarter of 2013, nearly doubling the 54 deals signed in the previous three-month period and the 55 in the second quarter of 2012, according to Healthcare M&A Watch, Modern Healthcare's quarterly report on healthcare merger and acquisition activity.

The report found that healthcare providers led the way in transaction volume, while other sectors of the healthcare industry—vendors, payers, and pharmaceutical and biotechnology firms—continued to pull back on their dealmaking activity.

But all four sectors showed that they weren't afraid to write large checks when it came time to seal the deal. While the healthcare industry as a whole forged only 229 transactions in the second quarter—representing a 28.7% decline year over year and 7.3% quarter over quarter—deal value soared to $49.9 billion, from $11 billion in the first quarter. The most recent quarterly results are only 1.4% below the eye-popping $50.6 billion in value in the second quarter of 2012.

Cash-flush dealmakers also signed more blockbuster deals. There were 10 transactions that reached or topped the $1 billion mark in the second quarter, compared with only two in the previous period.

Of the 66 deals with a disclosed deal value, 18.1% had a price tag above $500 million, compared with just 4.5% of deals in the first quarter, according to the report. The quarter's largest deal was in the vendor sector, with Thermo Fisher Scientific's $13.6 billion play for Life Technologies, a maker of products for the life sciences industry and particularly for genetic analysis. That's a subsector that proved to be in high demand last quarter.

In the pharmaceutical sector—where deep-pocketed companies are perennially big spenders—Valeant Pharmaceuticals spent $8.7 billion wooing eye-care firm Bausch & Lomb.

Back in the provider sector, companies committed a total of $9.1 billion to M&A transactions last quarter, compared with just $938.5 million in the first quarter. But that figure was far below the $17 billion in deal value seen in the second quarter of 2012, which saw a number of high-price tag transactions involving companies that provide pharmacy or physician practice-management services.

Nevertheless, the provider sector did see its share of blockbuster deals, including Catholic Health Initiatives committing $2 billion to acquire the six-hospital St. Luke's Episcopal Health System—with half those funds as an investment in St. Luke's and half in a foundation for underserved members of the Houston area, where St. Luke's is based.

The deal expands CHI's reach into the Houston market—its first entry into fast-growing Texas—and also adds a number of affiliations with premier names such as the M.D. Anderson Cancer Center, Baylor College of Medicine and the Texas Heart Institute, according to the report.

About a third of the provider deals involved acute-care hospital groups, and another 26.4% involved post-acute care providers, with many of those transactions part of a roll-up strategy involving larger, often for-profit players in the sector.

Similarly, physician management companies such as Mednax and IPC the Hospitalist Co. also continued their buying spree, with deals for clinician groups representing 16% of the total.

Payers were the least active sector of the healthcare industry, disclosing only three deals. A great deal of consolidation in the sector already occurred about a decade ago.

Healthcare vendors—typically some of the most active dealmakers in the industry—also scaled back their M&A activity, announcing just 67 transactions—a 46.8% decrease quarter over quarter and a two-thirds decrease year over year.

Pharmaceutical and biotechnology firms signed 53 deals in the quarter—a decrease of 10.2% over the first quarter and 8.6% less than the second quarter of last year. But they were large deals.

Drug developers and the companies that serve them spent $24.8 billion in the second quarter, compared with $4.9 billion spent the previous period. Deal value was 37% higher than it was in the second quarter of 2012, when the sector committed $18.1 billion.

Biopharmaceutical firms also demonstrated that they could get sizable returns from the public markets, and initial public offerings were once again seen as a viable exit strategy for young companies. The Healthcare M&A Watch report tracked a total of 16 IPOs, with 12 in the pharma and biotech sector.

Private equity firms, meanwhile, were less active than they usually are in the healthcare industry, with just 12 deals, according to the report. Most of the $1.7 billion in deal value was concentrated in only one blockbuster transaction: Kohlberg Kravis Roberts' $1.3 billion buyout of PRA International, a clinical research organization. That showed an appetite for opportunities in the pharmaceutical services space.

Follow Beth Kutscher on Twitter: @MHbkutscher