Without the large tax-motivated plays from the U.S.-based pharmaceutical sector, total healthcare deal value plummeted quarter over quarter. The $60.7 billion in deal value—which was concentrated in 76 deals with a publicly disclosed price tag—represented a 73.6% drop over the $229.8 billion in value seen the previous quarter. But $60.7 billion is still the second-highest level of deal value since at least the fourth quarter of 2012.
In the provider space, most of the third-quarter dealmaking value was concentrated in deals involving real estate investment trusts, which have benefited from the stock market boom.
Deal value shot up to $13.9 billion compared with $6.4 billion during the same quarter last year. It also continued to rise quarter over quarter, increasing 41.8% over the second quarter's $9.8 billion.
While the dealmaking wind has calmed for drug developers, the drive for size and scale has shifted to related sectors. “There's definitely a material trend in the specialty pharmacy and pharmacy services space,” said Michael Hess, a Memphis, Tenn.-based attorney at law firm Bass, Berry & Sims who focuses on the specialty pharmacy sector. “We're seeing a pretty large entrance of private equity financing, and we're seeing a trend of nontraditional buyers looking at specialty pharmacy.”
Investor interest in the space also appeared strong. Six of the transactions for a company in the pharmaceutical products and services sector involved a private equity buyer, as did three of the pharmacy and PBM deals. There were 40 private equity deals overall.
Hess pointed to the momentum around the initial public offering for Diplomat Pharmacy, a Flint, Mich.-based specialty pharmacy that filed for a listing in July, as evidence that the large independents are doing well in the market.
But specialty pharmacy is an industry that requires a large amount of overhead. There often will be restrictions on what insurers will pay above the cost of the drug itself. Some of these drugs are only distributed on a limited basis.
Small independent pharmacies, therefore, lack the size and capacity to effectively compete in the market. “There's a certain level where you're not going to get the manufacturing contract; you're not going to get the drug,” Hess said.
Meanwhile, the number of specialty drugs continues to grow, as pharmaceutical and biotech companies realize they're a better investment than small molecule compounds that can be more easily copied by a generic drugmaker. A report from Express Scripts, a pharmacy benefit management organization, found that 19 out of the 28 drugs approved by the Food and Drug Administration last year, or more than two-thirds, were specialty pharmaceuticals. In 2008, only 33% were specialty drugs.