M&A Activity in Healthcare Is Way Down

(MoneyWatch)  Mergers and acquisitions in health care have dropped off significantly, and there is concern in the private equity sector that they may not come back for a long time. According to a report from Irving Levin Associates in Norwalk, CT, the health-care venture capital market saw a 28 percent drop in funding and an 18 percent decrease in deal volume in 2008, compared with 2007. In Levin's survey, 396 M&A deals worth $7 billion were done in 2008, down from 481 deals worth $9.7 billion the year before. The drop-off was especially large in the fourth quarter of 2008, when 81 agreements worth $1.4 billion were struck, versus 109 deals worth $2.1 billion for the prior-year period.

Medical device, pharmaceutical, biotech, and biopharmaceutical companies led the M&A sweepstakes in 2008. Healthcare services and e-health companies did far fewer mergers, but it's notable that e-health firms had nearly as much M&A activity as all healthcare providers put together. That appears to reflect the consolidation going on in the health IT software business.

"Venture capital investors continue to focus on identifying quality investments in the health care sectors, including companies that are intent on improving the efficiency, effectiveness or safety of health care processes or products," commented Gretchen S. Swanson, editor of Healthcare Corporate Finance News, which is owned by Levin. "Conserving cash and staying lean may be paramount for entrepreneurs right now, but venture capitalists are generally expected to continue investing equity in both new and existing portfolio companies."

But that was not the sentiment expressed at the recent Investment and M&A Opportunities in Healthcare conference in Nashville. According to Modern Healthcare, speakers told the assembled private equity partners, transaction lawyers and business development officers that banks are no longer lending. Healthcare companies, including hospitals, are holding onto their cash. And one executive of a private equity firm said healthcare providers will have to get used to operating in an environment with little spare capital floating around.

"People are going to realize that this is not a temporary condition," said Benjamin Edmands, a managing director of CCMP Capital Advisors, which backs Legacy Hospital Partners of Plano, TX.

Meanwhile, Moody's Investors Service announced that last year, the credit downgrades of not-for-profit hospitals outnumbered upgrades to a degree not seen since 2001. Not-for-profits received 27 credit upgrades, compared with 53 downgrades. In 2007, by contrast, there were 40 upgrades and 31 downgrades. Moody's attributed the shift to a rise in bad debt, a drop in patients seeking elective procedures, and investment losses.

Even the participants at the M&A conference clung to the belief that healthcare would continue to be stronger than many other industries. That certainly will be true if healthcare reform leads to more people being insured. But the question is, what will happen when the government can no longer subsidize coverage for the less affluent or pay healthcare providers more and more every year?