The healthcare sector should see growing mergers & acquisitions activity in the coming year, according to the results of KPMG International’s Global M&A Predictor released earlier this month.
The KPMG M&A Predictor forecasts global M&A activity by tracking and analyzing two valuation indicators on a 12-month, forward basis: price to earnings (P/E) ratios, to determine market confidence; and net debt to earnings before interest, tax, depreciation and amortization (EBITDA), to gauge the capacity of companies to fund future acquisitions.
According to Bill Baker, a partner with Healthcare Transaction Services within KPMG, these indicators have shown that the healthcare sector in North America (dominated by the U.S.) is one of the leading industries for potential M&A activity. Healthcare experienced a 20 percent increase in forward P/E compared to June 2012, with forward net debt to EBITDA declining 59 percent, which outpaces the capacity for all other regions. Globally, the healthcare sector’s forward P/E ratio is expected to increase by 20 percent.
“I think what we’re seeing - at least in marketplace data - is there is a continuing degree of M&A activity, not only in U.S., but also globally,” said Baker. “It also tells us there are different factors driving this. The regulatory environment in the U.S. is unique to the U.S., however, different financial mechanisms are consistent global issues as everyone is trying to absorb increasing healthcare costs, regardless of what the financing scheme is.”
Baker added that while in the U.S. the healthcare sector is dealing with a large budget deficit, outside of the U.S., as healthcare quality improves, many countries are trying to figure out how to afford their rising costs.
“Specifically to the U.S., the healthcare sector has to learn to do more with less. We see decreased reimbursements across the vast majority of the healthcare landscape and a fundamental increase of cost,” he said. “Added to that, increasing technology costs, and you’ve got a market going under tremendous consolidation. There have been a larger number of hospital mergers in the last 24 months and several company mergers seen just this summer.”
Baker added that it’s not just the hospital sector that's deeply involved in mergers and acquisitions.
“Payers are acquiring other payers and providers, while medical device companies are merging," he said. "It’s a growing trend.”