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Perspectives on Healthcare Consolidation

Posted by Matt Breese on Nov 24, 2015

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Consolidation within the healthcare industry dominates the existing landscape, with acquisitions and mergers in the news each week. Pharmaceutical manufacturers embody this trend with the development of strategies that identify acquisition targets and proactively leverage external resources. Whether breaking into a new class with treatments already on the market, building up dwindling pipelines or procuring targeted commercialization capabilities, effective M&A strategies provide solace to pharma.

A review of the mergers and acquisitions activity from the biotech and pharma industry over the past month reveals hundreds of events, per intelligence from BioSpace. A deeper look into the news reveals a wide variety of arrangements, from big pharma mergers to small biotech acquisitions. Remarkably, the first nine months of 2015 yielded $235 billion in M&A deals (not including the massive $160 billion Pfizer-Allergan deal). As a point of reference, the total pharma and biotech transactions for 2005 was only $25.5 billion. Key drivers of the tremendous increase in activity include fallout from the patent cliff, desire for more disease specialization and innovation in buying arrangements. This new generation of healthcare provides opportunities for pharma companies, like Valeant and Shire, to purely operate on buying up manufacturers and selling their products.

Stepping back to look at the larger picture of healthcare consolidation reveals the impact of these trends for the integrated healthcare network of health insurance and healthcare plans. For instance, five payers control 50% of U.S. covered lives as a result of key health plan and PBM mergers. On the provider front, integrated delivery networks dominate the landscape and own 60% of all group practices. With more centralized power in the two industries that pharma needs to influence, payer and provider, the competition among manufacturers intensifies. Several pharma companies share the mindset that they can access more resources via M&As, from clinical networks to payer contracting relationships, to improve the probability for commercial success.

The largest deal in healthcare history, between Pfizer and Allergan, dominates recent industry news. The effects of this $160 billion inversion merger include displacing Johnson & Johnson as the largest global drugmaker and monumental consolidation in R&D and commercialization resources. Therapeutic markets, such as rare disease, oncology, antidepressant and ophthalmology, may see massive shifts in drug development with so much amassed drug development capabilities. Considering the implications across the globe from such a deal, experts predict ample hurdles from regulators and industry voices. Concerns around drug pricing implications result in increased government scrutiny and adjusted rules to deter such domicile-shifting inversion mergers.

Two short-term factors for advanced healthcare consolidation include evolving reimbursement trends and the current financial environment. The Affordable Care Act creates an ecosystem with an uncertain future of payer coverage. The increasingly centralized influence of payers pushes the industry towards pay-for-performance and away from fee-for-service. From the patient and provider perspective, pay-for-performance makes a great deal of sense in providing access to the patients who need treatment with dollars exchanged for pure value. However, a case study of Novartis’ Entresto reveals that the system adds a great deal of complexity to coverage, which resulted in less-than-stellar adoption by insurers. Key pharma players leverage consolidation to mitigate the risk of future reimbursement models. Adding to this mindset, historically low interest rates foster increased timing pressure on M&A activity.

The increasing amount of mergers and acquisitions add to the complexity of the healthcare environment. Across the pharma, payer and provider industries, key player consolidation creates a constantly changing environment as many vie for increased influence.

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Topics: Industry Trends, Market Access