Although the first half of the year showed promising signs of increased mergers and acquisitions (M&A) activity in the overall pharmacy segment, the third quarter saw that activity come to a screeching halt. However, continued interest from private-equity groups may indicate that this latest quarter was simply a brief glitch in the overall M&A picture.

The Braff Group, a health care M&A company, tracks three pharmacy components: infusion therapy, specialty pharmacy and institutional pharmacy. Collectively, “their deal flow was definitely down in the third quarter,” says Dexter Braff, president of The Braff Group. For the first quarter of the year, the pharmacy services segment had 12 deals. That number dipped slightly to 11 in the second quarter and then plummeted to only six in the third.

The most recent quarter’s M&A activity, notes Braff, was “down to a level that’s not been that low since the third quarter of 2009. We haven’t had that many quarters with this few deals.” Since 2006, only four other quarters — third-quarter 2009 (six), first-quarter 2009 (three), first-quarter 2008 (six) and fourth-quarter 2006 (five) — have had equal or fewer transactions (see chart, p. 5).

After starting 2011 strong with 12 deals — seven in the first quarter and five in the second — infusion therapy notched one transaction in the third quarter. The specialty pharmacy segment remained consistent, with three deals in each of the first three quarters of the year. Institutional pharmacy had two transactions to start the year, then three in the second quarter, followed by two more in the third.

Prior to the most recent quarter, there had been “relatively consistent increases [in pharmacy M&A activity] for seven consecutive quarters,” Braff observes.

Pharmacy Wasn’t Only Health Care Sector Down

However, it’s not just the pharmacy segment that was down for the third quarter. When all of the health care segments that The Braff Group tracks — home health, hospice, pharmacy, home medical equipment, health care staffing, and behavioral health and social services — are considered collectively, “the third quarter of 2011 had the lowest total number of deals…since the first quarter of 2009,” he says.

“On the pharmacy side of the ledger, there is no particular reason why we would expect to see pharmacy services deals down. There is no new legislation that has spooked people,” Braff tells SPN. And “pharmacy services to a large degree are not government reimbursed.”

Moreover, with pharmacy, Braff points out, “we’re talking about a segment where in aggregate there are not a lot of deals” compared with other health services segments. For instance, segments such as home health, home medical equipment, and behavioral health and social services consistently boast double-digit transactions per quarter.

But, while not specific to specialty pharmacy or infusion, the quarter saw “a lot of bad headlines” for health care overall “related to reimbursement and payments” tied to the debt-ceiling negotiations and the supercommittee’s efforts, he says. Home health and skilled nursing facilities saw a drop in reimbursement, and there is the “overhang on the expense that will be incurred to temporarily or permanently address the physician payment fix.”

According to Braff, though, “We’ve seen this happen before. When there is a lot of negativity going on in a couple of sectors related to another sector, it freaks people out” and makes potential buyers “risk-averse.”

Therefore, he says, the drop-off in infusion therapy and specialty pharmacy services, individually and in aggregate, “might actually simply be an anomaly. It could be a function of an overall depression in health care service volume driven by an extraordinary amount of uncertainty and fear regarding health care reimbursement both governmentally and as relates to spending overall” that was exacerbated by activities such as the debt-ceiling negotiations and states’ budget problems. “There’s a lot of negativity out there.…It has little to do with pharmacy. It pervades health care services in general.”

Waiting to see how the next few quarters play out will determine whether this was “more of a macro health care reimbursement issue or anomalous,” he contends.

Private-Equity Activity Was Silver Lining

For the pharmacy segment, “the one piece of good news was private equity,” asserts Braff. His company tracks two types of private-equity deals: platform and follow-on. Platform buys are initial investments in a company that can bring “effective, strong and deep infrastructure upon which you can layer additional deals,” which are considered follow-on investments.

Through the first nine months of 2011, the pharmacy sector has seen 16 private-equity transactions, split evenly between platform and follow-on deals. That’s only one off from the total number of private-equity deals for 2010, which had 10 platform and seven follow-on investments.

In fact, all six deals in the pharmacy segment for the third quarter were private-equity investments, divided equally between platform and follow-on acquisitions. That activity is “extremely meaningful,” he maintains. “That’s a lot [of private-equity activity] in one particular quarter.”

“2010 was a good year for private-equity investment and for new platform investments,” says Braff. So far this year there has been “a lot of private-equity” activity. “Almost assuredly, this year will be equal to 2010. And even if the year ended this way, this is the highest except for 2010 in platform investments.

“I like the private-equity activity we’re seeing in 2011,” continues Braff. He maintains that “it’s generally a measure of optimism for the go-forward aspects of segments.” In addition, “Private-equity activity spawns additional private-equity activity in two ways.” First, it prompts follow-on activity. With “increasing levels of platform activity” from 2008 through 2011, “each one of the platforms is liable to do follow-on deals.” And second, “Activity begets activity. The more private-equity activity, the more interest a space gets. It’s a herd mentality.”

Ultimately, Braff asserts, “the aggregate activity for the year is not so shoddy as it relates particularly to private equity.” And so, he says, “with all the private-equity activity, my bet is that the [decreased M&A] quarterly activity is anomalous.”

Pharmacy Service Deal Trends, 2006 Through Third-Quarter 2011

SOURCE: The Braff Group

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