Last year, M&A activity in the U.S. healthcare and life sciences sector saw a decrease in both deal number and deal value when compared with 2012. While 2012 saw 463 deals worth US$124 billion, 2013 saw 294 deals worth US$97 billion. Nevertheless, according to the results of Mergermarket’s Healthcare and Life Sciences M&A Outlook optimism reigns for 2014.

The report, published June 30, believes M&A activity in the healthcare subsector will rise as a result of increased regulation. In particular, the report expects the Affordable Care Act (ACA) to have a significant impact on M&A activity among hospitals and healthcare providers. Because of the ACA’s shift away from a fee-for-service model and towards a managed care delivery system, it is predicted that hospitals and healthcare providers will look to consolidate to achieve economies of scale. Furthering this push to achieve more productive, cost-efficient systems are Medicare reimbursement cuts, and readmission penalties. Consequently, it is anticipated hospitals will demand facility and equipment improvements in as well as greater IT support or capabilities.

In the life sciences subsector, the report expects M&A activity to be significant among biotechnology/pharmaceutical firms. Large pharmaceutical companies are currently undergoing a period of decreasing sales and limited organic growth opportunities. To address this, companies will look to consolidate to improve their R&D development, and to gain access to new and emerging markets and to new drug pipelines/niche products. This trend began to play itself out in 2013 with Amgen’s US$9 billion purchase of Onyx Pharmaceuticals, whereby Amgen obtained full rights to a lucrative blood cancer drug.

Despite predicting an increased appetite for deal-making, the report cautions as to the effect of regulatory change on closing. New regulations have added complexity and have contributed to greater scrutiny from enforcement agencies, thereby making compliance more difficult. In response to these new challenges, it is anticipated that buyers may obtain representations and warranties insurance relating to the seller’s compliance with healthcare regulations. In an industry survey of would-be deal-makers, 88% of respondents said they intended to obtain representations and warranties insurance in 2014 compared with 44% in 2013.

The author wishes to thank Michael Viner, summer student, for his assistance in preparing this legal update.