The Middle Market Guide to Navigating Through the Wave of Healthcare M&A

The pharmaceutical and healthcare industry shows no sign of slowing down in terms of M&A and consolidation. There have already been $427 billion in transactions according to Dealogic data.

Last week Pfizer and Allergan announced that they are currently in merger talks to form one of the largest pharmaceutical companies in the world. Certainly one motivation for the deal is to capitalize on lower tax rates outside the U.S. Allergan is based in Ireland and is  expected to enjoy a tax rate of just 15% this year compared with U.S.-based Pfizer’s rate of 25.5% last year. Of course, this wouldn’t be the first tax-incentivized merger we’ve seen in healthcare.

Meanwhile, Walgreens and Rite Aid plan to combine in a $9.4 billion acquisition — another mega-deal to fuel the fires of M&A activity in 2015. If the acquisition moves forward the new company would own 128,000 drugstores, consolidating two of the three largest drugstores in the U.S.

Big Healthcare Gets Bigger

These large mergers and acquisitions illustrate a phenomenon that I’ve been talking about for quite some time: what I call the “dumbbell” effect. At one end of the dumbbell, large corporations continue to size up, and at the other end small mom and pops and startups are flourishing. In between, middle-market businesses are getting squeezed.   The dearth of smaller, middle-market companies is easy to identify in the retail space, where it’s visibly more challenging for independent outfits to survive.

For example, in the restaurant industry, it’s increasingly hard for independent players to afford the costs of commercial leasing as chain restaurants exploit the economies of scale and their sheer purchasing power.. In some ways it’s similar for the healthcare industry, where the flurry of deal activity is about consolidation, purchasing power, retail leases, and the most favorable contracts with retailers and insurers. Smaller companies are also under enormous pressure to deal with the cost of complying with regulations.

The big pharmacy mergers are mostly about grabbing market share on both the West and East coasts. Walgreens and Rite Aid both have a strong presence in California and New York and Massachusetts, while CVS’s acquisition of Target Pharmacy strengthens its presence in the Pacific Northeast.

Whatever the appearances, Walgreens is using its acquisition of Rite Aid to ensure the company is large enough to compete in terms of distribution, channels, and customers. When compared to CVS, Walgreens isn’t huge ($76.4 billion in 2014 revenues vs. $139.4 billion 2014 revenues). Even at that scale, it’s becoming more difficult to be the smaller player simply because of the burden and cost of regulatory compliance and ensuring that you have the right healthcare plans, contracts and exchanges to remain competitive.

Advice to Middle Market Companies

In the current climate, my advice for middle-market companies is this: Figure out how to continue growth by whatever means necessary. You’ll probably have to do something different than simply grabbing market share because you don’t have the resources of a a huge publically traded company. A strategic use of acquisitions can be a smart way around this dilemma. What’s certain is that if you don’t take action you risk becoming a “me too” player, or simply obsolete.

Wherever there is a challenge, there is also an opportunity to think outside the box and differentiate yourself – whether it’s in terms of service, technology or something else unique to your business. Middle-market companies have one key advantage: the freedom to be agile and offer new, insightful solutions for their customers in ways that large corporations can’t. Keep your growth strategy top of mind as you think about your company’s plans for 2016 and beyond.

Photo Credit: Mike Mozart via Flickr cc

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