United States

Q1 2019 Health Care and Life Sciences Industry Spotlight



The intersection of patient/customer expectations, regulations and technological change requiring investment will continue to be a potent driver of M&A, even as it has already encouraged a shift to value-based care. As noted for some time by industry participants, the companies that can offer a more seamless digital-physical interaction for consumers tend to win greater loyalty nowadays and potentially have an impact operating margins due to decreased back-office processing costs. However, health care in particular experiences hurdles in the form of regulations when it comes to virtually any policy or procedure. The unique customer experience and exposure generate ripples of ramifications, from the increased need to cybersecurity due diligence during M&A to the strict HIPAA regulations around electronic medical records (EMR).

Cyber risks, for health care organizations, are extremely expensive,” Ellis states. “Ransomware gets the headlines, but multiple other issues can be HIPAA violations, which bring larger penalties and that much more exposure, so it is an area of intense focus for health care businesses.”

But an aspect of digitization and security beyond the defensive is often related to M&A as a matter of pure financials. As demographics and a robust M&A cycle combine to produce a steady crop of health care practices and more looking to sell, the quality of financial reporting and business documentation can not only become areas of focus for quality control and potential cleanup prior to going to market, but also security focus. “We now have two streams of clients with varying types of related issues,” Ellis states. “Larger sell-side projects that have PE backing already tend to focus on pro forma matters given a scenario such as newly created locations impacting run-rate adjustments. However, smaller, physician-owned practices usually are looking for cash basis versus accrual accounting assistance.” All in all, the blend of technological and financial and security concerns is only intensifying, requiring multiple facets of focus prior to M&A.

Big picture

With one quarter in, it’s easier to assess the evolution of the health care mergers & acquisitions (M&A) cycle. Interestingly, across both Europe and North America, the volume of M&A was down by a considerable portion, more so than any private markets data lag could explain. Mega- deals still boosted aggregate deal value, yet regardless the M&A cycle definitely took a breather at least to kick off 2019.

“The fundamentals for deals remain in place,” says Andy Jenkins, partner with transaction advisory services at RSM. “The biggest complaint we hear is that multiples are still quite high – there are too many buyers for the number of existing assets.”

That could help explain, in part, the reduction in volume, as could the sheer longevity of elevated volume since 2015’s start. Any single quarter’s downturn after a period of exuberant dealmaking could be ascribed to a pause on the part of buyers as they focus on internal integrations post-close. Even if buyers are cash or capital-rich, it’s difficult for financial sponsors to justify elevated multiples consistently, and strategics can take some time to consolidate and integrate. Furthermore, as volume is mostly concentrated within health care services still, it is likely that key niches will see cyclical declines as both financial and strategic buyers look to the next set of prime targets. Consequently, the downturn to kick off 2019 is likely not foreshadowing so much as temporal.

Looking ahead

This state of sluggish M&A persisting for an entire quarter is unlikely to persist. The health care ecosystem only continues to grow within the U.S. in particular, as multiple companies across various segments look to streamline operations and cut costs in general, even as the number of job openings continues to outstrip the supply of workers. Demographics provide an even stronger if slow-paced tailwind. All in all, one down quarter in an environment characterized by positive drivers suggests more a temporary state marked by unfavorable dealmaking conditions and timing than anything else.

“The fundamentals for health care M&A are still very strong,” says Jenkins. “The industry is still extremely fragmented, there’s plenty of private equity (PE) dry powder, and the demand for health care services continues to increase.”

Ellis adds: “Specific sub-segments of health care will continue to support consolidation as some will be more popular than others depending on temporary fluctuations in the overall climate.”

What will help drive further consolidation in key arenas going forward are even greater shifts in regulations of either pharmaceuticals or insurance, both of which appear to be significantly popular issues of focus within the political sphere as US elections approach. Beyond the realm of policy, even greater penetration of digitization into not only the customer experience but also diagnostic tools and back-office procedures will prompt investment of all kinds, from the acquisitive to growth funding. Medical and biotechnology plus consumer-facing health care solutions look set to benefit in particular.


Datagraphic available for download.


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