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Q1 2018 Health Care and Life Sciences Industry Spotlight

INSIGHT ARTICLE  | 

Spotlight

Third parties, 3 risks and your life sciences business

The network of complex relationships that make up the life sciences industry can contribute to significant complications for multiple companies. Every pharmaceutical, medical device and biotechnology company must leverage third parties, but with each benefit of such relationships comes an associated risk. From security to regulatory compliance, the range of risks is broad, but there are three key areas in particular to heed in the current environment: regulatory compliance, data security and reputational impact, as highlighted recently by RSM US professionals. (To address the full gamut of risks, the life sciences third-party relationship management practice of RSM US contains additional resources for consultation.) Although significant uncertainty around potential policy changes remains intact, there is still significant regulatory overhang to ensure providers are in compliance with, particularly given how easy it is to garner negative exposure in today's era of mass, 24/7 media. Hence the need to pay more attention to consumers' concerns, especially regarding the safeguarding of their sensitive data, as well as to have more control of and transparency around the chain of care. In short, third-party relationships are a paramount concern in life sciences, but for health care in general, all types of relationships matter.

Key findings

The health care industry remains characterized by significant opportunities for innovation and investment. Longer-term demographic trends and slow-moving yet consequential regulatory changes continue to contribute to the sector's shifting dynamics. However, the deal-making environment remains complicated due to imbalances in supply and demand. With potentially monolithic mergers such as Aetna and Humana blocked last year, consolidation at the top appears to be moving more toward the vertical rather than the horizontal, as the even-more-mammoth $69 billion acquisition of Aetna by CVS Health continues. In other health care segments, horizontal consolidation is also steady, yet nowhere near the levels seen in recent years. The decline in overall volume of mergers and acquisitions (M&A) can be attributed more to timing, as many acquirers focus more on post-integration absorption plans and financial sponsors look for better value in the consistently high-priced environment.

"The buy side has become a lot more concentrated in add-ons," says Ron Ellis, senior director with transaction advisory services at RSM US. More and more niches are being explored by financial sponsors as well as acquirers in general, ranging from behavioral health to dermatology. The key traits unifying the health care segments that are commanding the most attention are: favorable regulatory dynamics, lesser exposure to reimbursement risks, regional potentiality (although Ellis states that state-by-state factors do matter) and, last but not least, significant fragmentation. "There are other ways than just the pure numbers to drive growth when it comes to adding on," Ellis says.

Looking ahead

The narrative of synchronized global growth remains intact, although there are some troubling signs given macrofinancial trends among sovereign debt loads and contentious political topics such as trade. However, the health care industry remains somewhat insulated from such shocks and enjoys multiple positive drivers like aging populations and recent technological advances, to list just two separate areas. Consequently, its specific economics look set to persist, although that in turn contributes to the factors that have been exacerbating businesses' challenges for the past two decades: inexorably rising costs, considerable regulatory burden and significant upfront costs when it comes to grappling with innovation.

Meanwhile, the deal-making environment looks set to remain pricey for at least the near term, but opportunities in the lower end of the middle market, amid niche care providers, still persist; meanwhile, new ways to leverage cost-saving technology could lead to newer, more efficient provision of holistic care, as well as the expansion of new consumer segments as preventive health care becomes more digitized. That said, in the shorter term, deal-makers will still face many challenges. As Ellis states, "The reason we get called so much on the sell side is that we help explain the real numbers based on value and not necessarily what ended up on historical books and tax returns, as you have to factor in seasonality, run rates and more." Especially with many small enterprise owners looking to take advantage of the current climate, those challenges are unlikely to go away any time soon. On the buy side, reimbursement rates remain a primary concern, according to Ellis. "Your population and payer mix matter more than on the sell side," he says.

Datagraphic available for download.


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