United States

Q2 2018 Health Care and Life Sciences Industry Spotlight



Running a smooth sale

In the current sellers' market, it is imperative to heed due diligence across all types of risk factors. Anecdotally, there is talk of increasing numbers of prospective PE buyers walking away from deals given the quality of the target companies, and given the level of current transaction multiples, one can hardly blame them. Savvy investors still looking for exposure to health care companies are now emphasizing the creation of sell-side quality-of-earnings reports, and looking for founder- and family-owned businesses that have undergone an audit—accordingly, to adopt the seller's perspective, garnering at least some type of financial review is well worth investment. Moreover, the inclusion of qualitative data is also key—brand loyalty, for example—and is a useful data point when it comes to analysis of a local care provider. Last but not least, especially for those firms that may undergo management transitions as part of the acquisition, personnel forecast or succession plans can help entice buyers, especially if the firm is a smaller care provider.

Of care providers in general, office-based specialty practices such as podiatry, fertility, behavioral health, ophthalmology and dermatology are especially attractive to buyers in the current market. Their potential to serve as a platform base for future growth via the acquisition of ancillary service providers is especially alluring. Consequently, there appears to be no curbing dealmakers’ appetite for such companies going forward.

Big picture

For some time now, the health care industry has seen steady increases in the volume of mergers and acquisitions (M&A) against a backdrop of significant change, albeit transformation that has only contributed to the sector's growth. From the demographic to the technological, transformative shifts within health care show little signs of stopping, although the dealmaking they have aided and abetted has grown increasingly complex. As M&A has resulted in larger and larger entities in key industry segments, resulting transactions have only grown in size, as exemplified by the ongoing megamergers such as the $69 billion purchase of Aetna by CVS Health. The U.S. Department of Justice just announced it would not contest the merger which is an encouraging sign for additional vertical integration going forward. In addition, the avid interest on the part of financial sponsors and the increasingly large sums at their disposal have also contributed to significant expansion in aggregate transaction multiples.

"On both the sell side and the buy side, investors are willing to pay high multiples," says Ron Ellis, senior director with transaction advisory services at RSM US LLP. "Certain segments like dermatology, physician practices, dentistry and more are ripe for consolidation." This has been the case for some time, which has led to an increasing number of sellers flocking to market. In turn, then, the primary challenge for those looking to buy is adequate diligence across both the qualitative and quantitative. Especially for private equity (PE) sponsors that are still keenly sourcing retail health care opportunities, prioritizing review of the smaller firms that were previously owned by families or founders is critical. 

Looking ahead

The dealmaking environment within health care is complex and competitive, so current transaction prices are quite costly. These are critical factors to consider when making a forecast. Considering the spate of megamergers that are likely to close this year, yet slowly diminishing volume, it is clear that the supply and demand dynamics are likely to continue shifting inexorably. Investors still want exposure to health care companies, but must balance the need for exposure with paying the right price for the right company. Consequently, it is likely volume will even out at best, as there isn't an endless supply of businesses for acquirers' purview. Buyers will still focus on either vertical integration or other types of consolidation at the top of the market, or in the case of financial sponsors, delve into fragmented niches where proportionally greater growth opportunities reside.

As for industry-wide issues, increased adoption of technology and demonstration of the ability to adapt in the face of regulatory pressures, and their knock-on effects will be top of mind for health care firm leaders. For example, firms need to be able to navigate potentially murky regulatory arenas that may grow increasingly dynamic. Ellis states, "Parts of the Affordable Care Act may have been eroded, so there have been some changes to reimbursement, but there has also been action to increase funding for programs to combat opioid addiction and further fund behavioral health." Accordingly, companies must continue to embrace and anticipate changes stemming from regulatory updates and technological advances in particular.

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