Q2 2018 Health Care and Life Sciences Industry Spotlight
INSIGHT ARTICLE |
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.
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.
Datagraphic available for download.