Positive Prognosis: Healthcare Continues to Attract Strong Attention
Private equity investors remain focused on the attractive returns they can generate through investments in healthcare, while strategic acquirers see M&A in the industry as a way to accelerate cost reductions.
Those are two of the takeaways from recent healthcare events attended by professionals from Harris Williams & Co.’s Healthcare & Life Sciences (HCLS) Group. Vice presidents in the firm’s HCLS Group Eugene Bord and Mervyn Han attended the Association of Corporate Growth’s (ACG) 10th annual Healthcare Conference in New York. Meanwhile, Whit Knier, a director, and Nick Owens, a vice president, went to McGuireWoods and RSM’s annual Healthcare and Life Sciences Private Equity and Finance Conference in Chicago.
Read on for the details of what is driving this interest, including what makes some healthcare platforms more appealing than others.
Steady Growth Driving Healthy Interest
Private equity firms are committing a greater share of their funds to healthcare companies, says Bord, because these companies can generate growth that is generally independent of underlying economic conditions: “After nine years of economic expansion, acquirers are actively focused on putting dollars to work in areas where they continue to see a long runway for growth.”
Such interest continues to drive strong valuations, especially for large, attractive healthcare platforms. However, that demand is leading to some changes.
“As these platforms become harder to find, groups are starting to focus more on add-on acquisitions,” says Bord. “They are increasingly looking for smaller businesses that can be merged with existing portfolio companies. Many private equity investors see this as a good way to put more equity to work.”
And while add-on acquisitions have historically been more affordable, that may be changing too, particularly in certain multi-site healthcare sectors: “We continue to see multiples for add-on acquisitions across multi-site healthcare creeping up to the mid-to-high single digits, although in more fragmented sectors, such as dermatology, add-ons at attractive multiples are still common,” says Nick Owens.
Cost Structure and Reimbursement Setting Some Platforms Apart
Some healthcare platforms are more valuable to investors than others. For example, those with flexible, lower-cost operating models, or that have the potential to become more flexible, can deliver higher returns to investors. “That includes healthcare businesses that that can operate with a higher proportion of nurses and physician’s assistants,” notes Mervyn Han.
Likewise, platforms with favorable reimbursement rates or large numbers of private-pay patients—including dermatology, certain segments of dentistry and veterinary—are proving especially enticing to investors.
“Practices with a diverse range of services and respective charge codes tend to be shielded from the risk of targeted reimbursement cuts,” explains Owens.
Platforms that can combine lower-cost operations with favorable reimbursement rates are especially differentiated. “The most attractive businesses are able to deliver the right care to the right patients in the lowest-cost setting,” says Bord.
Strategic Acquirers Building Vertical Businesses, Lowering Costs
For their part, strategic acquirers are focused on building innovative businesses that give them more control over healthcare costs.
“It's fascinating the way they're creating new business models inside and outside of their networks,” Han says. “For example, we’re seeing large insurers buying healthcare providers, including urgent care and home care.”
With the purchase of urgent care networks, insurers can direct customers to clinics instead of emergency rooms, Han says, lowering costs for patients and themselves. Similarly, acquiring home care businesses enables insurers to increase the portion of treatments that members receive in lower-cost home-based settings.
The recent Tax Cuts and Jobs Act has given corporations an unanticipated windfall, adding fuel to the fire. “It provides them with extra ammunition to go out there and find acquisitions,” says Bord.
Both private equity groups and strategic acquirers continue to invest heavily in healthcare. Private equity is focused on building platforms with flexible cost structures and opportunity for growth, while strategic acquirers are creating innovative business models that help them control costs. For both groups, healthcare will remain an important sector for acquisitions.
Published March 2018
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