Taylor Will, a vice president in the Healthcare and Life Sciences Group, recently participated in a webinar titled Investing in the Animal Health Industry. The webinar also featured professionals from Katten Muchin Rosenman LLP, Ernst & Young, and Pathway Vet Alliance.
Here we share key insights from Will on what attracts investors to animal health, how dynamics in the space are shifting, and what sellers should be thinking about before going to market.
Strong investor interest
Will says several factors are putting animal health on investors’ radar. One is cash flow: Compared to some healthcare segments, animal health is a largely cash-pay business, with little to no complexity related to reimbursement.
Even more important, he says, are the strong tailwinds driving increased consumer spending on veterinary services. Sixty-eight percent of U.S. households have a pet, according to the 2017-2018 National Pet Owners Survey conducted by the American Pet Products Association (APPA). That’s an increase from 56 percent of U.S. households in 1988.1
Will also points out that as veterinary medicine continues to evolve, it’s beginning to mirror human medicine. “There’s more awareness of and demand for specialty procedures, which is driving longer pet lifespans,” he explains. “As with human health care, you see a large increase in spending during those later stages of life.”
In addition to those factors, Will says investors can achieve significant multiple arbitrage by acquiring veterinary clinics and rolling them up into bigger platforms. “Compared to some other multi-site opportunities, veterinary services is still relatively fragmented,” he says. “Investors can also create significant value by integrating purchasing activities, driving costs down, and pulling organic growth levers.”
Shifting M&A dynamics
Given the attractiveness of animal health to investors, it’s no wonder that M&A dynamics are shifting. For one thing, says Will, investors have begun to shift from a “land grab” mentality to one more focused on professionalization.
And as investor interest continues to intensify, rising multiples are driving interest in alternative sectors of animal health that still benefit from the segment’s attractive fundamentals. “As the private equity universe has continued to penetrate the industry, it’s becoming more and more competitive in terms of entry multiples,” says Will. “Yet investors are still very attracted to the industry, which is driving interest in related areas: things like end-of-life care, burial or cremation services, and software and logistics providers to veterinary hospitals.”
Looking forward, Will anticipates that the industry will continue to move toward the retail healthcare model: “Platforms that are fully built out, fully integrated on a single hospital management system, with a very robust administrative team, back-office analytics, and other measures. And all of that will be geared toward providing better customer experiences. There’s a substantial opportunity for animal health businesses to differentiate themselves and gain market share.”
Rising above the herd
In an environment of rising multiples, how can animal businesses justify a premium valuation? Will says savvy investors are focused on those businesses with clear visibility into their performance. “Data is king, specifically operational metrics, historical and expected growth, and DVM retention and turnover.”
Will adds that the vast majority of platforms use multiple hospital management systems, and that it can be challenging to integrate data from those systems and see how the platform is really performing: “In our experience, the most successful sellers have taken the time to create a holistic view of key metrics, as well as a hospital-by-hospital view. They’ll have a clear view of growth from M&A versus organic growth, price volume mix, and patient profitability.”
He also says that it often makes sense to hire a third party to perform a quality of earnings (Q of E) report to validate those analyses: “The more data you can share, the better positioned you’ll be in the marketplace.”
For more information, contact Geoff Smith, a managing director in the Harris Williams Healthcare & Life Sciences Group.
Published May 2019