Ten Reasons Why Healthcare M&A Activity Will Remain Strong In 2016

For some time, healthcare M&A deal activity has been robust in the US and much of the international community. Despite the vagaries of world markets, especially for commodities, many verticals within the healthcare market remain quite strong. For example, the GF Data® M&A Report recently noted that in 2015 high EBITDA premiums for Total Enterprise Value (TEV) in the lower US middle market increased for the $10-$25 million range (to 6.6x), the $50-$100 million range (to 8.0x) and the $100-$250 million range (to 9.7x). The $10-$25 million range is especially noteworthy since this is often the size of healthcare “add ons” for existing investment platforms.
 
A reasonable question could be raised about the sustainability of this trend, however we believe this is a longer term phenomenon for the following reasons:
 
Room For Innovation
Much of healthcare, especially in the service sector, has been practiced the same way for the past half century, with an emphasis on physician gatekeepers and office visits. This environment is ripe for considerable evolution in both service delivery and value-based reimbursement practices.
 
Our International Perspective
Innovation is increasingly an international experience, with US hospitals borrowing cost-effective practices from their Indian counterparts; African clinics embracing new portable diagnostic imaging technology from Europe; and US citizens traveling to Thailand for world-class substance abuse treatment or Costa Rica for bariatric surgery at 1/3 of the cost of similar therapeutic services in the US. Practices that once were considered medical tourism are now acceptable middle class healthcare options.
 
Increasing International Investment
US healthcare companies, including insurers, are acquiring healthcare service entities in Europe, Latin America, and Asia at an increasing rate, with healthcare investors from around the world also entering the US market. Opportunity in the healthcare industry is less limited by borders than ever before.
 
Expanding Investment Diversity
Investor activity is growing in a broader range of healthcare verticals, ranging from intellectual/developmental disabilities programs and autism treatment services to physician/dental practices and early-stage life science companies. Private equity groups (PEGs) are also partnering with more sub-$2 million EBITDA entities than ever before.
 
Baby Boomer Transition Continues
While the US baby boomer owner transition has not been as pronounced as expected (largely due to the Great Recession and the desire to work longer), it is picking up steam as values have increased. Many sellers believe the timing for a transaction will be ideal for the next couple of years, fueling more deal opportunities.
 
Increased Sophistication And Transparency
As buyers and investors have acquired more experience in the healthcare space, they have understandably become more sophisticated, opening the door for more options, including de novo growth and diversification. Their financial modeling is highly attuned to their specific market, so it is easier for them to see possibilities while mitigating their risk. For example, we now have private investors who are as knowledgeable about the US Medicaid arena as seasoned professionals who have spent a lifetime working in that environment.
 
Public/Private Partnerships
One of the bedeviling aspects of the US healthcare market has been the perceived conflict between private and public providers of healthcare, including public funders. More recently, partnerships like the Independence At Home (IAH) demonstration project have created an environment where public funds are used to reimburse private providers of home-based primary care. The resulting savings are then shared between the public funder and the private provider. Interestingly, for several IAHs, not only have the financial results been positive, but the quality ratings by patients have been extremely high.
 
Outpatient Preference And The New Consumerism
As the result of supportive research, accessibility, and economic necessity, customers of healthcare services are increasingly embracing outpatient alternatives to facility-based options. This is the case with urgent care and ambulatory/surgery centers, as well as with substance abuse treatment options. Intensive outpatient (IOP) substance treatment can be a highly effective option without removing patients from their community, which also opens an array of possibilities for investors. Urgent care centers are unique in that they allow consumers to easily access affordable care as well as one-stop shopping for other products that they want – and these centers can be established at minimal expense.
 
Inevitable Technology
Largely because of US regulatory issues, technology-based services such as telehealth have barely begun to be fully utilized and the up-side potential internationally is tremendous. Other technology-enabled services, including electronic health records and revenue cycle management products, are increasing efficiencies and reducing costs. Add to this the use of technology to facilitate self-directed support services for multi-billion-dollar public programs and we will soon have a very different way for patients to more rapidly access and pay for services.
 
What Our Data Says
In addition to the cited GF Data® report, we are seeing a rapidly growing pipeline of healthcare deals, as well as new hybrid investors who want to enter the healthcare marketplace for the first time and on a one-off basis. They have significant capital and believe there is a very long runway for the expansion of this market.
 
The vitality of the international appetite for healthcare services and products is aided by other factors, including populations that are living longer and wanting to age in place. However, this only reinforces our view that there is more innovation, affordability, and accessibility to be found in healthcare markets. This will drive more interest – and investment – on a global basis.
 
Tom Schramski, PhD, CMAA, is the Founder and Managing Partner of VERTESS, an international merger and acquisition firm that is exclusively focused on the healthcare marketplace. He is a former healthcare executive, Licensed Psychologist, and the recipient of numerous awards. Tom has represented sellers and investors across the healthcare spectrum and was recognized for his executive leadership in the 2005 Entrepreneur of the Year issue of Inc. More recently, Tom was named the 2015 Member of the Year by the Alliance for Merger and Acquisition Advisors (AMAA). Tom is the editor of SalientValue, VERTESS’s bi-weekly e-publication.  

Tom can be contacted on 520.975.5347 or by email at tschramski@vertess.com