Healthcare M&A Ends 2013 in Sickbay

Is it the flu or a more chronic illness?  As measured by pre-2010 transaction activity, deals were plentiful in 2013.  However, most M&A professionals observed that 2013 ended with business owners and deal-makers on a more guarded note.  The recent tepid mood shift is evident in 4th quarter 2013 M&A activity.  Every sub-sector of healthcare experienced a drop in transaction volume except Equipment & Supply.  See “PCE Industry Update – Healthcare 4th Quarter 2013” report.

Source: PCE Industry Update – Healthcare – 4th Quarter 2013

Despite the recent decline in healthcare M&A transaction volume, it is important to remember that the Affordable Care Act “ACA” is driving the industry to implement Accountable Care Organizations which are pushing the industry to lower the cost of healthcare while demanding better patient outcomes.  At the same time, the ACA provides insurance for millions of previously uninsured. As this population gains coverage, the industry ownership and their investors will benefit from the growth of increased spending.  This bullish outlook can be seen in the confidence in publicly traded healthcare companies.  Despite recent across the board compression in the profitability or “Gross Margins” and “EBITDA Margins,” the “Total Enterprise Value” of public companies across the healthcare industry continues to increase.

Most M&A professionals involved in the healthcare industry attribute the 2013 year end “wait and see” mood to the anticipation and uncertainty of the roll-out of the ACA compounded by the Federal government’s divisive decision budget making malaise. The ACA has now been launched, Washington budget policy making appears to be recovering and the public equity markets are at record highs, so the tentativeness toward M&A and investing in this sector is expected to dissipate in 2014.

Sub-sector Spotlight – Compound Pharmacy & Home Health

The compound pharmacy industry is facing increased oversight as a result of new Federal regulations.  The new Federal mandates and expected heightened State oversight have been brought on as a result of last year’s widely published stories of illnesses and deaths resulting from inadequate pharmacy operators in New England and Tennessee.  These new regulations will most likely drive the smaller operators out of business in favor of the larger and better capitalized compound pharmacies.

This “upgrade” in the compound pharmacy industry standards comes at a time when most expect to see increases in demand for outpatient services.  The increase is expected as the medical community and Accountable Care Organizations created by ACA, push to move patients out of the hospital to less costly options.  This push is expected to place renewed importance and M&A interest on the home health care industry.As we look toward 2014, expect to see these two subsectors and the overall healthcare M&A activity to pick up as the system continues to search for ways to lower costs and provide care with better outcomes for patients.  Any healthcare business service, device, technology or process that can eliminate costs from the system will be a target for acquisition or investment in order to accelerate growth in the market.
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David Jasmund

Investment Banking
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