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.