Healthcare M&A
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Healthcare Report 1H 2022


Take a deep breath and let us reset for a moment. That seems to sum up 1H22 in Healthcare M&A. Unless you’re old enough to remember the 1918 Spanish influenza epidemic, none of us have seen the Healthcare Industry in a period quite like the past two years. As we emerge, vaccines in hand, it was maybe inevitable dealmakers would take a step back and breathe, and that’s what we saw, a very slow, cautious reset.

Only 12 big hospital M&A deals were cemented in the first three months in the industry. That seems hard to believe. Everyone went back to their corner and took a stool. Then, even if deal numbers remained depressed, the heavyweights were back at it in Q2.

None of this should be a surprise, a lot of energy was expended last year as 2021 offered catalysts for acceleration. There was talk of a change to capital gains taxation from the new Biden administration. It didn’t happen, but nothing accelerates deals faster than the threat of higher taxation and a potential deadline. In addition, the Biden administration has been pushing federal regulators to scrutinize mergers and acquisitions in the industry more closely, providing additional pressure. So there was pressure to get things done before 2022, leaving less unfinished business heading into this year…

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Healthcare Report 2H 2021


Healthcare deals surged in 2021, up over 50% through November over the prior year with heavy action in physician medical groups, managed care, and rehabilitation subsectors. And never mind high multiples. Despite average multiples of value to EBITDA eclipsing 15x, the buying spree continued, including nine megadeals at over $5 billion.

Special Purpose Acquisition Companies, the so-called blank-check investment companies known as SPACs, continued to be active, as we saw 40 healthcare and life science SPAC IPOs in the first quarter of 2021 alone, with activity stoked by plenty of available capital.

The current administration’s focus on regulatory issues – especially in the healthcare sector – may begin to shape activity. If hospitals can’t acquire other systems the horizontal mergers in a more tightly regulated environment, they can – to a degree – turn to vertical acquisitions. In any case, there may be little room for extensive horizontal moves, as hospital systems in metropolitan markets are heavily concentrated, a trend on the rise since 2012. But now we’re seeing an increasing concentration of physicians under larger health system umbrellas. Digital health systems appear to become increasingly popular as healthcare systems look for profitable ways to keep up with interest from Amazon, Microsoft, and Walgreens in everything from telehealth to chatbot technologies…

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Healthcare Report 1H 2021


The Healthcare industry sustained a shock to the system in 2020 as COVID-19 struck a direct and dramatic blow to the bottom line. The hospital sector saw outpatient revenues fall due to the pandemic and operating margins were down nearly 5% over the year, without accounting for federal assistance. Throughout the year, private equity remained active in the space, and we expect that to accelerate, however with interest rates so low and weaker players looking for a lifeline, we anticipate some bigger deals will continue to be made in 2H21. The number of deals in 2020 was down slightly, but with the added strain and costs of coping with COVID, we anticipate smaller systems and independent facilities will be looking for partnerships with larger buyers in 2021.

Analysts report capital has been pouring into markets across multiple sectors this year with venture-backed companies attracting some $150 billion in just 1H21 – about 90% of the capital inflow in all of 2020 – with private equity and hedge funds playing a major role.

Today, health systems shaken by a decline in patient visits and additional costs are on the mend. And we believe many of the newly learned practices seen over the pandemic, including a focus on personal care, telehealth services, and remote monitoring, are likely to continue, creating opportunities in health tech as consumers and providers seek convenience, efficiency, and savings…

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Healthcare Report 2H 2020


The healthcare industry took a huge, unexpected, blow from 2020’s COVID-19 pandemic, a blow we believe may dramatically change the healthcare model and spur M&A activity as organizations race to increase margins, achieve efficiencies, fill gaps in patient expectations and overhaul how and where care is provided.

In the United States, the industry suffered lost revenues estimated at $202.6 billion (an average of $50.7 billion per month). As they readied for a surge in hospitalized patients with COVID-19, hospitals faced unprecedented new expenses as revenue from higher-margin, elective procedures and services plummeted. Hospitals had to convert space to deal with the special needs of virus patients, add workers, pay overtime, provide new staff training, even obtain the basics such as personal protective equipment (PPE). Elective surgeries were canceled – either by the hospitals to free space, or by patients out of fear of contracting COVID. Healthcare providers across the country suffered.

Damage was equally spread throughout the space, not only independent hospital systems, but across academic medical centers, federal Veterans Affairs facilities and nursing and long-term care facilities. And physicians in private practices across the country reported struggling, some turning to GoFundMe drives to stay afloat, reporting up to 80% drops in patient visits…

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If there’s a sector impacted by a global viral pandemic, it’s Healthcare. While patient care, research, workplace safety, and supply logistics took center stage in 1H20, it was understandable that M&A activity in the sector was disrupted during what may be one of the most unusual and unanticipated periods in a generation. Healthcare, an industry generally considered immune to economic disruptions, took this one hard. As the virus dug in its heels and valuation uncertainty became apparent, M&A activity fell in 1H20 year-over year. But looking forward, we see a sector where consolidation, fueled by the pandemic’s effects, will only accelerate. Those in the best position to act are those who have remained engaged, attuned, and ready.

The COVID-19 pandemic is exposing inherent weaknesses in the Healthcare system. Hospital systems that papered over fissures in the past are being exposed to cash flow strains, debt loads, staffing issues, and patient concerns over safety. Lucrative elective procedures and routine care visits are being postponed while pandemic protection measures are increasing costs and demand for less profitable services. Envision Healthcare Group, operating in 45 states and held by private equity firm KKR, in April found itself wrestling with $7 billion in debt and hired restructuring advisors. The company reportedly took drastic action, slashing senior staff pay 50% and suspending retirement contributions and raises amid decreases in patient volumes as high as 70% for ambulatory surgeries and anesthesia services…

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In the world of mergers and acquisitions, healthcare stands among the titans. In hospital systems, mega pharmaceuticals, and medical device manufacturers, the price of entry is stratospheric, and operations are complex and intertwined. But the rewards are massive. In 2018, American healthcare spending was up 4.6% to $3.6 trillion. At more than $11,000 per person, health spending accounts for nearly 18% of the country’s gross domestic product (GDP).

It’s little wonder the general and specialty provider sectors are leaders in the M&A space. With transactions often measured in billions, these deals involve multiple investment banks, potentially thousands of people hammering out the deals, and often publicly traded companies.


Healthcare is an undisputedly mature market which has grown well beyond the mom and pop, small town scope. Hospitals are large operations, the price of a single piece of equipment such as an MRI scanner can surpass $2 million, and the complexities of scheduling, billing, insurance, and physician and employee management are daunting…

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Healthcare Report - 1H 2019


Major players in the Healthcare Industry led the way in the flurry of M&A activity during the first half of 2019, which culminated in a total of 371 transactions tracked by SDR Ventures in the sector. Many prominent corporations have successfully executed or announced major acquisitions thus far in 2019, including multi-billion-dollar deals by Centene, Danaher, 3M and Ethicon. The combined enterprise value of these companies’ 2019 targets alone totals to nearly $50 billion, which reflects an increase in the implementation of large-scale inorganic growth strategies by the largest Healthcare Companies in the United States. Furthermore, The KPC Group made quite a splash with its $610 million acquisition of the Verity Health System of California, Inc., which is comprised of four notable subsidiaries: Orange County, Anaheim, Chapman, and South Coast Global Medical Centers.

That being said, there was no shortage of active financial buyers in the Healthcare sector in the first six months of 2019. Both New MainStream Capital and Gryphon Investors, Inc. completed five investments each during this period. It is important to note that the majority of these financial firms’ targets shared a key attribute – they are categorized as Specialty Providers. These companies operate in a variety of specialty fields, including but not limited to podiatry, ophthalmology, and dermatology.


No one individual group made more acquisitions in the Healthcare Industry in the first half of 2019 than The Ensign Group (NASDAQ:ENSG), which has already completed 10 transactions this year. Ensign is the parent company of a group of subsidiaries that consists of skilled nursing, rehabilitative care services, home health care, hospice care and assisted living companies. The company’s 2019 acquisition portfolio is predominately comprised of Long Term & Behavioral Care targets, with the exception of Bruno Dialysis – a Specialty Provider. Ensign’s deals in the first half of 2019 demonstrate the group’s willingness to employ an inorganic growth strategy in order to bolster its presence within its primary segment.

The 2019 acquisition spree for Ensign appears to be less focused on service diversification and more targeted towards geographic expansion. With 9 of the 10 deals completed by the group this year being in the Long Term & Behavioral Care segment, the targets that are being pursued by Ensign all provide skilled nursing, assisted living, and rehabilitation services. The geographic footprint of this acquisition campaign spans the western side of the country, with 4 deals closed in Arizona (Olive Ridge Senior Living, Vista Post Acute & Rehabilitation, Groves Assisted Living Community, and Phoenix Mountain Nursing Center), 4 deals closed in California (Portside Healthcare, Genesis Healthcare, Bruno Dialysis, and Downey Care Center), and a single acquisition in Nevada (Goldfield Mountain Healthcare and Utah (Bella Terra Cedar City) respectively.

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Healthcare Report - 2H 2018



Overall Healthcare M&A activity continues to be robust in the second half of 2018, with over 75 more transactions than the second half of 2017 and nearly 50 more than the first half of 2018. We have seen these jumps across the board, but most notably in mergers and acquisitions of medical device, specialty providers, pharma services and long-term and behavioral health companies.

2018 started out with significant M&A deals and new strategic initiatives focused on streamlining healthcare services and reducing costs. For example, a consortium now at over 700 hospitals has formed their own generic drug company, Civica Rx. Civica Rx’s goal is to have a more reliable supply and consistent pricing of generic drugs to counteract drug shortages and unexpected price hikes. Additionally, Amazon, JP Morgan Chase and Berkshire Hathaway have teamed up to create a healthcare company to manage the treatment and costs of their combined 1+ million employees.

While it remains to be seen how these strategic initiatives will play out, much has been noted around the cost benefits to healthcare resulting from M&A, especially to large hospitals and health systems. In addition to streamlined services and continuity of care, hospitals and health systems tout the cost benefits to patients due to improved efficiencies and continue to announce deals.

However, studies over the past couple of years have shown that patients often pay more in MSAs (Metropolitan Statistical Areas) with significant horizontal integration due to reduced competition and increased prices for hospital admissions, often well over 10% in some markets. Meanwhile, patients haven’t seen lower insurance premiums or out-of-pocket expenses associated with these mergers. There have also been concerns of hospital systems shifting lower priced outpatient procedures to hospital settings to reap higher prices. If these trends continue, we can expect to see more oversight and critical reviews of hospital and health system mergers. This becomes increasingly troubling with the fact that hospitals continue to snatch up physician practices. According to Health Affairs, over 40% of physicians work in practices owned by a hospital in 2016 compared to 25% in 2010.

Even as the concepts of primary care and urgent care coalesce, we are seeing increasing prevalence of urgent care and retail clinics serving as alternates for both emergency room visits and routine appointments with primary care physicians. Many urgent care facilities market themselves as providers of annual physicals, pregnancy tests and vaccinations, all of which would typically occur in primary care offices. Urgent care and retail clinics can be more convenient due to flexible hours, accessible locations and increased availability for patients without the need for appointment scheduling. Additionally, they are able to provide pricing transparency that…

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Healthcare Report - 1H 2018



Amazon touches our daily lives on so many fronts – groceries, electronics, streaming content – and now the “Amazonization of Everything” is making its way into the healthcare sector.

In January, Amazon, Berkshire Hathaway and JP Morgan Chase announced a joint healthcare initiative to provide coverage for their combined workforce in an effort to reduce the burden of healthcare expenses and at the same time improve patient outcomes through innovation. The initiative would cover over one million Americans. Although in its infancy, the initiative announced Dr. Atul Gawande as CEO, who has spoken extensively on the use of data to improve the healthcare system. Amazon already collects massive amounts of data on its users that could be used to enable everything from advanced analytics to the development of price transparency tools.

With healthcare accounting for almost 18% of U.S. GDP1 and growing, it is no surprise that large employers are seeking novel ways to reduce their tremendous health insurance burdens. Drug spending reached $450B in 2016, according to QuintlesIMS, and it is expected to reach approximately $600B by 2021. Overall medical expenses are expected to increase another 6% in the coming year, continuing to increase at a rate greater than inflation. Healthcare costs, including insurance, services and prescriptions, are big concerns for consumers, and with much of the population insured through their jobs, employers are incentivized to find ways to reduce healthcare costs to keep valuable employees.

In order to rein in pharmacy spending, we are seeing rapid consolidation among PBMs, retailers and providers and increasing disruption in the pharmacy space.

In June, Amazon announced the acquisition of PillPack, a full-service, online pharmacy licensed to operate nationwide with approximately $100MM revenue in 2017. PillPack delivers pre-made dosages of medications to users’ homes sorted into individual packets, indicating the date and time to take each packet. PillPack had raised a total of $118MM in funding from investors including Charles River Ventures and Menlo Ventures. The reported $1B acquisition announcement was followed by an 8-10% drop in the stocks of major pharmacy chains, based on Amazon’s history as an industry disruptor. Immediately, Amazon could sell throughout the entire country.  Walmart was rumored to be in the running for PillPack and now is supposedly in talks with Humana, the sixth largest insurer2 with 200 standalone clinics, which would complement the pharmacies in most of Walmart’s 4,700 stores. Walmart may be seeking to acquire Humana not just as a means of competition but also to help manage its own healthcare expenses. Walmart is the single largest employer in the U.S., with over 1.5 million workers…

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1. Source: CMS – Center for Medicare and Medicaid Services
2. Source: Statista. Ranking as of 2017, by membership.

Healthcare Report - Q1 2018


We recently welcomed Brian Williamson and Greg Rockers to the SDR Ventures team as Directors of Pharmacy & Healthcare. As former owner/operators of 503A and 503B compounding facilities, Brian and Greg have an unparalleled understanding of this space as well as a deep network of contacts with compounders and investors.

Brian and Greg co-authored this quarter’s report, along with SDR Co-Founder Chris Bouck.


Patients turn to compounding pharmacies when they are prescribed a dosage or form of a drug that is not available through commercial pharmaceutical manufacturing, or if there are drug shortages. Compounded medications are prescribed by physicians and prepared by trained, licensed pharmacists for children, adults or animals.

Some examples include:

  • Proper dosage for a young child or infant
  • Exclusion of certain ingredients that cause allergic reactions in the patient
  • Medications discontinued by manufacturers
  • Alternate forms to improve patient compliance, such as different flavorings or routes of administration


According to IBISWorld, compounding pharmacies will generate revenue of $6.4B by 2020. The International Academy of Compounding Pharmacists (IACP) estimates that in the U.S., there are 7,500 advanced compounding pharmacies, over 3,000 of which are sterile compounding pharmacies.

Under the Federal Food, Drug and Cosmetic Act, there are two categories under which compounding pharmacies can exist.

  • 503A pharmacies are licensed by individual state boards
  • 503B pharmacies are registered with the FDA, are defined as “outsourcing facilities,” and are subject to more stringent federal requirements under the FDA


Since the enactment of the Drug Quality and Security Act (DQSA), we have seen dramatic changes take place, including the increase in M&A activity in the compounding space. The DQSA granted the FDA authority over the manufacturing of compounded drugs. Companies who choose to voluntarily go the 503B route must be in compliance with current good manufacturing practices (cGMP) and additional reporting and labeling requirements.

So why would companies elect the more expensive and complicated route of becoming a 503B? 503As are only allowed to produce a medication according to patient-specific prescriptions, so they fill each request individually. 503Bs can produce medications in large batches with or without prescriptions, enabling them to be produced in bulk at lower costs and stored until they receive orders or prescriptions. 503B facilities can sell and ship the products they manufacture via interstate commerce as well. This creates opportunities for many customers on a national level…

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Q4 2017 Healthcare Report



Overall, healthcare M&A slowed down in 2017 as the U.S. awaited changes to the existing healthcare environment. However, the announcement of several insurance mega-mergers in the fourth quarter of the year signaled rapid consolidation in the market.

Insurance companies have combined at a fierce pace since the passage of the ACA in 2010. After federal antitrust regulators blocked the merger of the two insurance giants, Aetna and Humana, as well as an Anthem/Cigna transaction, large insurers are looking to vertically integrate instead. Aetna and Humana have each announced new transactions with non-insurer parties:

qAfter the failed CVS/Express Scripts merger earlier this year, CVS returned to the market with the announcement that it was acquiring Aetna for $69B, combining one of the biggest health insurers in the country with the drugstore and pharmacy benefits manager (PBM) giant. CVS aims to create community-based healthcare centers that would enable consumers to receive information on illnesses, health benefits, prescription drug coverage and to remotely monitor chronic conditions, all in one place.

qHumana is taking a 40% stake in the home healthcare arm of Kindred Healthcare, a national provider of home health, personal home care and long-term acute care assistance, with TPG Capital and Welsh Carson acquiring the remainder. As a significant Medicare insurer, Humana focuses on insuring the elderly and disabled and stands to benefit from providing home care to improve health outcomes and reduce overall medical expenses.

Also this quarter, the insurer UnitedHealth Group’s Optum unit agreed to acquire DaVita Medical Group, which owns and operates almost 300 medical clinics, urgent care centers and outpatient surgery centers, for $4.9B. UnitedHealth had previously declared its strategy to build an ambulatory care business and began acquiring doctor groups and surgery centers as part of that strategy.

Of note, these insurers have rapidly grown their revenue from Medicare and Medicaid in recent years. Since 2010 and the signing of the Affordable Care Act, the top five insurers, including the three above that announced transactions in the fourth quarter, have increased Medicare and Medicaid revenue from $92.5B in 2010 to $213.1B in 2016.1

The insurance companies appear to be replicating trends in the not-for-profit sector. Innovative not-for-profit systems have successfully combined insurance with delivery mechanisms to provide high-performing medical systems, such as Kaiser Permanente and Intermountain Healthcare of Utah and Idaho. These medical systems have found ways to deliver better care at lower costs…

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Healthcare Report - Q3 2017


The uncertainty surrounding the U.S. healthcare market hasn’t put a damper on the strong M&A environment in 2017. The third quarter saw the highest number of overall transactions this year and 2017 is on pace for a record in digital health deals – in terms of both dollars invested and number of transactions.

Sizable hospital systems and health organizations continued to drive the higher end of the M&A market. In August, the University of Pittsburgh Medical Center (UPMC) announced the acquisition of Pinnacle Health System, a seven-hospital system based in Harrisburg, which greatly expands UPMC’s reach out of western Pennsylvania and enables the health system to sell its insurance products to a larger coverage area.

Hospital systems and health organizations face a host of unknowns around:

  • Insurance coverage
  • New reimbursement models
  • New care delivery through Medicare’s Quality Payment Program
  • Compliance and regulatory environment

To remain competitive, health systems are looking to M&A to provide stability amidst this undefined landscape. Beyond the obvious, such as building scale and creating multi-region organizations, hospitals and health systems are consolidating to enable more seamless delivery of coordinated and cost-effective care.

Software and the digitization of healthcare delivery are key to meeting these goals. As part of the FDA’s Digital Health Innovation Action Plan, the FDA launched its Software Precertification (PreCert) Pilot Program this quarter. The program will determine quality metrics for software and digital health technology developers, rather than waiting to evaluate the final products. It is designed to speed up time-to-market for new and innovative digital health tools, while safeguarding quality and effectiveness of those tools for patients. Nine companies, including Apple, Fitbit and Verily, have been chosen for the pilot program. The FDA’s objectives to drive innovation also will encourage continued investment in the space…

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Q2 2017 Healthcare Report



Developing a new drug takes over 10 years and $2.6B of R&D spend when considering all of the unsuccessful attempts it takes to get a successful one. As a result, with the exception of the largest players, most drug development companies outsource a significant portion of the services for development. The core competency of most drug companies, whether startups or those with a track record of getting to market, is innovation, research and discovery. Drug developers have long outsourced many of the necessary execution, monitoring and analysis functions of development. The largest players in the outsourced pharmaceutical space tend to be Clinical Research Organizations (CROs), with Contract Manufacturers (CMOs) owning a substantial share as well. However, there are many other service providers focused on areas such as regulatory affairs, quality & compliance (GxP), pharmacovigilance, biostatistics, chemistry manufacturing and controls (CMC), and marketing.

Recently, there has been a significant rise in consolidation in the pharmaceutical services space starting with CROs. Two major CRO deals happened in Q2; it was disclosed that INC Research and InVentiv Health are merging and Pamplona Capital Management announced that it was taking PAREXEL private. On May 10, Alistair MacDonald announced the INC/InVentiv merger saying, “biopharmaceutical companies of all sizes face increasingly complex challenges… [and] are seeking comprehensive outsourced solutions across the clinical and commercial spectrum.” On June 20, PAREXEL revealed that it will be taken private by Pamplona. In announcing the deal, overtures of CRO consolidation were a major topic. “The market for biopharmaceutical services is evolving,” CEO Josef von Rickenbach announced after the transaction almost exactly two years after being quoted that competition among CROs was “ferocious.”

As CROs consolidate, the rest of the industry is following suit. In the lower middle-market, German-based PE firm, Auctus, has created a pharmaceutical services roll-up within the Pharmalex platform. In April, Auctus added its first U.S.-based company to the platform, Safis Solutions. (The diagram on page 4 outlines Auctus’s outsourced pharma services platform in detail.) Numerous private equity groups have crafted a similar thesis and SDR expects that there will be continued linkage of the various aspects of pharmaceutical services through aggressive M&A activity…

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Q1 2017 Healthcare Report


At the risk of sounding like a broken record, our thesis on the drivers of M&A in healthcare remains unchanged. The two overarching narratives remain: (1) driving cost out of the system, and (2) improving patient outcomes. As long as a business model articulates value created for key stakeholders (payors, providers, patients and physicians), the fate of Medicaid, albeit important, does not alter this over-arching theme.

We will continue to see consolidation in the following areas:

  • Providers with large patient management systems acquiring smaller add-ons
  • Business processes, services or technologies that make practices more efficient or better at collecting reimbursement
  • Providers and business services surrounding areas that do not have significant reimbursement risk…

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Q4 2016 Healthcare Report


In 2017, the healthcare industry will take its first step in what we believe is one of the most significant developments of the recent era. In April 2015, Congress passed the Medicare Access and CHIP Reauthorization Act (MACRA). Part of MACRA is something called the Quality Payment Program (QPP), a form of Medicare Repayment reform that shifts the methodology by which providers are compensated from “fee for service” (or similar models) to a model based upon long-term patient management. “Under the new system, doctors will be rewarded if they improve the way they track and manage patients over time, work in teams to make sure patients get the best, most appropriate treatments, use electronic health records and prioritize wellness and prevention,” says Steven Findlay of Kaiser Health News.

While this is rather old news, 2017 marks a very important step in this implementation. Although new payments begin in 2019, they will be based on quality measures that are collected and reported beginning in 2017. Physicians who do not implement such tracking and reporting systems will be subject to upwards of a 4% penalty on Medicare reimbursement.

A major question in the minds of many is whether physicians will stop accepting Medicare patients. We view this as unlikely for two reasons. First, physicians were already threatening to abandon their Medicare constituents because of the constant threat of declining reimbursement rates for core services. The new formula will carry less risk of rate pressure if it is successful. Thus, in the short run we expect physicians to assess the success of the program prior to taking a stance. Second, Medicare enrollment represents over 22% of Americans. For reasons we’ll discuss below, physicians are further incentivized to join large practices and large practices (simply because they are large) are not incentivized to cut off a quarter of their addressable market…

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Healthcare M&A Report - Q3 2016

Regardless of the outcome of the 2016 U.S. Presidential election, it is tough to foresee a scenario in the healthcare industry where the true economic cost of providing care is sufficiently covered by the reimbursement rates from government and private payers.

If a declining rate environment is a given, two types of healthcare businesses (or one type when combined) are positioned to benefit: (1) companies with sufficient scale to possess and employ efficient business processes and (2) companies with lower cost structures than peers.

Thus, we find ourselves witnessing two trends within healthcare M&A: (1) companies are pursuing specialties that allow them to establish repeatable processes, best practices, safer environments and better clinical outcomes, and (2) these companies also are pursuing scale in doing so.

This has created an ecosystem very conducive to M&A, and here is how it typically plays out throughout the healthcare industry:

  • Providers – Specialty providers are acquiring other specialty providers in pursuit of economies of scale and market leadership.
  • Practice Management – Practice management companies are on-trend because they help providers reduce costs and add efficiencies. Practice management companies with scale can do so more than their cohorts; thus, roll-ups are taking place throughout the space.
  • Medical Devices – Devices that improve procedural outcomes and reduce patient stress, hassle and time in the office are more likely to gain market share than others. These help providers improve market leadership.

We expect to see this very fragmented space continue to consolidate through M&A in the coming years. Additionally, companies that provide products and services around the pursuit of market leadership and economies of scale will likely be takeover candidates.

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Q2 2016 Healthcare M&A Report

Every business school student learns about Porter’s Five Forces: threat of new entry, supplier power, buyer power, threat of substitution and competitive rivalry among existing firms. Participants in today’s Healthcare industry are affected by rapidly shifting landscapes in at least one, and sometimes all five, forces.

Players who are differentiating themselves in what are sometimes called the “4 Ps”, as defined in the graphic on the next page, are becoming attractive candidates for growth investment and M&A due to the rapidity of this evolution.

A great example of this evolving landscape is in the Specialty Providers segment (i.e., niche providers of specialized care facilities or services). MEDNAX has grown rapidly (nearly doubling since 2011) due to an intense M&A focus on neonatology, teleradiology and anesthesiology, among other specialties. By standardizing best practices and standards of care in neonatology and anesthesiology, MEDNAX has been able to improve outcomes, organizational communication and reduce overhead. Its large corporate infrastructure enables it to improve revenue cycle management in its acquisition targets, making it attractive for its physician partners to sell to them, but also to retain ownership in specific facilities. In teleradiology, each incremental physician adds efficiency to its system. With more physicians in its system, studies can get from the radiology center to the right licensed and credentialed radiologist faster, and diagnoses can be made faster, improving outcomes and profitability for each center. These drivers not only make specialty providers in fragmented industries like neonatology, teleradiology and anesthesiology better takeover/growth investment candidates, they also make MEDNAX a better partner for larger hospital systems and care networks. The seven acquisitions that MEDNAX has completed in 2016 (at the time of this report) all point to this thesis. AmSurg Corp., a provider of ambulatory services (gastroenterology procedures, ophthalmology procedures and orthopedic) and physician services (anesthesiology, radiology and neotalogy) has grown at a similar rate and has been aggressive through M&A in a similar fashion.

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Industry Overview

U.S. Healthcare M&A Activity - Q1 2016

Activity within the Healthcare industry in the first quarter of 2016 continued to be driven by the growing cost of providing care. Although medical cost trends are continuing to outpace inflation, advances in telehealth, new payment models and a focus on value-based care have reduced the healthcare cost growth rate from 6.8% in 2015 to an estimated 6.5% in 2016. Conversely, the number of adults aged over 65 is growing at 3.4% per year which, teamed with the continued implementation of the Affordable Care Act’s penalty tax, has resulted in significant coverage expansion for customers with pre-existing conditions. This, in turn, has contributed to industry cost appreciation. However, an overall deflation in spending growth is indicative of industry trends that are aimed at propelling more affordable care.

Consolidation has become a common strategy for industry players to capitalize on corporate synergies and back-office support, which has resulted in larger health systems. A PwC Health Research Institute consumer survey revealed recently that Americans are willing to travel further to receive care from a respectable or well-known care provider, enhancing the importance of branding for these conglomerates. However, the continued expansion of M&A regulations in the industry may force a portion of deal activity away from traditional acquisitions to affiliations, partnerships and joint ventures. For example, in February, McKeeson Health Solutions announced an alliance with Health QX designed to aid insurers to create and modify bundled payment models. Additionally, regional and niche companies are becoming more common acquisition targets due to unique strengths that could increase the capacity of larger healthcare providers to deliver value-based care.

The emergence of innovative healthcare technologies designed to improve treatment access, enhance data storage and monitor cybersecurity threats has continued to be a major trend within the industry. As the telehealth movement gains momentum, care access is shifting to mobile platforms, fulfilling the public’s desire for value-based treatment and helping reduce industry costs. According to a health industry issues report by PwC, over 32% of consumers claimed to have at least one health related app on their mobile device, as compared to only 16% just two years prior. By improving mobile connectivity and expanding data analysis capacity, many industry players are engineering marginal costs out of the system and making primary care more accessible and fluid. However, with the estimated value of Internet-connected healthcare products exceeding $280 billion by 2020, vulnerability to hackers has prompted increasing cybersecurity regulation. Medical product manufacturers will therefore need to proactively invest in securing and protecting customer data.

As costs to U.S. businesses associated with mental illness now exceed $440 billion, compared to $200 billion in 2013, many industry stakeholders are recognizing the importance of behavioral healthcare, propelling the sector in 2016. Additionally, advances in telehealth technology have allowed mental healthcare providers to conduct virtual appointments, streamlining access to behavioral healthcare.

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