Healthcare Heating Up: Investors Bullish on Deals in 2018
The new corporate tax rate and other trends are sparking fresh interest in the healthcare market.
Investors are bullish on the healthcare market this year thanks in no small part to the corporate tax reform passed by Congress in November. This attitude was apparent throughout the 2018 JP Morgan Health Conference, where lenders showed a strong appetite for talking deals and new and existing investment scenarios took on renewed significance.
Some of the scenarios carried over from the previous 12 months, but with refreshed appeal. Case in point are physician practice rollups — the acquisition of fragmented segments of the health market. Last year, interests were concentrated around dental practices and urgent care centers for consolidation and potential sale. Though the trend did not prove as fruitful as first anticipated in 2017 — largely due to back office scaling issues — private equity investors are still on the hunt in 2018. With money to spend and an appetite for high valuations, rollups in different subsectors have remained attractive to PE investors and continue to be a trending topic in the industry.
Investors are also eyeing non-profit, public hospitals as they experience profit pressures due to a drop in volume. While operating cash flow is expected to contract by 2 to 4 percent this year, interest in consolidation will likely continue, and with it, increased M&A talk. What is the danger of all this talk turning into action? There is a significant number of small, distressed companies, which larger companies may look to purchase. To overlook the fact that there are a myriad of these distressed companies may result in regret.
Here is look at three other trends that investors will be watching closely throughout this year.
1. What the Funds Are Saying
Beyond the tax cuts, the pro-corporate environment in Washington is another factor spurring significant competition for deals, with investment banks proving highly receptive to financing. (According to Dealogic, "healthcare was the second largest sector in the U.S. for M&A volume [in 2017] with 1,038 deals worth $271.7 billion. It was also the fifth largest sector for North American M&A revenues, and the sixth largest sector for American investment banking revenues.") One strong holdover from 2017: PE multiples, which continue to increase across most subsectors.
2. Where Private Equity Dollars Are Headed
With their focus on rollups, it’s clear that PEs are willing to take on the additional operational risk of building versus buying. This is likely a result of the huge premium being garnered by established practices. Two in high demand are dermatology and ophthalmology. Why? Because of recurring revenue and the ability to cultivate a patient base that will require services over years. Additionally, gastroenterology offices are proving attractive along with physical therapy.
3. Major Merger Raises Questions
The implications of the $69 billion merger between drug chain CVS Health and insurer Aetna remains to be seen. If approved, the merger will put CVS in a better position to compete with integrated providers such as UnitedHealthCare with its Optum pharmaceutical division. The new CVS-Aetna one-stop shop might provide more convenience for consumers, but others wonder if it might lead to less consumer choice overall. Meanwhile, the deal has focused attention on a potential acquisition of Humana by suitors such as Walgreens or Cigna.