Last month, the Berkery Noyes Investment Bankers firm released its latest “Health Care Industry Trend Report,” covering the first half of calendar year 2016 in healthcare, and focusing on merger and acquisition (“M&A”) activity in the healthcare and pharmaceutical information technology company sector. That report is finding a moderate level of M&A activity these days, but not the wave of high-profile, big-ticket activity that was the case a couple of years ago.
As the report, released in July, notes, “The largest deal in 1st Half 2016 was healthcare information and technology services company IMS Health's announced merger with Quintiles Transnational Holdings, a provider of biopharmaceutical development and commercial outsourcing services, for $8.75 billion.” More broadly, the report’s authors noted, “Total transaction volume in 1st Half 2016 increased by three percent over 2nd Half 2015, from 223 to 230.” At the same time, they reported, “Total transaction value in 1st Half 2016 rose by 72 percent over 2nd Half 2015, from $10.44 billion to $17.96 billion.” But, they added, “If the IMS-Quintiles transnational merger is excluded, value declined 12 percent during the past three months but still gained 59 percent on a year-over-year basis. The median revenue multiple decreased slightly from 3.2x in 2nd Half 2015 to 3.0x in 1st Half 2016. Median value moved downward from $42 million to $18 million. The segment with the largest rise in volume in 1st Half 2016 over 2nd Half 2015 was Pharma IT, which more than tripled, from 9 to 31 transactions.” The authors also noted that “Strategic acquirers during the last 30 months were responsible for 85 percent of volume in the Healthcare IT segment, as opposed to 76 percent of volume for the aggregate industry.”
Tom O’Connor, a managing director at Berkery Noyes, spoke recently with HCI Editor-in-Chief Mark Hagland regarding the report’s findings and the broader landscape around merger-and-acquisition activity now in healthcare and healthcare IT.
Based on what’s in the report, it seems that activity has slowed somewhat now?
I’ve been here 15 years, and have seen a number of cycles. I’m speaking next week at a Berkery conference, on M&A. There are a lot of little opportunities, for entrepreneurs, but there are never a huge number of very large companies that will be engaged in a lot of transactions. Meanwhile, there’s so much chaos in healthcare, there are so many smaller opportunities, and there are always strategics, but instead, I would say there’s a steady flow of deals, as opposed to the waves of a couple of years ago. And a lot of these deals that we’re seeing happening now have been in process for a while now.
You’ll probably see steady M&A activity going forward. We do see that. But it’s definitely for properties that have high revenue growth, recurring revenue, and scale. You need to have those three things in the market, to be attractive; and those are few and far between. We do look for disruptors. There’s so much change. Medhok was a good example; it just got acquired by Hearst Health. They were a population health management platform. They worked in emerging value-based models; a regulatory compliance platform. Look at their press release. But they had gotten to scale—to a certain size in revenue. They were more than $25 million in revenue, and were growing at 50 percent a year. So Hearst Health, a good example of a company you wouldn’t associate with HIT, but look at what’s happening. Verisk just sold their healthcare group to a private equity group.
The shifts taking place in the policy and reimbursement arena are changing the dynamics of business activity, correct?
Yes, the shift from fee-for-service to value-based is a seismic shift. And it’s usually new players and companies that have seized the opportunities, not your strategics. It’s usually these entrepreneurs and disruptors, who then typically get acquired by some of the big players. It’s very much an in-process thing going on right now.
What do you see happening in the next couple of years?
Especially as you go to value-based, outcomes-based payment models, things are changing. Physicians get paid, or get penalized, for readmissions in 30 days. All this is driving independent physicians to work for hospitals or affiliate with hospitals. They can’t afford to be independent practitioners anymore, or take on risk. What we think is interesting is that you’re seeing more hospital systems becoming payers. That’s interesting, because they’re assuming the risk. That’s an interesting dynamic. Kaiser does that.
There are a number of health systems that have created internal development entities, including Intermountain Health, UPMC, and Geisinger Health System. So you see their initiatives as triggering activity?
Yes. There’s still a lot of talk. But I do think entrepreneurs are going to be developing solutions. It’s also SaaS in the cloud, too. We see the shift in the cloud. And remote healthcare and telemedicine, that’s another huge trend. And some payment changes are happening. So there are players emerging in the marketplace that are getting size and scale. And they’re purchasing smaller companies to help. So we typically see that, smaller companies that disrupt the market and then will get acquired. A lot of these companies will take Series A, B, and C growth capital, and eventually, they’ll be sold to either a much larger private equity firm or by a strategic [company]. And there’s a trillion dollars of private equity money sitting on the sidelines looking for growth. These companies will do their life cycle and then get acquired.
Healthcare and healthcare IT are areas that are still appealing to investors, correct?
Yes, it’s a fantastic market for investors. It’s the third-largest employer in the United States, and filled with innovation. And another area is the post-acute area, per the aging of America. The Baby Boomers are getting older, and they’ll need a lot of services, so we’re seeing a lot of activity around how to help them, educate them, refer them to homes. Relias was a SaaS-based education platform for post-acute, owned by Vista Equity. Training modules, focused on the post-acute market, and they got sold to Bertelsmann for $400 million.
What would you say to CIOs and CMIOs, who might be concerned about service quality and stability in the evolving healthcare IT products and services marketplace?
I’m an optimist. A lot of times, these companies are sold to private equity. Well, private equity is a great buyer, because a lot of times, they’ll just invest in the business. They’ll invest in service and technology, because they want to achieve robust growth. The name of the company usually won’t even change. So private equity helps stabilize the company. And will support new product development. Typically, we’ll selling software businesses, not hardware businesses, today. And strategics today are very different; sometimes it’s not McKessons and Cerners; sometimes, it’s the Hearsts and ADPs. Like Premier, they bought CECity. An organization like that will buy a smaller company and invest in it. And a lot of investors want to grow and invest in companies, so it’s a good thing.
Is there anything else you’d like to add?
I would say what I tell clients. It’s very hard to find a privately owned HIT company growing rapidly with good margins, that’s willing to look into an offer. It’s very hard to find. Private equity has been focused on this market for a number of years, so a lot of the companies we think of as strategic, are already involved with private equity.
So most of these people already have dates?
Will anything change in the next couple of years?
The ACA [Affordable Care Care] has actually driven a lot of the innovation and change in the healthcare market. So we think that the regulations are not going to slow down, but that’s good for my clients, because they’ll help to solve problems in the marketplace. And we think it doesn’t matter who is elected in November. We’ll just continue to see more M&A in the next ten years. Healthcare is still behind in the adoption of technology. Medical errors are still happening, and some processes and organizations are still paper-based. So we’ll continue to see investment in health information technology.