What Are Healthcare Investors Looking for Next? Fundamentals.

Following several high-profile, silo-shattering mergers and acquisitions in the healthcare industry, many healthcare investors are questioning what might be the next paradigm shift and how these large-scale transactions will affect the M&A prospects of companies that aim to sell in the next few years. Fascinating and unexpected transaction counterparties were the hottest topics at several recent industry conferences, but the underlying takeaway at each has been that high-quality companies with strong fundamentals should have an increasingly larger universe of diverse investors and acquirers to choose from.

Intrepid’s Healthcare Group is regularly asked to make sense of the surprising recent M&A activity. We are excited to share some of our perspectives on what might come next.

The pace and scope of some of the most notable recent changes are signaling a new era of healthcare M&A. While massive regional hospital operators merging like Dignity and CHI are impressive because of their scale, recently announced megadeals, like CVS’ acquisition of Aetna and Cigna’s acquisition of Express Scripts, are fundamentally changing traditional industry roles and providing payors with even more influence over patient care and decision-making.

The most recent development, Walmart’s reported interest in acquiring health plan Humana, only furthers these trends. Walgreens’ potential acquisition of wholesale drug and supplies distributor AmerisourceBergen has reportedly fallen apart, but the strategic rationale remains unique and new.

Whereas strategic M&A is typically justified by horizontal integration to expand market share or geographic coverage, or vertical integration to consolidate additional services within an industry’s value chain, several of the transactions in Q1’18 involve buyers emerging from completely different sectors within the industry. It is safe to say that it has become commonplace to react with complete surprise at the buyers for sizeable healthcare assets.

Last month, Intrepid joined hundreds of private equity investors at various industry events like the healthcare M&A conferences organized by McGuire Woods and McDermott Will & Emery as well as the 40,000-plus Healthcare IT professionals at the HIMSS conference in Las Vegas. One development is clear: several factors are driving interest in healthcare companies beyond traditional silos, which could prove to bolster the M&A prospects for high-quality companies in the near-term.

Some variables that investors are focusing on suggest that strong business fundamentals are key, including dependable compliance infrastructure, an ability to improve quality while managing costs, vocal physician leadership and ancillary revenue opportunities. In other words, investors and strategic buyers alike are flocking to companies that can demonstrate an ability to produce high-quality clinical outcomes that drive the costs out of the healthcare ecosystem, are derived from defensible medical necessity, rely upon input from aligned physicians, and, finally, exhibit a capability of integrating with tangential services.

Even though a logical and directly competitive buyer may emerge ultimately to acquire one of these companies, Intrepid is seeing first-hand and hearing from many peers, that businesses from every corner of the healthcare ecosystem may be open to investing in businesses that meet these criteria. Of course, traditional business drivers like profitability, revenue diversity, leverageable data and automation technology are still critical to success, as in any industry, but healthcare-specific characteristics are becoming just as important in driving buyer appetite and transaction valuations.

We expect to continue to hear about silo-breaking transactions and see high-quality companies with strong fundamentals receive an increasingly diverse pool of buyers or investors to consider as they evaluate their strategic alternatives.

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