In a recent interview with Levin & Associates, Andre Ulloa and Mark Thomas, co-founders at M&A Healthcare Advisors, took a comprehensive look at the intricate dynamics shaping the home health and hospice market. They explored the factors driving the shifts in acquisitions, investor preferences, emerging trends, and the future landscape of this ever-evolving sector.

Understanding Acquisition Trends

The reported decrease in acquisitions from 2022 to 2023 can be attributed to several key factors. According to Ulloa and Thomas, the increased cost of capital and the insolvency of regional banks have kept financial buyers on the sidelines. Moreover, a slight decrease in the supply of home health agencies for sale has been observed, as many prospective clients are choosing to await a more opportune time for their exit.

Corporate Entrants and Their Approach

Large corporations like Humana have made forays into the home health and hospice market. However, their approach may not align with the preferences of lower-middle market sellers. M&A Healthcare Advisors’ experience reflects that these corporations often have a standardized approach, potentially undermining their rapport with sellers who seek personalized advice. This approach has impacted their transactional success and market reputation.

Appeal for Strategic Investors

Smaller investors find the economically defensive nature of healthcare services appealing. The highly fragmented nature of the home health industry presents an opportunity for significant returns on investment. Strategic acquirers focus on increasing their pool of caregivers, leveraging the operational benefits that smaller agencies offer in mitigating shortages of nurses and therapists.

Dominating Investor Types and Market Dynamics

The market has witnessed a transformation in investor preferences in recent years. Initially dominated by strategic operators, the entry of mid-market private equity groups around 2016 marked a pivotal shift. Financial firms, including independent sponsors, drove acquisition activity from 2018 through 2022. However, in 2023, this pace slowed due to increased capital costs and a focus on stabilizing existing portfolios.

Regional Dynamics and Emerging Markets

Thomas and Ulloa elaborated on geographic factors, which, while impactful, don’t necessarily dictate the viability of healthcare services companies. Emerging markets often encompass second-tier cities or areas adjacent to larger population hubs. Large urban centers like New York or Los Angeles aren’t primary targets for home health acquisition due to challenging growth conditions and questionable marketing practices.

Evolving Trends in Home Healthcare

Interestingly, there’s continued interest in adjunct services and products within home health operations, especially those generating revenue from cash payors. Ancillary services like home mobility and modification are flourishing, reflecting patients’ increasing preference to heal in their own homes, supplementing Medicare with personal investments in equipment.

Challenges and Opportunities Ahead

The persistent challenge of caregiver shortages continues to drive acquisitions by strategic operators. Looking ahead to 2024, the emphasis on deploying capital in uncertain times positions healthcare as a defensible investment avenue. However, addressing the continuing caregiver shortage remains a critical challenge for the near future.

Forecasting Acquisition Trends For 2024

These industry experts foresee a resurgence in healthcare mergers and acquisitions in 2024, anticipating increased interest from investors. With fewer sellers in 2023 and concerns about declining multiples, the stage is set for a potentially significant year in home health and hospice M&A activity.

In conclusion, the home health and hospice market remains a focal point for investors despite continuing operational challenges. With changing dynamics and emerging trends, the industry is poised for growth and adaptation, providing opportunities and challenges alike in the coming years.

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Source: Levin & Associates, November 2023

Original article written by Kate Humphrey, Editorial Analyst, is linked below. Andre Ulloa’s contributions were provided in a Q&A format over the phone.

Navigating the Dynamic Landscape of Specialty Pharmacies

In recent years, the specialty pharmacy market has experienced significant transformations. While grappling with surging demand, it has also faced challenges such as narrowing profit margins and escalating costs. Despite these hurdles, the specialty pharmacy industry has proven its resilience. Specializing in medications not commonly found in regular pharmacies, these pharmacies focus on highly specialized drugs designed to treat intricate conditions and diseases like cancer, multiple sclerosis, hemophilia, and HIV/AIDS. 

Mergers & Acquisitions Activity in the Specialty Pharmacy Market

Mergers and acquisitions activity within the specialty pharmacy sector has steadily increased since 2018. While 2018 saw 19 announced transactions, 2019 experienced a significant surge, with 25 deals reported. Although deal volume dipped to 21 transactions in 2020, it rebounded to 24 acquisitions in 2021 and 26 in 2022.

However, 2023 has not mirrored the robust activity of previous years. The first three quarters of 2023 witnessed only 13 transactions, the lowest annual total in the past five years when annualized. This decline can be attributed to the market’s consolidation, with major players like Express Scripts, CVS Caremark, and OptumRX controlling approximately 80% of the market share.

Source: Levin ProHC, October 2023

Private Equity in the Specialty Pharmacy Market: Opportunities and Challenges

Interestingly, private equity (PE) firms have not been as prevalent in the specialty pharmacy market. In 2023, private equity and portfolio companies accounted for only four transactions, constituting roughly 31% of the sector’s year-to-date activity.

According to Andre Ulloa, Partner and Executive Advisor at M&A Healthcare Advisors, “As private equity exits an investment, they expect returns to be enhanced by an increased multiple, or ‘multiple arbitrage.’ They achieve this by scaling and integrating the portfolio within desirable market sectors that are not overly burdened by regulations which diminish the services (or products) to the constituents utilizing them.”

Trends and Insights: A Closer Look at 2023 Transactions

In terms of disclosed spending, 2023 witnessed a substantial drop, totaling $75.35 million across two deals. This contrasts sharply with 2022, which saw a total of $1.75 billion in disclosed spending across three deals. The largest transaction in 2023 was Belmar Pharma Solutions’ acquisition of Innovations Group, Inc. from UpHealth, Inc., amounting to $56 million.

The Impact of FDA Approvals on Specialty Pharmacies

In recent years, the specialty pharmacy market has experienced a significant boost due to the surge in FDA-approved specialty drugs. Notably, in 2016, half of the new drugs approved by the FDA fell under the category of specialty pharmaceuticals. This marked increase from previous years has paved the way for innovative treatments in various therapeutic areas.

IQVIA’s 2021 report, Global Oncology Trends, highlighted the introduction of 17 new drugs to treat rare cancers in 2020, with an additional 30 novel oncology medications in 2021. While specific data on specialty pharmaceuticals was not provided, the report emphasized that over 30% of new medicines in 2020 were oncology-related, targeting specific genetic mutations. This trend underscores the growing importance of specialty drugs in the pharmaceutical landscape.

Emerging Trends and Challenges in Specialty Pharmacies

PBM Dominance and Market Consolidation

One of the prevailing trends in the specialty pharmacy market is the dominance of Pharmacy Benefit Managers (PBMs). PBMs, with their ability to negotiate lower rebates, have significantly influenced market consolidation. Ulloa noted that when there are high-volume, expensive drugs that are not a challenge to dispense or for the patient to take, PBMs can handle them easily. However, their preference for expensive drugs over cost-effective alternatives has raised concerns. This trend has made it challenging for independent specialty pharmacies to compete, leading to decreased investor interest in these businesses.

Rise of Long-Term Care Pharmacies

Another notable trend is the rise of long-term care pharmacies (LTC). LTC pharmacies distinguish themselves by providing holistic healthcare solutions working directly with patients and physicians. Their multifaceted capabilities have made them attractive to investors, leading to their prominence in the M&A market.

Notable Transactions: Insights into Industry Dynamics

PANTHERx Rare Acquisition

In 2022, Nautic Partners, The Vistria Group, and General Atlantic acquired PANTHERx Rare for $1.4 billion. This significant transaction highlighted the growing demand for specialty pharmacies catering to rare and orphan diseases. Despite the challenges, private equity groups strategically collaborated to navigate the market and spread the risk of the acquisition.

Walgreens’ Strategic Moves

Walgreens, a retail giant, made strategic acquisitions to establish a foothold in the specialty pharmacy industry. Their acquisition of Shields Health Solutions and Medly Health‘s pharmacy assets demonstrated a shift toward specialty pharmacies providing niche services. With these strategic moves, Walgreens aims to compete with other retail pharmacy-based PBMs like CVS Caremark.

Looking Ahead: Challenges and Opportunities in 2024

Despite the existing challenges, the specialty pharmacy industry is poised for enduring growth. While the rest of 2023 may not witness a significant increase in deal volume, Andrea Ulloa predicts, “I don’t expect an uptick in M&A activity this fourth quarter, but certain indicators suggest that 2024 will be a big year for transactions. There are several portfolio companies which are looking to exit the market and if the PBM strangle loosens…then these pharmacy assets will be more desirable.” 

As the specialty pharmacy market evolves, M&A Healthcare Advisors play a pivotal role in guiding investors and stakeholders. While challenges persist, opportunities abound for strategic investments and acquisitions. The industry’s dynamic nature requires astute navigation, and with the expertise of M&A Healthcare Advisors, stakeholders can make informed decisions in this ever-changing landscape.

In conclusion, the specialty pharmacy market remains dynamic, presenting both challenges and opportunities for investors and stakeholders. By staying informed about emerging trends and industry dynamics, M&A Healthcare Advisors can help you navigate the complexities of this evolving landscape, enabling you to make strategic and informed decisions.

Healthcare M&A Deal Volume Plummets 30% in January Amid ‘Fear, Uncertainty, Doubt’

Industry professionals involved in healthcare M&A transactions saw a drastic decline in deal volume during the first month of 2023.

According to data captured in the LevinPro HC database, 210 transactions were reported in January. This represents a 30% decline compared to the 301 deals posted in January 2022.

A record 2,397 transactions were reported in 2022 following 2,218 deals in 2021.

There were 59 transactions in January 2022 with reported prices that totaled approximately $26.2 billion. The recently concluded month featured 36 deals with reported prices that totaled about $7.9 billion for a total price decline of 70%.

“No sector [including health care] has been immune to the capital markets volatility experienced last year and valuations will adjust accordingly,” said John Nero, senior managing director at Newmark Healthcare Capital Markets Group in New York.

The often-cited fears of a recession, an elevated pace of inflation and the increase in the cost of capital caused by the Federal Reserve’s campaign of raising interest rates to the highest level since 2007 all contribute to the conditions market participants are dealing with. But they are only part of the story.

“2022 was an outlier year for M&A activity across all strata of the market,” said Andre Ulloa, partner/executive advisor at M&A Healthcare Advisors in Los Angeles. “From a macro level, the increased cost of capital will impact enterprise values, which may cause sellers to wait until they can drive higher offers. If the cost of capital increase is coupled with uncertainty in regard to hyperinflation, or the potential of a major deleveraging of the market, investors will remain less acquisitive until there is more stability.”

The Fed’s rate-setting Federal Open Market Committee believes there is a need for “ongoing increases in” borrowing costs.

“We do expect a slowdown of M&A activity in [2023],” Ulloa said. “In the small/micro-cap sector, or lower middle market, our firm deals with founder operators who are assessing if organic growth will be more fruitful than scaling through a merger or acquisition with their equity participation.”

Ulloa also discussed the involvement of private equity (PE) in the healthcare M&A market. PE firms and their portfolio companies were involved in 137 deals in January 2022. A decline of 47% was experienced in January 2023 when 72 PE transactions were reported.

“Over the past six years, we were involved primarily with transactions in which the buyer/investor was private equity, or some form of financial firm,” Ulloa said. “Now we are seeing more strategic companies valuing the operations more than the profitability.

“We are seeing private equity lowering their valuations. That leaves lower-middle-market M&A in a place where ownership may determine that pricing isn’t high enough from strategic buyers for them to exit completely, and the offers from financial firms may not be attractive enough for them to remain involved in anticipation for a follow-on capital event.”

Numerous target sectors within health care experienced year-over-year declines in deal volume. eHealth, which had 54 deals in January 2022, fell 52% to 26 transactions in January 2023. Physician Medical Groups (PMG) posted 77 transactions in January 2022, but declined 34% to 51 deals in the first month of 2023.

“Nothing is recession-proof in an absolute sense,” said Kevin Moyer, practice lead, transaction strategy & transformation at Sax Capital Advisors in New York. “All markets will experience some level of tangential effect during a recession. But in today’s current environment, the medical office building market should see minimal material trickle-down from a macroeconomic perspective as there is an ever-present continued need for medical office space.”

Declines experienced within the acquirer sectors included eHealth, falling 46% from 37 deals in January 2022 to 20 transactions; PMG declining 38%, from 64 transactions to 40 deals in January 2023; and real estate investment firms dropping 26% from 19 deals in January 2022 to 14 transactions.

Despite a drop from seven Hospital target sector deals in January 2022 to only one transaction in the recently concluded month, Nero foresees notable activity in the sector during 2023.

“Independent hospitals will likely continue to consolidate with larger health systems,” Nero said. “Cost pressures and thinner margins on smaller community hospitals have motivated this alignment with larger systems. A similar trend is occurring for small to midsize physician group practices. We have observed health systems aligning with specialty operators in inpatient rehabilitation hospital and behavioral health sectors, which will create more joint venture and merger transactions.”

Ulloa identified the “outlier bid” as a bright spot in the healthcare M&A landscape.

“On average, EBITDA multiples have gone down,” Ulloa said. “Certain segments have been hit harder than others. However, we continue to receive outlier bids on our deals, which are at the height of the market. We continue to see one offer in every deal that greatly exceeds the average valuation. There is plenty of fear, uncertainty and doubt to go around. So far, we have been able to find at least one buyer that adds value to the seller’s company due to operational synergies, geography or accretive integration with their current service line.”

Despite the decline from 15 Behavioral Health Care target sector deals in January 2022 to nine transactions a year later, Ulloa remains bullish regarding the sector.

“There is a silver lining with treatment facilities, which are inpatient and in network,” Ulloa said. “We are seeing financial growth in treatment centers.”

A drop in deal volume has not dampened Nero’s optimism regarding 2023. He said Newmark expects an uptick in M&A activity this year as investors and targets have had an opportunity to adjust valuation expectations and prices in a “new normal” rate environment. Also mentioned was the market’s performance when the economy has been battered.

A Resilient Industry: M&A Trends in Specialty Pharmacy

Significant changes have swept the specialty pharmacy market over the past several years. It was once a niche in the pharmacy industry but has grown significantly in market size. According to a report by Axtria, specialty drug spending is growing and constituted about 46% ($222.9 billion) of all prescription drugs in 2019, compared with 34.9% ($132 billion) in 2014. These numbers make sense with the tailwinds that pushed the industry, such as an aging population in the U.S. creating a greater need for medications that treat chronic and complex diseases.

Most of the changes in the market have come from M&A activity. Consolidation has swept the industry, with a few players controlling most of the verticals.

“Not too long ago the industry was much more fragmented, and independent pharmacies occupied the majority of the market,” Andre Ulloa said, Partner at M&A Healthcare Advisors, a boutique advisory firm focused on serving the healthcare industry. “Now, they’re about 20% of the market, with 80% occupied by a handful of large-cap healthcare corporations.”

We see this reflected in the data we’ve captured on the healthcare M&A market on LevinPro HC. Players across retail pharmacy and managed care have built up their specialty pharmacy segments through acquisitions. In 2021, Walgreens Boots Alliance, Inc. took a majority stake in Shields Health Solutions in a deal valued at $1.37 billion. Shields Health Solutions’ national presence can’t be overstated. It has partnerships with more than 70 health systems and serves more than 1 million patients.

In 2020, Centene Corporation acquired PANTHERx, one of the largest specialty pharmacies in the United States specializing in orphan drugs and rare diseases. Specific terms were not disclosed, but in the company’s 2020 annual report, Centene said the acquisition was a “significant” amount of the $7 billion Centene spent on investments that year.

OptumRx, the free-standing pharmacy care business of Optum, a subsidiary of UnitedHealth Group, purchased Diplomat Pharmacy in 2020 for $300 million, plus the assumption of Diplomat’s outstanding debt of $586.51 million. Diplomat Pharmacy provides specialty pharmacy and infusion services nationwide, specializing in managing medications that treat patients with complex chronic diseases. It has a presence in all 50 states and Washington, D.C.

“All of the major pharmacies have been merged with or acquired by insurance companies and/or pharmacy benefits managers (PBMs),” Ulloa said. “These intermediaries have wedged themselves into virtually all the pharmacy medicare reimbursement for independent specialty pharmacies. It’s a clear conflict of interest when the reimbursement for medicare patients is managed by a competitor pharmacy. PBMs have been the primary reason for the consolidation and/or divestiture of independent specialty pharmacies.”

Levin Associates

Almost every sector across the healthcare spectrum has picked up its deal activity this year following a quiet 2020, but the Behavioral Health Care sector has made noticeable jumps as a result of the deal-making environment opening up in tandem with the easing of COVID-19 restrictions.

And the numbers speak for themselves. Deal volume has spiked from 51 deals between January and September 2020 to 81 deals during the same time period this year. Announced purchase prices also have soared in 2021, from a total of $1.33 billion in 2020 to $2.7 billion during 2021.

During just the first few days of 2021, Medical Properties Trust (NYSE: MPW) acquired a 40-facility portfolio of Priory Group’s behavioral health hospitals. The deal’s $1.087 billion price tag is indicative of the growing need for behavioral health services. MPW piggybacked on that deal with the $950 million purchase of 18 behavioral health hospitals and a stake in the operations of Springstone LLC, a leading behavioral health provider, in June 2021. And by all appearances, the rising need for mental health services during the pandemic is a likely driver for these lucrative deals.

“In the last two years, there’s been a continued surge of new money and buyers [in the behavioral health care market],” said Mike Moran, partner and executive advisor at M&A Healthcare Advisors.

“Given the resiliency that these providers have shown throughout the pandemic, the demand for acquisitions within the segment has grown, no question. When speaking to providers across the country, unfortunately one common thread is that mental health struggles continue to surge, thus increasing the demand for more providers in the space.”

The healthcare editorial team at Irving Levin Associates sat down with industry veterans Mike Moran and Andre Ulloa to discuss the launch of their new advisory firm, M&A Healthcare Advisors (MAHA), and the state of the healthcare M&A market. MAHA aims to transform the M&A experience for lower-middle market healthcare business owners by providing highly accessible, transparent and experience-driven seller-representation services throughout the entire sale process.

What motivated you to launch the new firm?

Andre: We saw a huge void when it came to lower-middle market seller representation in the healthcare industry. These smaller healthcare agencies are often overlooked by investment banks and other advisory firms given the anticipated size of the transaction. We are nimbler than a larger bank and can provide the much-needed representation for those smaller healthcare businesses. Combined, our team has more than 20 years of experience in the healthcare M&A space. In that regard, our clients can expect a high level of expertise, as we handle all aspects of the transaction, other than legal. Our goal is to manage the sale process so our clients can remain focused on operating their business and, most importantly, continue to care for their patients. Our representation is particularly important as more financial investors, such as private equities, enter the healthcare market and bring with them a high-level of scrutiny in the due diligence process. As advisors, we protect the sellers’ interests throughout negotiations, which usually means maintaining their valuation by anticipating where the buyer intends to adjust the terms of the deal.

Mike: To add to that, a company’s valuation could be affected by hiring the wrong advisory firm. Not having the proper guidance for a transaction could be detrimental to a valuation and finishing a deal. We guide our clients through the entire sale process including managing all aspects of due diligence, which is usually lengthy, time consuming and complex.

You’re launching the new firm at a time of unprecedented activity in the healthcare M&A market. What is driving so much activity? Are there any sectors or type of companies in high demand that you’re seeing?