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INSIGHT: Health-Care Deals Up in Q2, but Long-Term Covid Impacts Unclear

July 29, 2020, 8:00 AM

Despite the resurgence of Covid-19 cases in a growing number of states and continuing uncertainty for businesses, the number of health-care deals announced or closed in June (144) trended upward to end Q2, as compared to May (104) and April (106).

The pandemic has fueled an intensified focus on life sciences and pharmaceuticals as the race to identify effective vaccines and therapeutics to prevent and treat Covid-19 has attracted new investment. Health-care IT and software transactions have also been spurred by the ongoing demand to meet patient needs both inside and outside of traditional care settings.

Covid-19 has left many health-care provider entities to re-examine their strategic priorities. The initial wave of cases resulted in sudden shift in operational focus to properly care for patients. In select “hot spots” areas across the country, many providers continue to manage an influx of new Covid-19 cases as well.

As a result, financial profiles across the provider landscape have been evolving with changes in utilization patterns. Providers with strong financial profiles are actively seeking to continue to increase their footprints and combine with organizations that are experiencing increased levels of distress and/or strategic uncertainty.

Moreover, many independent hospitals, physician groups, and other provider companies that previously desired to “go it alone,” have had a change of heart and are now exploring partnerships with larger health-care organizations with substantial capital and corporate infrastructure, to enable them to better weather Covid and any future pandemics or major economic downturns.

Others have been forced to seek these partnerships because of diminishing revenues that are not likely to rebound given the surge in Covid-19 cases and the inevitability of a second wave.

Consequently, 2020 will continue to be a dynamic M&A environment for health-care provider entities such as hospital/health systems, physician practices and services, homecare and hospice, among other providers, faced with Covid-19 related challenges.

Hospitals/Health Systems

Hospital/health systems deals totaled 56 through June 2020, with eight total deals announced of closed in June compared to only five in May. For the same period in 2019 there were 65 announced or closed deals, a 13.8% decrease year-over-year.

Notable transactions in June include the announcement of Advocate Aurora Health combining with Beaumont Health. After a abandoned transaction earlier in the year with Summa, Beaumont Health has pivoted to merge with Advocate Aurora Health. With the deal expecting to close later in 2020, the combined system would be one of the largest in the Midwest, with operations in Michigan, Illinois, and Wisconsin totaling $17 billion in revenue across 36 hospitals.

This continues the trend of “super regional” systems attempting to increase size and scale across select geographic focus areas.

Physician Practices and Services

Physician practices and services deals totaled 89 through June 2020, with 16 total deals announced of closed in June compared to only five in May. For the same period in 2019 there were 82 announced or closed deals, an 8.5% increase.

Private equity interest in select specialties continues to drive deals in this subsector. Notable transactions include Lee Equity Partners majority equity recapitalization of Integrated Medical Professionals and the Urology Group to form Solaris Health, demonstrating a continuation of private equity’s interest in single specialty physician practices in an effort to drive size and scale in a sector that remains highly fragmented.

In the deal, Cincinnati-based the Urology Group, combined with New York-based Integrated Medical Professionals through a management services organization, to create Solaris Health with more than 150 provides across 60 locations in Ohio, Kentucky, Indiana, and New York.

Life Science and Pharmaceuticals

Life science and pharmaceuticals (34) has led all subsectors for every month through the first half of the year. The sector has 168 total deals announced or closed year-to-date through June. Transactions and demand for the sector are expected to accelerate as we approach the end of the year with a growing number of Covid-19 vaccine trials progressing and an expanding pipeline of therapeutics being tested domestically and internationally.

Health-Care IT and Software

Health-care IT and software is also continuing a strong first half of the year, with 20 announced in June and 112 year-to-date. Recent reports show that the use of telehealth increased by thousands of percentage points during the pandemic, as compared to a year ago.

Although some health facilities have begun resuming elective services, they may be curtailed in some states given the resurgence of infections. In either case, the reliance on remote services and other technologies that enable effective communication with patients and sharing of health data across settings and platforms will continue to be an attractive investment target. This is especially so because many anticipate that some of the relaxed regulatory changes at both the federal and state levels during the pandemic could become permanent.

Health IT and software transactions are also anticipated to rise as new technologies are in high demand in light of the increased reliance on the internet during the pandemic to conduct business and the increased risk in healthcare data privacy and security concerns.

Medical Device and Supplies

Medical device and supplies had the third highest announced/closed deals in June (16) bringing the year-to-date total up to 80.

Just as reliance on IT services has increased during the pandemic, so too has demand grown for innovative medical devices to support patients outside of traditional health care settings and for suppliers to meet the needs of providers working on the frontlines of treating Covid-19 patients.

Other Notable Trending Sectors—Cannabis and Home Health

Cannabis deals continue on the rise, with 16 transactions in June and 73 year-to-date. The increased activity in this sector could potentially result in 150 deals by the end of 2020. As a substantial majority of states now allow medical marijuana, and others have fully legalized cannabis, this sector is trending “high”, notwithstanding certain legal/regulatory issues regarding federal law and banking.

The pandemic has also resulted in some shifts in subsector transaction activity within the long-term care continuum. Home health “stock is on the rise,” as it is expected that due to substantial spread of the virus in nursing homes and other long-term care facilities throughout the country, elderly populations will delay or avoid transitioning to institutional care settings, and instead, are likely to seek more home-based assistance to the extent possible.

This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.

Author Information

Gary W. Herschman is a member of Epstein Becker Green in its Newark, N.J., office. Anjana D. Patel is a member of Epstein Becker Green in Newark. Hector M. Torres is managing director at FocalPoint Partners LLC in Chicago. Larry Kocot is a principal and national leader at KPMG LLP in Washington, D.C. Carole Streicher is a national partner in charge, HCLS deal advisory at KPMG LLP in Chicago.

Zachary S. Taylor, of Epstein Becker Green; Aaron T. Newman, Ryan DeBlaey, and Michael Stotz of FocalPoint Partners; and KPMG’s Ross White, Puja Ghelani, and Shakoor Jilani contributed to this article.

Epstein Becker Green, FocalPoint Partners, and KPMG did not comment on any particular transaction or party discussed or listed in this article.

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