March madness is over for college basketball fans, but it’s just the beginning of a fast-paced year for health-care M&A activity.
At the current pace, deal activity is projected to eclipse over 1,200 deals by the end of 2019 (compared to 1,059 deals in 2018). With over 317 deals announced or closed year-to-date (through the end of March), we may very well see a record setting year for health-care deals.
Very Active Hospital/Health System Sector
Hospital and health system deals are currently on pace to eclipse 180 deals in 2019, with nearly 50 deals having been announced or closed through the end of the first quarter.
Several common themes from 2018 continue to drive M&A activity in 2019: (i) smaller, community based hospitals partnering with large regional players to accomplish the need for size and scale to ensure survival and longevity; and (ii) mega-mergers of larger regional, statewide and multi-state health systems to achieve a larger breadth of service coverage.
Of note, HCA and Mission Health completed their $1.5 billion dollar merger, resulting in HCA’s entrance into the North Carolina market. Additionally, the merger of San Francisco, CA-based Dignity Health and Englewood, Colo.-based Catholic Health Initiatives to create CommonSpirit Health, resulted in a 21-state enterprise with over 140 hospitals and generating more than $29 billion in revenue.
While deal activity is expected to continue its strong pace, some merger discussions fell apart due to the complex challenges in integrating large health systems. For instance, the previously announced merger of Memorial Hermann Health System and Baylor Scott & White, which would have created the largest health system in Texas, was called off, in part, due to concerns about the parties’ ability to provide continued high-quality of care.
However, deal activity is expected to continue at its current pace, as participants strive for innovative solutions for mega-merger integration challenges.
Long-Term Care Remain Red Hot
Long-term care continues to sustain high deal activity through the first quarter of 2019, in part due to new buyers entering the market and favorable market dynamics. The current pace of long-term care deals in 2019 is set to yield over 300 transactions by year end.
The aging population in the United States has increased demand for long-term care services and has incentivized new potential buyers to enter the market—ranging from publicly-traded REITs, private equity firms, to regional operators. With almost 80 long-term care deals announced or closed through March 2019, long-term care is very much an active “seller’s market.”
Notably, Omega Healthcare Advisors’ acquired MedEquities Realty Trust for $600 million in cash and stock, including the acquisition of fee simple interests in 34 facilities across seven states.
Private equity firms are also expected to further drive deal activity, following Apollo’s $264 million acquisition of 17 Brookdale-managed seniors housing communities late last year. The potential opportunities available in long-term care will continue fueling an active market.
Physician and Dental Practices Persist in Private Equity Crosshairs
Physician and dental practice deals continue to grow in volume and value, with 45 announced or closed physician practice deals and 20 dental practice deals in the first quarter of 2019. The current pace of physician and dental practice deals collectively are on pace to surpass 250 deals this year, far exceeding 2018 totals.
The strong pace is driven by the continued appetite of buyers targeting certain lucrative or high-growth specialties—namely dermatology, dentistry and ophthalmology. Private equity firms have been actively seeking practices in these specialties to build or expand upon a platform that achieves the desired scale and structure necessary for an accretive investment.
Other factors fueling deal volume in the physician sector this year include investors gaining interest in the following “newer” specialties: gastroenterology, orthopedics, radiology, urology and OB-GYN practices. These specialties offer appealing growth potential and profit opportunities, including via additional revenues that can be generated from a variety of ancillary services.
Healthcare IT & Software Follows Broader Trends
The fast-paced shift to a technology-based business environment continues to drive M&A activity in the healthcare IT & software sector. In the first quarter of 2019, there have been 46 closed or announced deals in this sector, setting the projected pace for over 175 deals in 2019.
Buyers have expressed strong interest in software platforms with innovative technology and “AI” capabilities, allowing providers to enhance patient engagement, improve data analytics, and otherwise enable them to navigate and succeed in growing value based reimbursement programs.
In particular, investors are targeting software platforms that offer consumer-centric health IT solutions—such as virtual care and patient engagement and rewards apps. In addition, investors have targeted platforms that offer software solutions narrowly tailored for certain providers (such as hospitals, long-term care providers and certain physician specialties).
As the need for innovative and specialty focused IT platforms increases in the provider community, investors will continue to target IT companies that can meet these needs.
Other or “Greener” Pastures
With 33 states now having legalized medical or recreational marijuana sales, the emerging medical marijuana market has made waves in 2019. In March alone, there were several high profile acquisitions of medical marijuana companies.
Although a relatively new sector in health care, medical marijuana is poised for consolidation, as regional companies seek to expand their national presence and smaller local companies struggle with low margins caused by strict regulations.
As medical marijuana becomes more accepted in the United States, investors will likely target smaller or regional companies in anticipation of possible forthcoming reform to current federal laws (which remain an obstacle for some investors). An uptick in deal volume and value is expected, as buyers continue to speculate and position themselves ahead of potential federal legal reform.
This column does not necessarily reflect the opinion of The Bureau of National Affairs, Inc. or its owners.
Gary W. Herschman is a member of Epstein Becker & Green in its Newark, N.J., office. Yulian Shtern is an associate of Epstein Becker & Green in its Newark, N.J., office. Hector M. Torres is a principal with ECG Management Consultants in Chicago. Aaron T. Newman is a senior manager with ECG Management Consultants in Chicago. Nicholas B. Davis is a senior analyst with ECG Management Consultants in Chicago. Robert Aprill is an analyst with Provident Healthcare Partners LLC, a leading middle market investment bank, in Boston.
Epstein, Becker & Green PC did not comment on any particular transaction or party discussed or listed in this article.