Health care transaction activity has been increasing through the third quarter of 2019, setting a record pace as summer ends. Total announced/closed transactions reached more than 1,063 deals through year-to-date September 2019 compared to 821 through YTD September 2018.
Transaction volume showed no end-of-summer lull, with 477 announced/closed transactions in Q3, an extraordinary increase from the 291 transactions in Q3 of 2018.
As such, expectations remain strong for the fourth quarter of 2019 as September hit a monthly high of 163 announced/closed transactions for YTD 2019. This increasing momentum is expected to continue throughout 2020 (an election year), and through 2021 as well.
Most Active Sector: Long-Term Care
Long-term care continues to be the most active healthcare sector through Q3 2019, with 226 announced/closed respective transactions, or 21% of all health care transactions through YTD 2019 (and a 31% increase from the 172 deals in YTD 2018). With 33 transactions in September, the highest of any month this year, the rapid rate of consolidation within the long-term care sector shows no signs of slowing down in the foreseeable future.
Financial sponsors, including private equity firms and real estate investment trusts (REITs), have been extremely active in this space due to the sector’s relatively stable cash-flows and inherent real estate value. CareTrust REIT, which acquired memory care facility Vista del Lago in September, marked its eighth transaction of YTD 2019.
Also having an active year is CPF Living Communities, a platform company of Chicago Pacific Founders, with five acquisitions through YTD 2019, four of which closed in Q3 2019, as well as National Health Investors, Strawberry Fields REIT, and The Ensign Group.
Physician Practices & Services Transactions
Physician practices and services continued strong transaction activity supported by increased private equity investment. Through Q3 2019 there have been 187 combined physician practice and dental practice management transactions (vs. 159 through Q3 2018), with 80 combined physician group and dental practice management transactions during the third quarter versus 50 during Q3 2018.
Paving way for a strong end to the year, September saw 26 announced/closed physician group transactions, surpassing the YTD 2019 average of 17 transactions per month. Through YTD 2019, specialties including dermatology, radiology, ophthalmology, obstetrics-gynecology, orthopedics, gastroenterology, urgent care and urology have led the way in attracting private equity interest, as new platforms are being supplemented with bolt-on investments in these sub-sectors.
For example, several existing ophthalmology platforms have grown significantly in Q3 2019, including EyeCare Partners, EyeSouth Partners, SightMD, and Acuity Eyecare Group. Large private equity platforms in other specialties also had an active third quarter, such as Pinnacle Dermatology, Premier Urology, Texas Digestive Disease Consultants, and the Joint Corp. (chiropractic).
Hospitals & Health System Consolidation
Consolidation across the hospital/health system landscape continues to be a key theme through YTD 2019, representing the fourth-most active healthcare sector as independent operators continue to seek scale and access to capital through a variety of partnership vehicles.
Although YTD 2019 numbers are slightly down compared to last year, the hospital/health system sector accounted for 43 transactions in Q3 2019, a slight increase from 38 transactions in Q3 2018, thus showing signs of continued activity at a steady level through the end of 2019 and beyond.
IT & Software Deals a Key Driver
The expansion of information technology across the healthcare universe has remained a key driver to overall transaction activity: (i) Q3 2019 saw an increased rate of activity, with 58 representative transactions compared to 29 in Q3 2018, (ii) total transactions YTD 2019 are trending upward from last year, with 130 announced/closed deals compared with 96 YTD 2018, and (iii) September volume of 18 deals compared to 6 last year.
The healthcare IT/software space has been attracting private equity interest due to unique industry characteristics highlighted by relative fragmentation and opportune scalability, combined with providers’ need for IT-enabled tools to assist them as the industry transforms to value-based care. Private equity firms Waud Capital Partners, TPG Capital, Warburg Pincus, New Mountain Capital, and Francisco Partners all completed IT/software acquisitions in September.
Within the software sector, payment processing has become a national trend due to the shift from cash-based to electronic-based transactions, and in this regard, Optum recently closed its previously announced acquisition of Equian LLC, a payment-processing services firm for healthcare providers and insurers, for approximately $3.2 billion.
United Health also invested billions of dollars to enhance its data and technology capabilities, which recently was reflected in its new virtual care and remote monitoring services for patients.
Cannabis Deals Accelerate
The pace of deals in the cannabis industry has tremendously accelerated in Q3 2019, with 11 announced/closed transactions in September alone involving over $458.73 million in investments, including Chicago-based Cresco Labs’ agreement to acquire Tryke for $282.5 million, plus 5 separate announced acquisitions by Medicine Man Technologies, collectively worth over $132 million.
Earlier in Q3, Curaleaf Holdings announced its intent to acquire GR Companies (d/b/a Grassroots Cannabis), an Illinois-based medical marijuana company for total consideration of approximately $875 million, which upon closing would make Curaleaf one of the largest medical marijuana organizations in the country.
One factor driving this robust activity is the increasing number of states that have legalized medical marijuana, and other states moving towards legalizing recreational use. Further, rapid consolidation in the cannabis industry is expected to continue to grow as the prospect of federal banking reform becomes increasingly viable.
Life Sciences Deals
Within the life science & pharmaceutical sector, the continued innovation across the spectrum has driven YTD 2019 transaction activity to 94 closed/announced deals. Recent large-scale transactions include Lundbeck’s announced $1.95 billion acquisition of Alder Biopharmaceuticals in September, and Permira’s pending acquisition of Cambrex Corp for $2.4 billion in August. It’s interesting to note that the transactions throughout the sector involve both strategic (e.g., Lundbeck) and financial buyers (e.g. Permira).
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. Christopher McGuine is an analyst with ECG Management Consultants in Chicago.
Epstein Becker & Green P.C. did not comment on any particular transaction or party discussed or listed in this article.