Despite the negative macroeconomic impact and growing uncertainty stemming from the Covid-19 crisis, the number of announced or closed health-care deals in March continued at a brisk pace (140), up from the 123 deals announced or closed in February.
The month of March caps strong health-care transaction activity in Q1 of 2020, with 476 total deals announced or closed. Absent the Covid-19 crisis, deal activity was broadly estimated to surpass last year’s deal activity (1,588); however, given the impact of the pandemic on all aspects of life in the U.S., the pace of new deal activity is expected to slow over the second quarter (and maybe through the entirety of the summer) as the country adjusts to a new normal.
The Covid-19 pandemic has catalyzed some health-care industry subsectors to increase both productivity and innovation (e.g., life sciences and pharmaceuticals, health-care IT and software, medical devices and supplies), while investment and growth in other sectors (e.g., physician practices and services) is likely to slow down considerably given the practical challenges of curtailing in-person patient visits for non-emergent health-care services and elective surgeries.
For example, deals in certain physician specialties (eye care, urology, dermatology, orthopedics, etc.) are likely to slow down for now, but accelerate as conditions stabilize (see comments below). Moreover, both availability and pricing of debt financing may also put downward pressure on overall near-term deal activity.
Hospital/health system and long-term care transactions are likely to also slow down as these sectors will remain on the front lines of battling the Covid-19 crisis for at least the next several months, if not longer. Conversely, transactions involving the acquisitions of certain distressed health-care businesses may increase as investors opportunistically acquire lucrative assets at temporarily depressed valuations.
Life Sciences and Pharmaceuticals
Life sciences and pharmaceuticals transactions (22) led all subsectors in Q1 with 84 total deals announced or closed (a substantial increase from the last year). The broader clinical implications of Covid-19 are likely to support ongoing growth and expansion within the Life Sciences and Pharmaceuticals segment, as companies continue to accelerate the development of faster and more widely available diagnostic tests, vaccines and alternative treatment pathways.
One noteworthy transaction in this space is Akers Biosciences acquisition of Cystron Biotech, a company primarily focused on the ongoing development of a novel coronavirus vaccine.
Health-Care IT and Software
Health-care IT and software deal activity continued on pace with its rapid start to the year, with 24 deals announced in March and 68 transactions year-to-date, up 20% from Q1 of 2019. The Covid-19 pandemic is likely to support ongoing interest and overall deal activity in the health-care IT and software sector as providers seek technology-enabled ways to better manage infected patients.
The near term effects of Covid-19 have translated to skyrocketing demand for care outside of the traditional health-care settings through mediums such as telehealth, remote patient monitoring, and other virtual care-type services—the demand for which is forecasted to remain at an all-time high during the remainder of 2020.
One notable deal in the health-care IT and software space is Blackstone’s acquisition of HealthEdge, a technology company that provides Core Administrative Processing Systems (CAPS) solutions to health-care payers, at a valuation of approximately $700 million. This transaction was funded primarily via Blackstone cash equity, as credit markets continue to exhibit volatility in the midst of Covid-19.
Hospitals and Health Systems
Hospitals and health systems are battling to defend their communities and patients against the Covid-19 pandemic, yet despite the immense pressures imposed on the sector, March saw 10 deals announced or closed, for a total of 34 in Q1 2020.
In the near-to-intermediate term, a decline in overall number of hospital/health system deals is likely. With a sector-wide focus on both the clinical and operational imperatives of Covid-19, very little (if any) deal activity is anticipated in this sector throughout the Spring and early Summer, with the exception of deals that were relatively farther along and/or near completion pre-Covid-19.
But, once the dust settles on “Covid-19 Round 1,” smaller community-based independent hospitals and health systems will very actively be planning how they will survive the “new normal”, including how to navigate the ongoing uncertainty and intensifying levels of clinical, operational, and financial risk.
These secular trends are anticipated to result in an increased number of independent hospitals seeking to affiliate with larger, well-capitalized health systems to better ensure their short-term survival and long-term sustainability in an ever-changing landscape, and to help them vigorously prepare for “Covid-19 Round 2.”
Hospital and health system deal activity will also be supported by the growing trend of larger acute-care providers expanding beyond core clinical operational areas and into new outpatient care enterprises. Specific examples of this trend include Northside Hospital, a $7 billion provider, and its recently announced acquisition of ChoiceOne Urgent Care from Fresenius Medical Care Holdings.
In addition, Vanderbilt University Medical Center, a large academic medical center, announced plans to acquire the Nashville location of Baby+Company, a freestanding birthing center that emphasizes a family-centered, low-intervention approach to delivery for uncomplicated pregnancies.
Physician Practices and Services
Despite the recent economic and clinical upheaval caused by the Covid-19 outbreak, the demand for physician practices and services investments by private equity remains relatively strong (despite a forecasted slowdown Q2 of 2020), as none of the core investment drivers have fundamentally shifted in the sector.
Sixteen physician practices and services deals were announced or closed in March, with a total of 62 in Q1 2020. Deal making activity in the sector will remain buoyant, driven in part by physician groups facing major challenges resulting from Covid-19’s shelter-in-place protocols and restrictions on elective surgeries.
As a result of these factors, private equity investment activity in physician groups is expected to sustain, or even accelerate its current trajectory later this year, as independent physician groups now, more than ever, may desire to seek out capital and strategic partners (with professional management and business infrastructure) to mitigate challenges resulting from Covid-19 (analogous to the likely pathway of independent hospitals).
One specialty physician group sector that is seeing increased investment activity is women’s health, as demonstrated by Axia Women’s Health, a portfolio company of Audax Private Equity, acquiring Cincinnati-based Seven Hills OB-GYN Associates, a provider of women’s health services in Ohio and Kentucky.
The women’s health sector remains an attractive area of investment for private equity because the demand for clinical services within the specialty is at an all-time high, yet the supply of OBGYN physicians in the U.S. is relatively low. This imbalance provides for long-term sustainable growth in the demand for women’s health services within what remains a highly fragmented clinical specialty.
Another example of transaction activity in the physician services sector is a deal from early April, in which Webster Equity Partners made an initial platform investment in Gastro One, a large gastroenterology practice headquartered in Tennessee. Interestingly, the deal was funded entirely with equity due to unfavorable debt market conditions as a result of the Covid-19 pandemic.
Long-Term Care, Home Health and Hospice
Transactions in the long-term care sector declined significantly from last year, with only 7 deals announced or closed in March. Given the heightened severity of the impact of Covid-19 on nursing homes, and the increased regulatory scrutiny that is likely as a result, deals in this sector are expected to decline in the near term, as investors shy away from the potentially high risk profile of these clinical enterprises.
Conversely, this exact dynamic likely will result in an increased demand for services from home health and hospice companies (with 10 transactions in March) during the remainder of 2020.
Cannabis sector deal activity remains active (averaging 11 per month in Q1 2020) due to the fact that it is still a relatively new and growing market, and its broader acceptance by States and consumers is on a steady upswing.
Further, many states have classified medical marijuana dispensaries and related businesses as “essential” services (similar to pharmacies) that have not been shut down during the coronavirus pandemic.
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. Anjana D. Patel is a member of Epstein Becker Green in Newark. Hector M. Torres is managing director at FocalPoint LLC in Chicago. Larry Kocot is a principal at KPMG LLP in Washington, D.C.
Zachary S. Taylor, of Epstein Becker Green in Newark, N.J.; Aaron T. Newman, a vice president at FocalPoint LLC in Chicago; Ryan DeBlaey, of FocalPoint Partners, Los Angeles; Michael Stotz, of FocalPoint Partners, Chicago; Mark Vasilenko, of KPMG, Chicago; and Ross White, of KPMG, Washington, D.C., contributed to this article.
Epstein Becker Green, FocalPoint Partners, LLC and KPMG, LLP did not comment on any particular transaction or party discussed or listed in this article.