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Healthcare M&A Update: The Challenges of Returning to Normal [Virtual Roundtable]


Just yesterday, the Dow Jones Industrial average plummeted another 1,100 points, as investors continued their relentless selloff. The question on everyone’s mind – are we headed towards a recession or is this just a painful and possibly overdue market correction?

These questions are not just limited to the public markets either. Healthcare private equity investors in particular are facing similar challenges. Namely, how do you price a deal when the asset’s performance may be inflated because of the pandemic? Is that performance sustainable? Which of the trends brought on by the pandemic are here to stay? 

Earlier this week, we sat down with 5 healthcare-focused deal professionals to talk about these shifting dynamics in the healthcare M&A space. Other topics of conversation included the changing operating structure of healthcare businesses and how wages and employment challenges are impacting deals.

Thank you to the following Axial members who participated in the discussion:



Introductions: 00:00 – 03:15

Post pandemic Healthcare demand and overall market 03:15 – 19:15

  • Peter Lehrman, Axial: What’s changing, what’s staying the same, and how is demand thought about in a post covid world in all the different categories of healthcare?
  • Terry Wang, Regal Healthcare Capital Partners: Regal’s philosophy has not changed. Although there is a lot of demand in the market driven by Covid, the volume of business seen by many companies due to covid has come down. Regal is losing some deals because some investment firms are willing to give more credit to businesses for that increase in volume than Regal is. Regal tends to remain conservative with companies that have seen a large covid bump in volume.
  • Peter Lehrman: Do you have a point of view on elements of healthcare that are going to experience fundamental change?
  • Terry Wang: Yes, Terry believes Covid has highlighted the importance of telehealth and home health. Those two areas look fundamentally sound for the future but some businesses like urgent care are simply not going to have the same volume of testing as it did during the pandemic.
  • Zak Eisenberg, Merritt Healthcare Advisors: Agrees with Terry on telehealth and more broadly, all remote services will see sustained growth in the coming years. Another large trend is the shift to outpatient services, so while urgent care may not have as much volume due to covid, they will have larger volumes of people who may have gone to the ER pre-covid but are now trying to stay out of hospitals.
  • Phil Campbell, Martis Capital: That’s all completely right and Phil points out that some aspects of healthcare are moving back to where they were pre-covid. For example, Martis has an orthopedic platform in their portfolio which at the end of the day is a very physical business where the doctors need to see the patients and so Phil has seen a lot of those types of business revert back to pre-covid operations.
  • Mike Forsyth, Excellere Partners: Mike agrees with everything that’s been said and argues that Covid drove a lot of consumerism within healthcare as well. Patient satisfaction increased during Covid with the adoption of telehealth and with that came the expectation of immediate feedback from testing. This has driven innovation outside of just Covid in the testing market.
  • Peter Lehrman: What is powering the trends of outpatient services?
  • Zak Eisenberg: The trends are actually accelerating and Covid was not the catalyst for these trends. It really started in low acuity specialties leaving the hospitals. High acuity specialties have been slower to move out because the physicians have been uncomfortable with the move, but Covid fueled the fire and now more and more physicians are moving out of the hospitals. The number one macro factor that is causing continued acceleration of the trend is the necessity to reduce healthcare costs in the US.
  • Peter Lehrman: What are you seeing in terms of cost reduction with this approach?
  • Zak Eisenberg: It’s a huge needle mover. A total joint in a hospital for example can be $30,000 – $50,000 whereas it might be $12,000 – $15,000 in an outpatient clinic.
  • Alan Hymowitz, Vertess Healthcare Advisors, LLC: Alan agrees with the growth of telehealth and saw many businesses either spike or dip during Covid. At Vertess, they’re still having a hard time normalizing the revenues of healthcare businesses due to the spikes or drops experienced during Covid. Alan is also seeing a greater number of critical patients in urgent care’s and ER’s because those patients avoided hospitals and medical facilities during Covid. There are even some physician practices that are not fully open yet and are not writing scripts.
  • Peter Lehrman: When Axial did the healthcare roundtable during covid, there was discussion of regulations that had historically blocked wholesale adoption of telehealth capabilities. Are there any regulatory updates?
  • Zak Eisenberg: One of the regulations that exists is certifications across borders so a doctor cannot see a patient in another state if they are not certified in that state. Another big issue was the question of insurance reimbursement but the contracts written during Covid will most likely extend for the foreseeable future.

Changes to cost structures of healthcare businesses 19:15 – 39:55

  • Peter Lehrman: Are there long term changes in cost structure in some of these businesses moving to telehealth?
  • Zak Eisenberg: Businesses now focus less and less on office spaces and more on services. There are some categories of healthcare though as Phil mentioned that do need a physical space, such as orthopedic offices. In these types of businesses there is always room to improve efficiencies but you will always need some physical location to see the patients.
  • Peter Lehrman: How is a business that needs a physical location capitalizing on telehealth or other innovations in the space?
  • Phil Campbell: It depends a lot on the sector, in orthopedics for example, telehealth can be used for screenings but the majority of the patients need to be seen by a doctor. Pre-pandemic, telehealth was exciting because it gave specialists the chance to service patients in rural and remote areas. Phil believes this trend will continue post-pandemic as well.
  • Mike Forsyth: Agrees with Phil and highlights the ability to see patients more conveniently and at a quicker rate. However, patients like to have continuity with the physicians they see which has been a challenge with telehealth.
  • Peter Lehrman: How is everyone thinking about pricing or procedures in areas that are being heavily influenced by telehealth?
  • Terry Wang: Terry does not see the pricing change due to implementation of telehealth because the sectors where adoption is large are actually at a relatively low price point already. The only real cost to run these businesses that you can exclude is the cost of facilities which is often not a large portion of the cost structure. Regal is actually seeing reimbursements increasing across the board for mental health because of access issues and wage pressures and so no one is discussing cutting costs of these services because of the adoption of telehealth.
  • Zak Eisenberg: Zak actually disagrees with some aspects of what Terry argues and believes that adoption of this new technology will have deflationary effects on pricing in the long run. Both real estate costs and the ability to screen more patients in a given amount of time will contribute to that effect. However, it will be outweighed by macro issues, which may sweep the deflationary effects under the rug.
  • Phil Campbell: Where telehealth can hopefully remove some of the costs from the system is with patient access. The new technology will increase coverage and ultimately drive down costs.
  • Mike Forsyth: There has not been a balance between supply and demand of physicians across the US and that will not change any time soon and so wages will only continue to inflate. To go back to the adoption of telehealth, in-home testing is an area that Excellere has seen tremendous growth.
  • Peter Lehrman: What’s exciting in home health?
  • Alan Hymowitz: Alan is excited about non-skilled home health services. He has seen continued growth and valuations in those types of companies. On the skilled side, the shift away from hospitals has driven the growth.
  • Peter Lehrman: What are some examples of a non-skilled home health category.
  • Alan Hymowitz: Non-skilled includes things such as preparation, daily living, and transportation to and from medical facilities. Medicaid is beginning to fund a lot more of those categories of healthcare. The Biden administration is increasing funding as well so Alan has seen large pay increases over the last three years.
  • Zak Eisenberg: Another reason for these upswings is the demographic shift of the baby boomers who are beginning to retire and so elder care tends to be the overwhelming trend.
  • Terry Wang: One area of home health that Regal spends a lot of time on is hospital to home, which refers to procedures that can be done at home rather than in the hospital. This then leverages nursing, both skilled and unskilled.
  • Peter Lehrman: What are the setups of those businesses, are they built to only do procedures in the home?
  • ‘Terry Wang: The businesses are usually set up to do both in home and hospital procedures. They set up the procedures in the home and the home stay for the patient. The provider will usually decide whether the procedure happens in the person’s home or in the hospital.
  • Mike Forsyth: Mike is also excited about the behavioral health sector. Less so on the substance abuse and more so on the autism, behavioral therapies, especially for minors. One of the downfalls of the pandemic was the increase of behavioral health issues from being isolated for so long.
  • Alan Hymowitz: Alan is also focused on the AIC (Agency for Integrated Care) and home infusion side of healthcare.
  • Phil Campbell: Phil agrees with Mike about the growth in behavioral health and adds that Martis is also focused on the pharmaceutical services sector with a recent investment in a decentralized clinical trial site.

Dynamic of deals in healthcare sectors 39:55 – 45:08

  • Peter Lehrman: Phil, when did Martis make that investment?
  • Phil Campbell: Martis made a couple of investments at the end of 2021, one being a company that works with developmental and intellectual disability patients, and another investment in a lab services business that helps businesses set up independent labs and lastly, the pharmaceutical business already mentioned. However, Martis has seen pipeline activity slow down a bit recently.
  • Peter Lehrman: Were the tractions straightforward or were they difficult to get across the finish line?
  • Phil Campbell: There were ups and downs with each of them but Martis was able to get a successful investment in each of them.
  • Zak Eisenberg: Zak argues that this year has actually been their strongest ever with 35 active engagements which is up from 20 last year. He agrees with Phil that there has been a recent slowdown due to inflationary pressures. Zak still believes, however, that healthcare is a sellers market at the moment.

Macro trends and impact on healthcare market 45:08 – 55:12

  • Peter Lehrman: How have things such as cost of debt and public market volatility affected the lower middle market healthcare sector?
  • Mike Forsyth: From a structure and value standpoint, cost of debt is certainly a factor. Excellere tends to be more conservative on the leverage side. In terms of volume, they have seen more on the add-on side rather than the new platform side. The first couple of months of the year were definitely slower but Mike has seen it start to pick back up again. Operationally, supply chain has been a big factor for manufacturing oriented businesses. Wage inflation has also been a big issue in terms of turnover rates for clinicians and nurses.
  • Peter Lehrman: What are your predictions for the nursing market? Will there be an equilibrium in the next 3 to 5 years?
  • Mike Forsyth: More people may get into the field as wages increase and a lot of nurse staffing businesses have gone to market.
  • Alan Hymowitz: Getting and retaining is the most difficult part, between burnout, and wage competition there is a huge issue there.
  • Phil Campbell: Martis has seen it across all industries and one thing that has not been mentioned yet is the decreases in immigration seen in the US which have largely contributed to the labor shortage.
  • Zak Eisenberg: Zak completely agrees with Phil and argues it’s a great time to be an employee with labor shortage in most industries. The market for physicians is even more complicated, as they tend to be of an older demographic and are retiring at greater rates than nurses. Residency slots and medical school allotment is another inhibitor of labor supply that needs to be considered in the future.

Machine learning and image analysis 55:12 – 59:53

  • Peter Lehrman: How are you each considering at-scale image analysis in terms of big data and machine learning capabilities?
  • Mike Forsyth: Radiology and Pathology are the two areas you are seeing it most. Mike doesn’t believe it’s going to replace specialists any time soon but believes it is more of a useful tool to both save time and improve accuracy in the field.
  • Peter Lehrman: Where are those businesses in terms of financial maturity, and who is capitalizing those businesses?
  • Zak Eisenberg: A lot of the businesses are home grown with a lot of the health systems focusing on it for example US radiology. Zak believes that the technology will eventually catch up and replace radiologists because of lower cost and higher accuracy. At the moment, the machines are not accurate enough and there are also regulations in place to prevent the replacement of actual specialists. The last issue is that insurers are not reimbursing for it yet.

Conclusions/Closing thoughts 59:53 – 1:04:16

  • Zak Eisenberg: Macro trends will continue for the next decade and so valuations for healthcare businesses will remain high. Does not believe the cost of debt will impact valuations to a large extent.
  • Terry Wang: Regal does not use a lot of debt so the interest rates don’t impact operations of the firm very much.
  • Alan Hymowitz: Alan does not tend to get involved in debt deals, mostly cash. This shift to cash deals has increased during Covid. There were so many deals put on hold that buyers have a lot of cash to spend now and so the structure of deals has shifted at Vertess.

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