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The Case for Healthcare M&A in 2022 [Virtual Roundtable]

Earlier this week, we sat down with 5 healthcare-focused Axial members (all recently named to Axial’s 2021 Healthcare Top 50 list) to discuss the state of healthcare M&A in 2022. While the discussion inevitably made its way to covid’s continued impact on the broader healthcare industry, there was a noticeable and welcomed shift in tone and general sentiment towards the virus. The days of speculating how the industry would survive the pandemic are well in the rearview mirror. Now, healthcare practitioners, their advisors, and capital partners are fully focused on the future and how to most effectively run a business in today’s new reality. Topics of conversation spanned balancing labor challenges with the vaccine mandate, to normalizing the covid-induced “bump” in activity to arrive at fair valuations.

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




Show Notes 

Introductions – 00:00 – 3:06

2022 predictions for the healthcare market: 3:15

  • Neil Johnson, Lawrence Evans & Co: The vaccine mandate is a cause for concern for some business owners; one particular client is concerned about selling to a larger organization that may require it – the seller is about 30 employees, and the buyer is 100+ – and the seller/owner will stay on, and he’s concerned for himself 
  • Andre Ulloa, M&A Healthcare: One of the businesses they’re working with, the seller bit the bullet and imposed a vaccine mandate to avoid any issues it could cause through due diligence.
  • Terry Wang, Regal Healthcare: Labor is in such short supply that employers don’t have a lot of leverage when it comes to pushing the vaccine mandate
  • One of Regal’s businesses would lose 25% of their employees if they mandated vaccinations
  • Another wrench that COVID threw into the mix is how hard it is to value companies that have had a big upswing because of the pandemic
  • Andre Ulloa: The big issue a year ago was PPP and forgiveness of those loans, so deals were on hold until buyers saw how that shook out, and vaccine mandates have become the next version of that
  • The delay of the tax changes has also caused deals to be pushed off

The COVID “bump” & deal pricing: 11:05

  • Terry Wang: The bump has been extended, but it’s not going to be permanent, and PE firms have a holding period that’s longer than 18 months, so that’s something that they need to be cognizant of when they’re looking at companies
  • Resignation levels are at all time highs and the labor shortages for those people making $15-20 an hour is also extremely high
  • There is a huge nursing shortage throughout the country
  • How can businesses become more productive and more efficient to help pad labor shortages and increased costs?
  • Centralization and technology has become a big place of interest; a lot of this can be outsourced
  • Regal tries to pay market price, but uses other levers to try to retain talent
  • One of the great ways to do this is through a good management team and good culture, so culture has become hugely important
  • Andre Ulloa: COVID gave businesses the opportunity to restructure how they do things and outsource/restructure payroll or increase the mileage they’re charging for visits, etc.

The shift to virtual: 18:45

  • Samantha Lincoln, Paragon Ventures: Executing transactions virtually is one of most interesting things that has come of COVID; Paragon closed a deal where the buyer didn’t even visit the seller until after they closed
  • The shift to virtual isn’t going to change, and taking advantage of technology is something that gives businesses a lift
  • Terry Wang: The diligence starts virtually, but Regal will never close a deal without meeting with the owner of a business multiple times
  • This has become a differentiator for Regal, because people appreciate in-person visits even more now that so much has gone fully virtual
  • Andre Ulloa: Trust between the buyer and seller is the most important thing in a deal, and there is no better way to get to know someone than to build a relationship in person
  • Whereas most communication used to be on the phone, one other big shift has been that everything is on video now
  • A lot of things can be misinterpreted via only voice on the phone, so using video has been very helpful in a lot of situations where you can better read people
  • Samantha Lincoln: Technology, Zoom, etc. has really enhanced communication and made it a lot more efficient
  • John Deguid, Auctus Group: When travel is needed to get a deal done, that can really slow it down a lot, especially when that travel is across borders

Sector growth due to COVID: 23:45

  • John Deguid: COVID has driven a lot of capital raises in the therapeutics area as well as the antiseptics area
  • Keeping nursing homes, hospitals, etc. cleaner has become hugely important 
  • Peter Lehrman, Axial: The mental health category has grown exponentially during COVID and businesses like Talk Space have been shot out of cannons; how permanent is this sector growth?
  • Neil Johnson: Telemedicine is an area that is giving a huge boost within the mental health space; getting treatment to the right people at the right time is a major focus 
  • There is also a lot more activity in the mental health space when it comes to school-age children (K-12 as well as college)
  • Andre Ulloa: The trend was already there – valuations were through the roof – when it came to behavioral health businesses, pre-COVID
  • While the shift to telehealth and putting a focus on mental health and other pieces of healthcare became a lot more prevalent because of COVID, a lot of these shifts are things that aren’t going to go back: “the genie is out of the bottle”
  • Terry Wang: Regal has four portcos in the behavioral health space, and one of their portfolio companies is a mental health counseling business with 300 locations, and 80% of their sessions are done via telehealth now (versus 2% prior to COVID)
  • A lot of the patients want to go back to in-person sessions, even though a lot of the counselors prefer to work from home
  • There is a need for a hybrid-model so that telehealth is worked into an in-person model
  • Samantha Lincoln: Telehealth has uncovered an unmet need in the market by removing a barrier
  • We’re in a more disconnected environment due to things like social media, so behavioral health is becoming so important
  • Andre Ulloa: The government has done a lot over the past couple of years in terms of easing regulations and making it easier to get treatment to the people who need it
  • Samantha Lincoln: The respiratory space is one where there hasn’t been a lot of lower middle market M&A activity over the past decade, but there is a big need there, and it’s picked up a lot and gained traction over the past 3 years
  • Andre Ulloa: DME is also a space that had really fallen off and has picked back up again

Dry powder: putting capital to work: 38:18

  • Terry Wang: People want to put their money into “safe sectors” and healthcare is 20% of the U.S. GDP and it’s relatively stable
  • Andre Ulloa: There used to be so many strategic deals, but private equity – and family offices, search funds, etc. – have really stepped up to the plate and are offering good money for businesses
  • PE is also dipping down below their more traditional financial thresholds and looking at smaller deals 
  • Samanthan Lincoln: All of this capital is providing good opportunity to growing businesses as well, because there are places to turn when people want to invest money into their growth and need capital to do so
  • Andre Ulloa: PE has been bringing a lot of operational experts in so they can really bring expertise to the table 

The hospital of the future: 43:08

  • Peter Lehrman: With all of the changes to the healthcare market, what might a hospital look like 20 years down the line when it’s built?
  • Andre Ulloa: fully integrated systems will exist and the healthcare system will probably own home health, pharmacies, telehealth and the technologies for their patients so they don’t need to keep or have people come back into the acute care center
  • Terry Wang: The above idea assumes that hospitals will start to be able to innovate and disrupt themselves, which has not been a strong suit to date
  • The healthcare of the future is not going to be hospital-centric, it will be outpatient
  • Outpatient treatment can be done at half the cost, and that side of healthcare is being rapidly built up
  • John Deguid: monitoring systems for things like heart disease are allowing people to stay out of the hospitals because they’re managing their issues before they become a huge issue; AI will continue to support this
  • Samantha Lincoln: The hospital system of the future may be competing with private equity

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