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Left: Adam Abramowitz - Managing Director, Co-Head of Healthcare Right: Jonathan Bluth, Co-Head of Healthcare

Intrepid’s Healthcare team routinely interacts with strategic buyers and private equity investors active in the sector, which gives it a unique insider’s perspective on the pulse of the market. We’ve completed three transactions so far this summer in the healthcare sector: the sale of Los Angeles-based Mini Pharmacy, one of California’s largest distributors of diabetic supplies and insulin; the majority recapitalization of Frontier Dental Lab, a Northern California based multi-national manufacturer of high-end cosmetic dental prosthetics; and the debt capital raise for Utah-based Advice Media, which develops and manages the online footprint of medical practices nationwide. These transactions reinforced our perspective that the pace and valuation of healthcare transactions continue to remain at all-time highs.

HIGHER BAR FOR INVESTING IN THE “OLOGIES”

With so much recent M&A activity in dermatology, ophthalmology, and gastroenterology, investors have become more selective about the businesses they pursue. It appears that this sentiment stems from an abundance of companies claiming to be “solid platforms” even though they have minimal back-office infrastructure or non-clinical leadership. We expect to see continued “ology” physician groups entering the market, but it is now clear that buyers are more intently diligencing the capabilities of each company’s managed services organization to distinguish stronger “A+” platforms from weaker players. Investors do not seem willing to pay premium valuations for less developed businesses, even in areas that have been red-hot with consolidation activity.

FROTHY VALUATIONS MAY PUSH INVESTORS TO NEW NICHES

While it is typically great news for business owners when comparable companies sell at high valuations, several private equity investors have shared with us that they are placing some opportunities in previously highly-desirable segments into a lower priority given lofty valuation expectations. After several investors lost recent autism services and animal health auctions that ultimately transacted at high-teens EBITDA multiples, there might now be fewer buyers pursuing deals in these sectors until valuations return to more rational levels. Investors continue to search for niches that are not saturated with buyers driving premium multiples. These may include segments that have not had recent activity, like oncology and imaging, or relatively uncharted areas, like brain injury, physiatry or vascular care.

CAN GENETIC DIAGNOSTICS BECOME INTEGRAL TO PRIMARY CARE?

Following recent announcements from two of the country’s larger integrated delivery networks, one of the more intriguing questions that investors are asking is whether genetic diagnostics could become incorporated into routine primary care services. Pennsylvania’s Geisinger Health System and Illinois’ NorthShore University Health System announced that their health plans would cover several genetic tests and train their primary care physicians on how to discuss and interpret these prognostic results. These health systems, as well as several innovative diagnostics labs, are beginning to help primary care doctors incorporate screening for cancer and other chronic conditions in such a routine way that investors are recalibrating their investment theses and more closely assessing if genetic diagnostics could become ubiquitous in the near-term.

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