President Donald Trump and House Speaker Paul Ryan’s push to roll back the Affordable Care Act fizzled last month, but extended uncertainty about the U.S. health care system doesn’t seem to have put much of a damper on the industry’s appetite for deals.
Data from Mergermarket show that health care, biotech, and pharmaceutical deals were up year over year in the first quarter of 2017, both nationally and in California. The state saw 22 transactions with a total deal value of $14.1 billion in the first three months of this year, easily outstripping the 2016 numbers and comparable with the first quarter of 2015.
If the market continues to trend as it did in 2015, that’s a good sign: California-based health care M&A peaked two years ago with 108 closings with an aggregate deal value of $56 billion.
Industry insiders said that while the lack of clarity about how the health care fight will play out has chilled some larger industry deals, the lower and middle market continues to thrive. The prevailing wisdom is that even if Congress implements changes to health care laws, it will take time, which gives companies some cushion when making projections.
“There’s a lot of uncertainty because of the push to change the regulatory framework of the health care system, but the reality, as we’ve seen recently, is that it is very difficult to implement these changes,” said Aytan Dahukey, a partner at Sheppard Mullin Richter & Hampton in Century City who focuses on deals in the health care space. “As a result, I haven’t seen a slowdown (in deal volume) except for in spaces where large Medicaid-funded companies operate.”
In Los Angeles, the market continues to see a fair bit of froth even with big providers, such as Long Beach’s Molina Healthcare Inc., staying on the sidelines for now. While Molina or another large provider could still roll up competitors or smaller outfits going forward, other L.A. deals in different industry segments kept the market going in the last several months.
Consolidation continues
One area that has seen particularly active deal flow is specialty medical practices. Once the domain of solo practitioners or small partnerships, bigger providers are snapping up outfits specializing in areas such as ophthalmology and dermatology. Santa Monica-based Imaging Advantage, an integrated radiology specialist, was acquired last month by Greenwood Village, Colo.-based Envision Healthcare Corp. for an undisclosed sum. The deal was part of a massive consolidation effort by health care companies – Envision alone has made some 45 acquisitions, spending more than $2.5 billion, in the last five years.
Sheppard Mullin’s Dahukey said this trend is driven by the desire to increase profit margins by expanding operations.
“There’s consolidation in the industry because in order to compete in the health care market you need to scale,” he said. “Specialty health care is seeing lots of consolidation and there’s going to be a lot more interest in the next several years. They’re high-volume (operations) and can improve patient care outcomes without hospital visits, which is what the reimbursement methodology rewards now.”
On the insurance side of the industry, there’s another prime target that companies are looking for: data analytics. Many businesses are sitting on piles of patient information and want to use it to price plan options more effectively, which has opened bolstered the M&A market.
Health insurance-focused data analytics company Traffk, based in downtown’s Arts District, found it was expanding so quickly – it’s gone from three employees in November to 15 this month – that it went out and acquired a competitor to help support its growth, according to co-founder Paul Ford.
Ford said the 3-year-old Traffk’s acquisition of Portland, Ore.’s Capsci Health last month will also help build out a mobile health care management platform for clients, something more are demanding.
He said the uncertainty brought on by political squabbling didn’t impact Traffk’s decision to go forward with the deal, even though it involved taking on some debt.
“(The political climate) doesn’t really create any concerns for us or the clients we do work for,” he said. “If there is any concern about uncertainty, it comes mostly from investors.”
Dahukey said that some level of uncertainty can even be good for the market and that companies in the space continue to be active dealmakers because the health care market shifts. While California is more stable than most markets, there are still value-add moves to be made.
“California is way ahead of the rest of the country when it comes to consolidating health care services,” he said. “But there’s still a significant focus on value. Companies are always finding ways to create better outcomes in the industry.”
