As VERTESS celebrates its 10th Anniversary - 2014 seems like only yesterday to most of us! - we are reflecting on the journey that has brought us to 2024. All businesses experience the highs and lows brought on by external and internal events, and we have had our share of both. We have grown substantially from our original team of three and are continuing to add new colleagues that expand our experience base and bring fresh perspectives. For many reasons, 2024 seems like the start of an exciting new chapter, particularly as we recall the hard work that has brought us to this point.
The VERTESS team is pleased to offer its annual year-end review and future outlook for healthcare M+A activity in each healthcare vertical our Managing Directors support. 2023 was a challenging year as interest rates and other economic pressures lowered valuations and slowed the transaction process. In the last two quarters, we experienced a shift in activity and closed several transactions. We are anticipating that to increase as we move into 2024. Sellers who were waiting for the recession that never came are reaching out to discuss the future of their businesses. Our current conversations with healthcare executives lead us to believe that 2024 will be a year of high deal volume. We appreciate the opportunity to support all of the amazing healthcare providers both past and present. VERTESS is excited to see what the next 10 years bring!
If you'd like to discuss your healthcare market in greater detail with any of our Managing Directors, we have provided contact information for each of them at the conclusion of their comments.
David Broussard, RN, CM&AA, Managing Director
Home Care / Home Health / Staffing / Hospice / Medical Transport / Medical Diagnostics
In 2023, the healthcare mergers and acquisitions (M+A) landscape witnessed a dynamic and transformative shift, reflecting the industry's ongoing response to various challenges and opportunities. The convergence of technology, regulatory changes, and the need for enhanced operational efficiency has spurred a wave of strategic consolidations, partnerships, and acquisitions within the healthcare sector. Traditional boundaries between pharmaceutical companies, healthcare providers, and technology firms continue to blur as organizations seek to create more integrated and patient-centric solutions. The M+A activity is not only driven by a desire for increased scale and market share but also by a strategic focus on innovation, digitalization, and the development of novel therapies.
Moreover, the global pandemic has accelerated certain trends in healthcare M+A, such as the emphasis on telemedicine, digital health platforms, and biotechnology advancements. Companies are increasingly recognizing the importance of a resilient and adaptable healthcare ecosystem, leading to collaborations that leverage expertise from various sectors. Governments and regulatory bodies are closely monitoring these developments to ensure that M+A activities contribute to improved healthcare access, affordability, and quality. As stakeholders navigate this evolving landscape, strategic partnerships are essential for addressing the complex challenges facing the healthcare industry and driving sustainable innovations for the benefit of patients worldwide.
During the last year, we saw a lot of headwinds and tailwinds within the pharmacy industry. This includes all verticals such as Retail, Home Infusion, Specialty, Behavioral Health, LTC, and Mail Order. Some of the factors that affected M+A in all sections included competition, regulatory issues, drug shortages, and reimbursement rates (PBM), just to name a few. Retail multiples are the lowest of all the pharmacy sectors. They will continue to remain low due to a lack of interest from buyers, reimbursement challenges, and low margins. Home Infusion has been the most stable, maintaining a 7-9 multiple, especially those with a good payor and therapy mix located in attractive regions of the country. Specialty pharmacy has seen a reduction in multiples as margins continued to slide. Behavioral Health and Compounding are seeing a resurgence and good growth. We should see increased activity in this market during 2024. New drugs in the pipeline, as well as the popularity of LAI’s and weight loss drugs, will spark renewed interest in these markets.
During the next year, we will continue to see consolidation among the larger providers such as Walgreens Boots Alliance, Kroger, Walmart, Amazon, and CVS. All are now shifting into the primary care market as well as home health. Examples are the recent acquisition of VillageMD by Walgreens. Kroger is now opening primary care clinics within their stores. We should see fewer acquisitions by Private Equity Groups and increased interest from strategic healthcare providers.
Behavioral Health / Intellectual and Development Disabilities / Physician Practices / Traumatic Brain Injury
Before turning our attention to 2024, let’s first understand where we are now. The lowering of interest rates to all-time levels helped fuel the buying spree we’ve witnessed over the past 5+ years. Deal volume in terms of both numbers and dollars transacted broke every record. Our Federal Reserve increased interest rates to fight inflation. When interest rates go up, asset prices come down. In this case, the assets are privately owned businesses.
Many buyers acquire a lot of similar businesses to gain scale. They add a management team, make operating improvements, and look to sell those businesses in less than five years. The problem of late is that while they acquired businesses, interest rates rose. They had expected a certain profit from the sale of those businesses. Market dynamics, however (including interest rates) turned against them. The buyers for their businesses were not willing to meet their price. They’ve paused to let the market come to them.
This “pause” will not continue. We’ll see an increase in deals in ’24 and ’25 as the longer-term forces that have driven deal volume will bring buyers and sellers together. At VERTESS, we have Managing Directors who specialize in industry verticals so that we’re experts in tracking deal activity, pricing, buyer and seller needs, etc. We’ll continue to help our clients navigate today’s market pause to their best outcome.
Close-up on discussion. Close-up of people communicating while sitting in circle and gesturing
David Purinton, MBA, CM&AA, Managing Director
Substance Use Disorder / Behavioral Health
Distinct and divergent factors affecting investment decisions in mental health and its segments (Substance Use Disorder, eating disorders, etc.) should keep valuation multiples relatively similar in 2024 compared to 2023, with the potential to be slightly higher.
Factors signaling lower valuations: the cost of capital is high; staffing challenges are persistent; and payroll costs are eroding margin without sufficient increases in reimbursements. Medicaid programs - which are the most needed of all - are in desperate need for their respective States to make substantive increases in reimbursements.
Factors signaling higher valuations: mental health is not only destigmatized, but it’s also en-vouge; despite billions of dollars deployed to consolidate market share, new entrants are estimated to be 56% higher in 2023 than in 2022 (source: Behavioral Health Business); and new technologies are (slightly) offsetting payroll increases. Americans are taking their mental health seriously, and employers and educators are encouraging it.
Sellers have no shortage of potential buyers for their mental health (and mental health segments like SUD) businesses. However, buyers are less willing to value these companies as high as sellers expect. The factors listed above net to a “buy” signal, and the dry powder buildup from 2023 should promote more aggressive dealmaking. Still, sellers will need to run a professional, coordinated M+A process to find the most appropriate buyer amongst a crowd of high-quality prospects. Buyers may be more likely to drop out of "auction" rounds, hence the need to cast a wide enough net to find out which buyer sees the most value in your business.
Man looking at wheelchair in medical supplies shop
Gene Quigley, Managing Director
Home Medical Equipment / Staffing
Moving into 2024, the M+A outlook shows the potential for a dynamic shift, reflective of the evolving global economic trends driving a resurgence in M+A activity spurred on by several factors. Improvement in economic conditions and a return of investor confidence could create a more conducive environment for M+A. Companies should continue to pursue acquisitions more aggressively to enhance their market reach and achieve strategic objectives as we started to see in Q4 of 2023. Within DME/HME, a lot of this will be driven by the ongoing need for businesses to adapt and grow in the face of changing market conditions, and technological advancements could drive a wave of strategic consolidations. This trend should be more pronounced within healthcare segments where scale and efficiency are key competitive advantages.
With the financial market rebounding, healthcare will continue to surge given the aging population, rising prevalence of chronic diseases, and the continued transition to value-based care. Additionally, a growing focus on consumer-centric healthcare solutions and the complex regulatory environment are generating a demand for specialized expertise and innovative healthcare solutions. These dynamics are expected to encourage healthcare companies to pursue acquisitions actively.
In 2023, the Medical Device industry experienced a notable surge in M+A activity, characterized by strategic acquisitions, partnerships, and consolidation. Several key players engaged in transactions to enhance their product portfolios, expand market reach, and capitalize on emerging technologies. The pursuit of innovation and a focus on addressing evolving healthcare needs were driving forces behind these mergers. Companies sought synergies to bolster research and development capabilities, improve operational efficiency, and navigate the complex regulatory landscape. The integration of complementary technologies and expertise aimed to position organizations competitively in an ever-evolving healthcare landscape, fostering a dynamic and collaborative environment within the Medical Device sector.
A significant aspect of this M+A surge was the heightened focus on contract manufacturing. Companies strategically sought partnerships and acquisitions to enhance their production capabilities and streamline supply chains. This trend aimed to address the growing demand for efficient manufacturing processes, cost-effectiveness, and flexibility in adapting to market dynamics. The consolidation in contract manufacturing within the Medical Device sector allowed companies to leverage specialized expertise, access cutting-edge technologies, and optimize production efficiency, ultimately fostering innovation and responsiveness to market needs.
As we look ahead to 2024, the outlook for M+A activity in the Medical Device space remains optimistic. The industry is expected to witness continued consolidation as companies strive to stay ahead of technological advancements, regulatory changes, and global healthcare trends. Emerging technologies such as artificial intelligence, robotics, and digital health are likely to be key drivers of M+A transactions as companies seek to strengthen their positions in these transformative areas. Additionally, the ongoing emphasis on personalized medicine, patient-centric tech, and in-the-home healthcare will likely shape strategic decisions in mergers and acquisitions.
Furthermore, an emerging trend in the landscape for 2024 is the noteworthy emergence of medical equipment leasing providers aimed at lowering capital expenditures (capex). This shift reflects a strategic response to the industry's need for access to advanced equipment without the burden of substantial upfront investments. By leveraging equipment leasing options, companies can stay at the forefront of technological advancements, enhance operational efficiency, and manage costs effectively. This trend signifies a dynamic approach to addressing capital constraints while fostering a collaborative environment where cutting-edge technology becomes more accessible to a broader range of industry players. The synergy between contract manufacturing and innovative equipment leasing is poised to play a pivotal role in shaping the competitive landscape of the Medical Device sector in the upcoming year.
In 2024, the home health industry is predicted to undergo a significant surge in mergers and acquisitions. This growth will be driven by the increasing elderly population and the rising demand for high-quality home health services and value-based care models. This trend is expected to continue as the demand for affordable and accessible healthcare services continues to rise.
The aging population and the demand for home healthcare services have created a lucrative market, attracting new investors and driving consolidation efforts. Advancements in technology and a shift towards value-based care models are also contributing to the M+A frenzy. Companies are looking to leverage innovative solutions and economies of scale to deliver outcomes. The quest for scale is a major driving force behind the surge in the homecare, hospice, and home healthcare sectors. By merging with or acquiring other companies, providers can achieve economies of scale and effectively manage costs. This allows them to invest in cutting-edge technology and infrastructure, ultimately improving service delivery and ensuring superior care for their clients. As the demand for home care services continues to rise, it is expected that more companies will embrace the idea of selling their business or acquiring others as a means of expansion. Exciting times lie ahead for the home health industry as M+A becomes the catalyst for growth and innovation in 2024!
Robert Villalobos, CM&AA, Managing Director/ Partner
Durable Medical Equipment / Staffing / Home Health
I expect we will continue to see an uptick in M+A transactions within the DME/Medical Supply industry as well as Home Health and Home Care for 2024. Buyers, both strategic and financial, have a strong appetite for tuck-in and platform acquisitions and are eager to continue this trend going into the new year. Healthcare staffing is another industry we may see strong activity in as we are past the post-COVID 'cool down' of buyer caution.
While we typically see a slight decrease in transaction volume during an election year, the new year is looking favorable for healthcare M+A transactions. If we do, in fact, see interest rates come down, you can bet buyers will be aggressive in their acquisition buys, and likely help drive valuations for potential sellers.
Bradley Smith, ATP, CM&AA, Managing Director / Partner
Durable Medical Equipment / Home Health / Medical Device
In 2023, the DME/HME market closed the chapter on several long-term issues, such as the Respironics CPAP recall and the supply chain inventory issues. 2024 will bring on new, more familiar challenges such as the expiration of the 75/25 blended rate currently in effect in rural/non-CBA, as well as additional reimbursement challenges to various Medicaid programs. However, reimbursement challenges are just part of being a DME/HME provider and should not surprise anyone.
I expect due diligence in all transactions (not just DME), or rather the time it takes to complete DD, will contract, as we receive some welcome news about lowering interest rates. Additionally, investors are getting more comfortable with a modest level (historically speaking) of interest charged on borrowed monies and are determined to avoid losing deals due to a prolonged DD timeframe.
Medical Device transactions will continue to heat up as the European Union's Medical Device Regulation (EU MDR) continues to disrupt. Since becoming fully applicable in May 2021, the EU MDR has caused a significant burden on manufacturers who are attempting to place products within the European Union from the initial design to reaching the market and beyond, including many bottlenecks in procedure that are costing manufacturers significant time and money. 2024 will continue to culminate in more consolidations in the EU as well as in the US, with many smaller manufacturers outright exiting the market.
2024 is setting up to be a year of tremendous opportunity for mergers and acquisitions in the healthcare environment. Now two years post-COVID, companies who have recovered or stabilized can now have their future revenue better determined from a potential buyer or strategic partner. This is especially true regarding Ambulatory Surgery Centers, Urgent Care Centers, and the Revenue Cycle Management space. Investors are better able to mitigate risk and more securely invest in these types of companies where future revenue can now be confidently determined due to stabilized growth with a consistent patient population. We saw a lackluster level of mergers and acquisitions in 2023 due to domestic and global uncertainty due to increased interest rates, inflation, and overseas conflicts, which could affect supply chains. All major predictors like J. P. Morgan and Goldman and Sachs are voicing fiscal recovery this year with a soft landing bringing confidence to investors. This makes 2024 the perfect opportunity for business owners to consider the right strategic partner and take full advantage of a pro-seller market.
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