Before the onset of COVID-19, there existed a seller’s market for businesses. Clean, profitable businesses were in short supply. An abundance of private equity and historically low interest rates drove multiples to levels this author had not previously seen in his 40-year legal career. Good businesses in even mundane sectors might sell for 10 times earnings. Strategic buyers in hot industries like healthcare often paid even more. How has the pandemic impacted the market? What are the experts anticipating for the months ahead? And in particular, for the healthcare industry?
Cleveland-based EdgePoint Capital has released its semi-annual Healthcare Industry Report, in which it asks, “Has Healthcare M&A Already Turned the COVID-19 Corner?” Addressing these questions with a wealth of pertinent data and their middle-market investment banking experience, EdgePoint covers transaction data since 2009, healthcare transactions by sector, with focuses on the behavioral health, physician practice, equipment and supplies, home health and hospice, pharmacy services, long term care, rehabilitation, dental practice, and veterinary sectors.
“Merger and acquisition activity in the healthcare industry continued its torrid pace in the second half of 2019, driving the annual total to a decade-high 1,829 transactions. … After climbing to its highest point of the last 12 months in January, healthcare M&A transaction volume plummeted 33% in February and more than 54% overall by April. The decline was broad-based as Providers & Services, BioTech, Pharma & Life Sciences, and Healthcare Information Technology all declined more than 50% from January to April.”
Transaction volume and EBITDA multiples vary considerably across various healthcare sectors. EdgePoint reports that in the behavioral health sector there were 34 transactions for the six-month period ended in March with an enterprise value to EBITDA ratio of 8, down from 9.7 in 2019. “Unlike Pharma and IT, the Physician Practice sector continued to decline through May, eventually falling more than 80% off the peak. Private equity buyers remain hesitant to close deals as patient volumes within their favored subsectors, dermatology, ophthalmology, and gastroenterology, remain soft.”
The equipment and supplies sector has rebounded well. Transaction volume returned to pre-pandemic levels in April and in the last twelve months transactions have closed at an average EBITDA multiple of 13.8. Over the same period, EdgePoint reports a multiple of 20.5 for the home health and hospice sector as “[i]nvestors continue to place a premium on services that lower the total cost of care, are well-positioned to benefit from the demographic tide of baby boomers hitting their 70s, and cater to patients who are thinking twice about entering a nursing home due to COVID -19 related concerns.”
“Pharmacy Services M&A activity has been modest recently with transactions occurring in only six of the past 12 months; however, there have been eight transaction in the six-month period from December 2019 through May 2020. The spur in activity includes Costco acquiring a large minority stake in a pharmacy benefit management company, and investments in specialty pharmacy services by two large insurers.” In the last twelve months, the EBITDA multiple was 9.3, declining from 12.5 in 2015.
2019 and early 2020 saw consolidation in the rehabilitation sector and an average multiple of 8.9 in the past 12 months. Although COVID-19 hit the dental sector hard, EdgePoint expects activity to rise as dentists reopen their offices.
It is expected that healthcare will continue to see a relatively high level of activity with businesses being valued at higher multiples than many other industries. EdgePoint’s Matt Bodenstedt commented for this newsletter, “The pandemic and the uncertainty surrounding the upcoming election will continue to depress healthcare M&A activity for the remainder of 2020; however, we anticipate the industry will regain its status as a favored safe haven, leading to a very robust transaction market in 2021.”
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 EdgePoint, “Has Healthcare M&A Already Turned the COVID-19 Corner?,” p.1-2 (https://www.edgepoint.com/sites/default/files/Ind-Report-Healthcare-4Q19-1Q20.pdf).
 Id., p. 4.
 Id., p. 5.