The Healthcare M&A Party Continues…But for How Much Longer?


Earlier this month, Intrepid’s Healthcare team met with many of the healthcare leaders who made the pilgrimage to attend the 37th Annual J.P. Morgan Healthcare Conference in San Francisco. After dozens of meetings with executives and investors across the healthcare dealmaking ecosystem, several interesting takeaways emerged that were notably different from last year’s conference. While the pace and valuation of healthcare transactions continue to impress, 2019’s dealmakers are now performing greater levels of diligence when evaluating transactions, with the greater scrutiny prompted by increasing long-term economic uncertainties. Here are a few of the more notable takeaways that we wanted to share with you.

Heightened Bar for Investing in the “Ologies”

With so much recent M&A activity in dermatology, ophthalmology, and gastroenterology, some investors have become more savvy and selective in 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. Valuation levels have remained enticing, and 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 unexpectedly high valuations, we heard several private equity investors at the conference share that they are placing some opportunities in a lower priority given lofty valuations in what were previously highly-desirable segments. For example, after several investors lost recent autism services and animal health auctions that ultimately transacted at high-teens EBITDA multiples, it appears that 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 recently seen activity, like pharmacy outsourcing or imaging services, or relatively unchartered areas, like brain injury or fertility services.

Can Genetic Diagnostics Become Integral to Primary Care?

One of the most curious discussions was about whether genetic diagnostics could become incorporated into routine primary care services, following recent announcements from two of the larger regional integrated delivery networks.  Pennsylvania’s Geisinger Health System and Illinois’ NorthShore University Health System announced that their health plans would begin offering coverage for several genetic tests, partnering with leading labs and training their primary care physicians on how to discuss and interpret these prognostic results. These health system models, as well as several innovative diagnostics labs, are beginning to help primary care doctors incorporate discussions about 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.

Buyers Breaking Out of Their Silos

Nearly every discussion at the conference included some reference to either: the apparent willingness of United Healthcare and its Optum division to enter every industry sector; Amazon’s threat to disrupt the pharmacy and distribution arenas; or hypotheses about how the joint venture between Amazon, J.P. Morgan, and Berkshire Hathaway will transform healthcare. These uncertainties are motivating executives from across the healthcare ecosystem to explore how they can innovate and drive costs out of their businesses to remain competitive against uncertain future market forces. While private equity always diligences a potential investment’s competitive moat, today’s sellers need to be prepared to explain how they might defend against a new entrant from outside their traditional sector. The constant disruption in the healthcare market is attracting new and unconventional entrants. Intrepid’s arranging the sale of Ambry Genetics to Konica Minolta represented a fundamental pivot of the equipment maker into advanced healthcare diagnostics.

How Recession-Proof Is This?

One of the most frequent questions we heard during this conference was: “How can this company respond to a downturn in the economy?” Questions about how a business model can withstand potential reimbursement pressures or volume declines are returning to standard diligence after not being a primary area of concern for the past several years.  Businesses focused on discretionary, elective services will face greater scrutiny, while essential services targeting the Medicaid community or high-risk populations, should draw higher levels of interest.

2019 should be an interesting year filled with plenty of unique M&A activity and continued radical changes.