For the fifth consecutive year, the Bass, Berry & Sims Healthcare Private Equity Team hosted BBS Connect, a forum to connect healthcare dealmakers during the annual J.P. Morgan Healthcare Conference.
Over three days – January 11-13, 2021 – we brought together senior executives and healthcare dealmakers on the front lines of the healthcare industry's hottest sectors. Our sector-focused sessions included insights into deals completed in 2020, opportunities and challenges healthcare companies will face in 2021, the current M&A environment and investment trends, and lingering impacts from the past year. Despite these unprecedented and unpredictable times, healthcare M&A activity did not decline as sharply as many predicted, even rebounding in the second half of the year. Across all of our sector-focused discussions, panelists shared an optimistic outlook with strategic opportunities continuing in 2021.
A recap of each session and links to the recordings are included below.
- In 2020, impacts from COVID-19, the proliferation of 340B, and opportunities for consolidation drove deal activity in the specialty pharmacy sector. A major focus was placed on creative solutions for a coordinated patient experience beginning with hospital-based pharmacies and continuing through a broader alignment with various healthcare services companies to achieve that vision.
- The specialty pharmacy market saw tremendous activity in digital and rare disease pharmacies, home-poly chronic management, infusion, and management services organizations. Sporadic and moderate activity was seen with independent pharmacies, 340B contract pharmacies and hubs, and it is suspected each will continue to be a good investment in 2021.
- Hospice, as end-of-life care rather than care intended to treat disease, occupies a special place in our healthcare system. The resulting philosophy looking both at how you treat the quality of life and the interdisciplinary team that supports it, can be different than the episodic approach toward care of home health and other post-acute healthcare. Hospice is expected to remain a highly attractive sector to buyers in 2021 – both strategic companies and sponsors – given these care considerations, as well as deal trends such as velocity, number of transactions, competition and high valuations. Panelists agreed that integrated care systems are spending more time in and around hospice and that it continues to become an important and prominent service in the post-acute continuum.
- While discussing lessons learned from Addus HomeCare's acquisition of Queen City Hospice in December 2020, panelists highlighted the importance and value of specialized understanding of the industry in building a hospice operation and transactions in the sector. Several key components emerged, including the need for hospice companies to invest in systems and personnel to have good visibility and articulate key metrics about their patient population. Moreover, the panelists provided insights into and lessons learned from the case study and the key roles of transaction participants.
- The pandemic had a significant impact on deal flow in the physician practice sector. Many unforeseen variables in cash flow projections, valuations, the credit markets and deal terms put acquisitions on pause. Deal volume dropped in Q1, driven by the March shut-downs, then dropped further (as much as 50%) in Q2. Deal volume rebounded in Q3 and even progressed into Q4, with 28 deals announced in December alone.
- Specialties including radiology, ophthalmology, orthopaedics and gastroenterology continued to see activity in 2020.
- With prevailing headwinds – including government aid, increased reimbursement rates across the board under the Medicare physician fee schedule, and the shift toward value-based care – we expect to see robust M&A activity in the physician practice sector in 2021.
- Healthcare Information Technology (HIT) was one of the sectors that thrived in 2020. Key transaction themes discussed by panelists included: (1) digital transformation of traditional delivery of care; (2) data security and interoperability; (3) helping payors and providers manage risk; (4) a shift to digital pharmacies; (5) robust demand for behavioral health driving need for efficiency and improved software platforms catering to this space; and (6) accelerated demands around technology for patient engagement.
- Our panelists shared that digital health data experienced a 900% growth from 2016-19, and it continues to accelerate. This growth creates greater cyber risk exposure, as hackers turn their attention to the healthcare sector. Data breach costs are rising, and healthcare is spending more than any other sector per breach. As the industry moves toward value-based care, and away from acute setting, there is continued expansion for telehealth and connected devices requiring additional need for infrastructure and software security solutions to support it.
- Looking ahead, HIT in 2021 is expected to thrive as we continue to see an evolution of the digital environment and IoT in healthcare. Panelists expect HIT investment and M&A trends to remain healthy, with more activity being driven from payor side solutions. Panelists expect to see more HIT special purpose acquisition companies (SPACs) as sponsors look for this alternative capital path with attractive economics by going to the public markets, where investor demand remains strong. The IPO market will remain open, and with a trickle-down effect into valuations in private markets, it will be a continued good year for HIT companies looking to raise capital in 2021. In short, 2021 will continue to be a seller's market, but numerous opportunities will abound for HIT investors, including at the venture and growth equity stage.
- The continuity of care, and the social factors that influence health outcomes, continue to draw interest among the investor community. Energy is being brought to how this sector is defined as the majority of investment in healthcare has been focused on the individual expert model and prescriptive, instead of looking at the broader course of overall health and wellness. Panelists described the social determinants of health (SDOH) model as both the conscious and unconscious influences that nudge us toward different behaviors and habits. The model focuses on changing the environment and systems in which we live and work to improve health, as well as making services that support social determinants more efficient and easier for patients to access, versus making changes on an individualized basis which produces higher costs and is hard to sustain.
- Early deals in the SDOH space have yielded successful results, dispelling any initial concerns that SDOH was not ripe for investment. Panelists noted that this is an active topic with private equity firms, large strategic buyers and payors; particularly in light of investment vehicles such as SPACs (special purpose acquisition companies). With the continued focus on ESG (environmental, social and governance) in the investment market place, SDOH will continue to be seen as an area that should be supported. From an investor standpoint, the technology piece is important and creates an opportunity. Leaning on data will be a way to differentiate and change treatment protocols and will improve quality of care and cost.
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