Certain M&A Healthcare Services Immune to Coronavirus…Here is Our Real Data

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Certain M&A Healthcare Services Immune to Coronavirus…Here is Our Real Data

Thesis: In the time of the Covid-19 Pandemic, the same meta-data that protects us can be inadvertently manipulated to hurt us. In lower-middle-market healthcare transactions, we base our M&A health on actual data, not assumptions. The data is clear: our deal flow is thriving, and transactions continue to stay on track.

A Health Crisis by the Numbers. What It Means for Healthcare Operators.

It took me longer than most to realize this pandemic was real. Despite a shut down from Europe, canceled schools for the kids, and my wife looking into purchasing a spare refrigerator; I was still unmoved by the gravity of it all. Then I saw the ominous data coming out of Italy. The staggering statistics were more powerful than the images or articles. The data told a compelling and tragic story.1

Obviously, data matters. And the data from the past few months of transactions demonstrates that despite the current trajectory of the overall US economic markets, the healthcare industry is strong. Most people are surprised to learn that our past month is a record month in generating deals and deal execution. Furthermore, if you were to compare past trends leading up to the current data, you could assume our deal volume will persist, even in the worst of times. With our recent engagements and continued traction in the market, we can assume a better year-over-year outcome for 2020 Healthcare Services M&A.2

Several of our clients remain busy in this time of crisis. This suggests strong operational viability. It is in this viability that investors focus. If you can weather an economic storm, the likes of which we have never seen, and continue with the same numbers in revenue, census, scripts, or other financial metrics, you will maintain (or increase) your valuation even as other industries fall.

Deal Volume Increases Despite Economic Downturn.

We do not use financial models to generate valuations. They are rarely accurate and not usefully predictive. The true indicator of value is transactional comparative data. We have determined the strength of the healthcare lower-middle market based on deal flow and closed deals. In that regard, the deal volume has continued unaffected by the current economic depression in certain healthcare segments we represent.3 Despite our larger concern for the economic wellbeing of the nation, we see a massive silver-lining in healthcare services M&A. When virtually every other industry has inhibited deploying capital or acquiring assets, healthcare services, such as Home Health, Hospice, Pharmacy, and Behavioral Health, stay on a growth trajectory.

This economic shutdown has accentuated the need for viable well-supplied, well-staffed, and well-capitalized health services. Being an industry fueled by compassion and courage, it is fitting that healthcare is receiving the recognition it deserves. From a financial perspective, Healthcare investment is surging at a time when other industries have been in the steep declines. There is still room for improvement. I believe the post-COVID-19 US healthcare industry, will shore up its supply-side (PPE, DME and Pharma) and dedicate more resources to all services on the continuum of care.

Certainty will always increase a valuation. And there is no entity that is more financially certain than the Federal Government. Over the past month, the Federal government has shown its unwavering support for smaller healthcare agencies. CMS has delivered on advanced/accelerated payments to several of our clients with a Medicare payor.4 This is a significant form of stimulus, even for agencies that did not have an immediate need for it. As much as our clients are burdened by Medicare regulations, CMS is stepping up when they are most needed. This exhibition of Federal government support (and partnership) creates confidence with investors. Confidence is good for valuations. CMS is the largest payor for most of the business we transact. The vitality and wherewithal of this payor is extremely comforting to our clients and acquirors, alike.

Lower Middle Market Behavioral Health, Pharmacy, Home Health, and Hospice are as Strong as Ever.

The foregoing is actual valuation data of our current deals in process in the categories of Behavioral Health, Pharmacy, Home Health, and Hospice segments. These listings have been originated within past 3 months. The list is for statistical analysis; for more information on our current listings please contacts us.

Valuations are typically based on either Multiple (X) of EBITDA or Percentage (%) of Revenue. For each deal we have listed the more relevant metric.

Behavioral Health

Our buyer network has become increasingly interested in Behavioral Health as a segment. Autism focused agencies are commanding the highest valuations. In the deals below, we experience premium valuations exceeding our sellers’ expectations. Depending on the criteria of the agency we may see valuations as high as 7X to 8X.

  • Crisis Intervention and Skill Building Agency

    Under LOI for 4.2X (EBITDA of approximately $1.7MM)

  • Mental Health for at Risk Youth Agency

    Under LOI for 5.2X (EBITDA of approximately $500K)

Pharmacy

The variety of differing pharmacy modalities make this a particularly difficult segment to value. Pharmacy, on aggregate, has seen a decline in valuations over recent years. Headwinds such has DIR fees, large strategic consolidation, and well-intentioned, yet misguided, legislation/regulations have caused a drop in most types of pharmacy values. In contracts, we are seeing stable valuations in the areas of Infusion and Long-Term Care. In the COVID-19 environment, we have seen no slow downs in Pharmacy deal flow.

  • Retail & Community Pharmacy

    Offers coming in at 35% of $10MM in Revenue
    This represents cash at close

  • Infusion Pharmacy (Closed December 2019)

    Sold for 6X (EBITDA of $4MM)

  • Specialty Pharmacy

    Listing for 14% of $52MM in Revenue

  • LTC Pharmacy

    Projected to list for 9X (EBITDA of $900K)*

  • Specialty Pharmacy

    $80MM of Revenue. Price TBD*

    *Under engagement with past week

Home Health & Hospice

The big concern at the beginning of 2020 was the impact of PDGM. Wow, seems so long ago now! Clients are being supported by CMS (as opposed to scrutinized) and the patients have moved heavily towards home-based care (moving away for facilities).

  • Utah Based Medicare Licensed HH and Hospice

    Under LOI for roughly $70,000 per Hospice patient or 4X (EBITDA of approximately $935K)

  • Texas Based Medicare Licensed HH and Hospice

    Under LOI for roughly $70,000 per Hospice patient or 5X (EBITDA of approximately $1MM)

  • California Based HH with break-even profit

    Under LOI for 15% of Revenue
    Even zero EBITDA agencies are trading

  • California Based HH and Hospice

    Under LOI for 4X (EBITDA of approximately $2MM)

COVID-19 Mitigation Measure May Have Increased the M&A Curve

From Feb 15th – April 15th, 2019, our team saw 3 engagements signed to list companies for sale. Those 3 engagements comprised a total of $37 MM of revenue with a combined potential transaction value of $31 MM.

During that same time period for 2020, in the midst of COVID-19, we have seen more than twice as many engagements signed, for a total of 7, representing a $75.5 MM of revenue and a combined $33.4 MM of potential transaction value.

What Does Large Cap Tell Us?

Here are a few of the publicly traded companies we have worked within the past. Although the success of larger cap strategic companies does not reflect the lower middle market, we do think it represents the strength of the healthcare market overall. Admittedly, our success as M&A advisors in driving premium valuations has come from finding buyers outside of the public domain.

Name of Healthcare Company Healthcare Segment Ticker March 17 Price April 17 Price Gain / Loss
Amedisys HH & Hospice AMED 153.63 213.81 +60.18
National HealthCare Corporation. Home Care, ALF, SNF NHC 62.79 72.08 +9.29
The Ensign Group, Inc. Post-Acute Care ENSG 27.85 35.50 +7.65
CVS Health Pharmacy CVS 58 62.56 +4.56
Brookdale Senior Living ALF & LTC BKD 1.99 3.36 +1.37
Five Star Senior Living Inc ALF FVE 2.73 3.24 +0.51
Diversicare Healthcare Services Hospice & LTC DVCR 1.30 1.80 +0.50
Capital Senior Living Corporation ALF CSU 0.70 0.86 +0.16
Genesis Healthcare LTC & SNF GEN 1.05 0.82 -0.23
Walgreens Pharmacy WBA 49.6 43.23 -6.37

(click on a company name for details)

Healthcare Segment
HH & Hospice

Ticker
AMED

March 17 Price
153.63

April 17 Price
213.81

Gain / Loss
+60.18

Healthcare Segment
Home Care, ALF, SNF

Ticker
NHC

March 17 Price
62.79

April 17 Price
72.08

Gain / Loss
+9.29

Healthcare Segment
Post-Acute Care

Ticker
ENSG

March 17 Price
27.85

April 17 Price
35.5

Gain / Loss
+7.65

Healthcare Segment
Pharmacy

Ticker
CVS

March 17 Price
58

April 17 Price
62.56

Gain / Loss
+4.56

Healthcare Segment
ALF & LTC

Ticker
BKD

March 17 Price
1.99

April 17 Price
3.36

Gain / Loss
+1.37

Healthcare Segment
ALF

Ticker
FVE

March 17 Price
2.73

April 17 Price
3.24

Gain / Loss
+0.51

Healthcare Segment
Hospice & LTC

Ticker
DVCR

March 17 Price
1.3

April 17 Price
1.8

Gain / Loss
+0.5

Healthcare Segment
ALF

Ticker
CSU

March 17 Price
0.7

April 17 Price
0.86

Gain / Loss
+0.16

Healthcare Segment
LTC & SNF

Ticker
GEN

March 17 Price
1.05

April 17 Price
0.82

Gain / Loss
-0.23

Healthcare Segment
Pharmacy

Ticker
WBA

March 17 Price
 49.6

April 17 Price
43.23

Gain / Loss
-6.37

Conclusion: Although a shutdown of the economy is not sustainable for much longer, the strength of US Capital Markets are on full display. There is no sector where this is more evident than Healthcare. On the smaller scale, lower middle market healthcare transactions in home-based care, pharmacy and behavioral health remain healthy. This is not based on models or assumptions; it is based on experiential data from the past month. We can confidently claim that this is an excellent time to sell, despite the greater economic challenges.

About Team M+A

Team M+A at American Healthcare Capital consists of the company’s top performing advisors and analysts: Andre Ulloa, Mike Moran, and Mark Thomas. For any questions regarding Team M+A, selling your Healthcare business, receiving a valuation, or targeting a Healthcare acquisition, please contact us for more information.

1I’m extremely sympathetic to the pain and destructiveness of the current health crisis. This article is meant to answer technical questions, and as such may seem insensitive. My heart ways heavy with the loss of life inflicted, yet equally as uplifted by the response of our communities.

2Regardless of our firm’s success, I’m very concerned in a greater socio-economic impact if we don’t revise our models and discontinue using the stale data from Italy’s spike in deaths. For example, the death rate “models” in the US have been off by many orders of magnitude. We were being told “potentially” >240K would die in the best case with mitigation measure. The actuals are <33K deaths as of 4/15/20. That is huge deviation! Regardless, we don’t blame anyone for being wrong…better to be safe than sorry when lives are on the line. However, we must adjust to this data going forward. To me the current economic indicators (GDP, Unemployment, Interest Rates, Market Volatility, and even the incompressible size of the Stimulus Package debt) have now become the existential threat to the health of this country.

3See my last article on the differences between Large Cap and Lower Middle Market Healthcare deals. There are few corollaries, and we rarely refer to one to generate conclusions about the other. But it interesting to see that larger strategics remain acquisitive.

4CMS has doled out nearly $34B in advance, accelerated payments to providers to combat COVID-19 https://www.fiercehealthcare.com/hospitals-health-systems/cms-has-doled-out-nearly-34b-advance-accelerated-payments-to-providers-to

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Meet Team M+A

mike moran

MIKE MORAN
PRINCIPAL

andre ulloa

ANDRE ULLOA
PRINCIPAL

mark thomas

MARK THOMAS
SENIOR ANALYST

mike moran

MIKE MORAN
PRINCIPAL

andre ulloa

ANDRE ULLOA
PRINCIPAL

mark thomas

MARK THOMAS
SENIOR ANALYST

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2020-05-13T16:57:11+00:00April 21st, 2020|Categories: Articles|
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