Banker Insights: Physician Services

PHYSICIAN services

physician services transactions

Artificial Intelligence and Automation as Strategic Differentiators for Healthcare Provider Organizations

  • In today’s healthcare landscape, organizations are increasingly turning to Artificial Intelligence (AI) and automation to address ongoing operational challenges. These technological solutions offer a pathway to enhanced efficiency, improved clinical workflow support, and higher morale among employees and clinicians through the simplification of administrative tasks. 
  • The spotlight was on AI at the recent HLTH conference in Las Vegas, with industry heavyweights like Microsoft and Google unveiling new AI initiatives. These developments are marketed as key to easing the everyday administrative and clinical issues that healthcare providers encounter. 
  • By implementing these innovations, healthcare organizations can automate essential tasks, such as patient intake procedures and complex documentation processes, placing themselves ahead in the market. The adoption of AI not only improves operational effectiveness but also addresses potential staffing issues by automating routine tasks, which, in turn, can attract and retain clinical talent. 
  • Although the full potential of AI in healthcare is still unfolding, it’s critical for organizations to carefully consider the range of available technologies and their potential ROI. Those who successfully integrate AI and automation, not only establish a position of competitive strength but also stand to improve financial performance at a time of growing cost containment. 

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]

Healthcare: Monthly Insights-November

Healthcare M&A Insights

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Company-Specific Value Drivers

Commentary:

In the last edition of our Monthly Insights, we provided guidance on four steps to follow when pursuing an outright sale or capital raise to maximize value. In this edition, we continue to build on that theme by offering some company-specific value drivers for healthcare organizations.

These five value drivers are based on our experience of what strategic and financial (private equity) buyers consider or emphasize when evaluating an appropriate valuation to place on a target. The more a company has of these factors, the more likely a company is to achieve a premium valuation.

1.Scale

Scale demonstrates a successful model that is working well and has likely been built over time. Size helps mitigate risk and volatility.  There is also scarcity value to scale as there are fewer scaled players in healthcare’s highly fragmented sectors. Buyers also typically believe it is easier to buy vs. build scaled businesses.   

  1. Payer Mix

Payer Mix is important as it can indicate favorable or unfavorable reimbursement rates and the likely stability of a company’s revenue stream.  Typically, the market favors a commercial insurance mix as it provides for higher reimbursement rates and does not share the risk of CMS rate cuts that come with Medicare and Medicaid.

  1. Margin

Margin is somewhat a “Goldilocks” factor where it needs to be “just right”.  Too high of a margin can be a red flag that appropriate staffing levels are not being achieved and clinical quality is suffering.  Alternatively, if margin is too low, it is an indicator of poor operational efficiency, and the new buyer will need to expend significant resources improving margin.

  1. Diversification

Organizations with many service lines mitigate risk by providing a variety of focus areas that can offset each other when times become volatile.  It also represents the availability of multiple growth levers that can drive additional revenue opportunities.

  1. Growth Rate

A company’s growth rate is an excellent indicator of strong upside.  It can also create the perception of a management team executing on well thought out strategic plans with substantial white space to capture additional market share.

Our active healthcare deal flow and our processes are designed to create competitive tension; highlight the critical factors that drive value in the market and are aimed at increasing a buyer’s willingness to pay premium multiples for our clients. If you are a healthcare business owner and would like to have a confidential discussion on your specific strategic options, please feel free to reach out to one of our healthcare team members directly.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]

Market Monitor: Outdoor & Recreation

Market Monitor: Outdoor & Recreation

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Market Monitor: Outdoor & Recreation

 Making the right decisions for your business starts with having the most accurate and current information available. Our Outdoor & Recreation  Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

  • The outdoor recreation participant base grew in 2022 to a record 168.1 million participants or 55% of the U.S. population ages 6 and older.
  • Transaction volume in the Outdoor & Recreation sector has picked up after a slow first half of 2023.
  • Investors are willing to make minority investments into the space which highlights the newfound resilience of the Outdoor & Recreation sector.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: randerson@hexagoncapitalalliance.com

Tyler Dale, Managing Director: tdale@hexagoncapitalalliance.com

Johnny Sherwood, Director: jsherwood@hexagoncapitalalliance.com

 

Market Monitor: Healthcare

Market Monitor: Healthcare

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Market Monitor: Healthcare

Making the right decisions for your business starts with having the most accurate and current information available. Our Healthcare  Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

  • In Q3 2023, total U.S. healthcare services M&A volume reached 172 transactions.
  • Well-positioned and strong-performing healthcare service companies continue to be attractive assets to suitors looking to deploy capital.
  • Automation, staffing, and acuity remain a focal point of providers, while investors continue to have dry powder to chase opportunities across segments and remain in active pursuit of quality targets.

For more information or questions, please contact our contributors:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Managing Director: [email protected]

Market Monitor: Online Retail

Market Monitor: Online Retail

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Market Monitor: Online Retail

Making the right decisions for your business starts with having the most accurate and current information available. Our Online Retail Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

  • US online sales continued to display strong growth, reaching approximately 15% of total retail sales. This marked a significant 7.5% increase from Q2 2022.
  • On a broader market basis, in the second quarter of 2023, total retail sales in the United States reached $1,799 billion, indicating a modest increase compared to 2Q 2022. 
  • M&A activity in the on-line sector has been muted throughout 2023.  Inflation, rising interest rates, scarce loan availability and concerns about a potential recession, all contributed to lower deal counts.
  • However, strong brands are still performing well and gaining market share from small and/or financially-strapped competitors.  Our Consumer bankers feel the brands that perform in the present market environment are clearly differentiated from the pack.  As such, they can attract multiple investors / suitors and command extraordinary valuations.

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: [email protected]

Brandon Clewett, Managing Director: [email protected]

Johnny Sherwood, Director: [email protected]

 

Banker Insights: Life Science Consulting

life science consulting

healthcare transactions

Market Dynamics Lead to Explosion in Life Science Consulting M&A

Commentary:

  • Outsourced life science services providers have attracted enormous interest from private equity and strategic investors in recent years, and this trend is expected to continue. This surge in interest is a result of the ever-increasing complexity surrounding drug discovery and development (e.g., real-world evidence (RWE), genomics, mRNA), combined with a continually changing regulatory environment, which has further highlighted the demand for medical affairs professionals who can add value to the commercialization process. In addition, the COVID-19 global pandemic necessitated an increase in investment in R&D activities, as well as domestic pharmaceutical manufacturing capacity, by life science companies. As a result, outsourced life science consulting companies have experienced a significant increase in demand for services. These market dynamics are driving industry-wide attention from both private equity and strategic investors.
  • Key areas of interest include traditional pharmaceutical service providers such as contract research organizations, contract development and manufacturing organizations, companies providing pharmacovigilance, and third-party logistics providers, as well as newer breeds of specialized service providers, including those with a focus on specialty genomic therapeutics.
  • The pharmaceutical industry has experienced a shift in focus from traditional drugs intended to impact a broad patient population to specialized and precision medicines for a narrow and diverse target patient population. The development of these specialty drugs is primarily led by small-to-medium-sized life science companies that often require a greater degree of outsourced support from specific vendors.
  • M&A activity in the life science consulting industry has continued to remain strong since 2021. Healthy margins and low systemic risk make attractive targets for private equity and strategic investors. Over the past few years, transaction multiples for outsourced life science companies have steadily increased, reaching healthy low-to-mid teens EBITDA multiples, representing higher valuations than the overall market, reflecting strong interest in the industry’s potential for growth in the future.
  • Going forward, we anticipate continued strong private equity and strategic interest in the space as the growing demand for services across the entire lifecycle, coupled with a highly fragmented industry, provides ample opportunity for continued M&A activity.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]

Market Monitor: Personal Care

Market Monitor: Personal Care

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Market Monitor: Personal Care

Making the right decisions for your business starts with having the most accurate and current information available. Our Personal Care Market Monitor keeps you up to date on the events, trends, and market forces that shape and guide the industry.

  • While transaction volume in the Personal Care sector is behind 2022 levels and well below peak 2021 levels, there are signs of accelerating activity.  Of the 20 Personal Care M&A transactions completed year-to-date August 2023, 13 have come within the past four months.
  • Perhaps an indication of stabilizing credit markets, private equity groups accounted for 25% of completed Personal Care M&A transactions thus far in 2023, compared to just 8% during all of 2022.
  • Although valuation multiples have declined from the all-time highs of 2021, premium valuations exist for companies with differentiated products, superior profit margins and strong growth trajectories, as evidenced by e.l.f. Beauty’s recently announced acquisition of skincare brand Naturium (implied 21x EV/EBITDA multiple).

For more information or questions, please contact our contributors:

Rich Anderson, Managing Director: randerson@hexagoncapitalalliance.com

Brandon Clewett, Managing Director: bclewett@hexagoncapitalalliance.com

Johnny Sherwood, Director: jsherwood@hexagoncapitalalliance.com

Banker Insights: Medical Spa

Medical Spa

healthcare transactions

Growing Medical Spa Market is Primed for Investment and M&A Consolidation

  • The Medical Spa market is attracting significant investor interest with an astounding projected CAGR of ~15% through 2030, high profit margins, and service line expansion. The sector is continuing to provide a wider variety of treatments available at price points appealing to a broader patient base. The highly fragmented industry is a ripe opportunity for consolidation by institutional investors and strategic buyers.
  • Beyond providing a broader service offering, patient demand and demographics (young and middle-age patients) are currently providing exceptional recurring revenues with repeat patient visits representing ~65% of visits. There is also an exceptional market opportunity that is largely untapped amongst men as they currently represent only 12% of Medical Spa patient population.
  • The sector also maintains positive reimbursement characteristics with essentially no exposure to both commercial and government payors. Many providers also see additional runway for further service line expansion across medical and non-medical treatments (e.g., Bio-stimulatory treatments, massages, and acupuncture), as technology advancements expand treatments, and more locations vertically integrate services.
  • And while the sector has many positive tailwinds supporting its growth, we do see a challenge through present and potential regulatory requirements and oversight. Corporate practice of medicine and non-physician provider supervision and regulation are likely to increase given the growth, which will require operators to adapt and be nimble in order to comply as more states impose greater regulations.
  • M&A and Private Placement activity in the Medical Spa sector is light relative to other sectors. However, with the sector’s continued growth, it has exhibited an increased velocity with the number of completed transactions doubling annually since 2021. As the sector continues to mature, transaction volume and values are expected to increase and achieve premium values.
  • Going forward, we anticipate growing private equity investment and interest in the space as the sector’s resiliency, growing market opportunity, and fragmentation provide elements that allow private equity to consolidate.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]

Banker Insights: Healthcare

Healthcare M&A Insights

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Keys to Value Maximization

Commentary:

  • Founders and owners of Healthcare companies continue to see first-hand how strong the Healthcare M&A market has been over recent years simply by the number of inbound calls they are getting each day from interested strategic and private equity buyers.
  • Valuation multiples continue to hold strong for the right companies across numerous healthcare sectors. However, oftentimes we see too many business owners leaving money on the table simply because they were not adequately prepared when selling their company.
  • To avoid this common occurrence, we recommend the following steps when pursuing an outright sale or capital raise:

1.Get Your Financial House in Order

Companies with detailed and accurate financial statements always fare better than those with poorly compiled financials.  Buyers use poorly-prepared financials to their advantage when negotiating valuation.  Sellers should strongly consider using a reputable accounting firm to convert from cash-based to accrual-based statements, and invest in a Quality of Earnings Review ahead of a formal launch to the market.  

2. Metrics, Metrics, Metrics…

Alongside detailed financial statements, sellers should be prepared to provide detailed operational metrics to buyers.  This includes accurate billing and reimbursement history, changes in reimbursement rates over time across service lines, as well as any quality/outcome metrics appropriate for the practice going back several years.  Healthcare companies with more detailed and accurate metrics are typically cleaner for buyers to analyze and ultimately sell for higher valuation multiples.

3. Bench Strength

Many times private equity buyers will use perceived gaps in the management team as rationale to reduce the price they are prepared to offer to a seller.  Consider a company being sold for 10x earnings that needs to hire a key team member for $200k annual salary.  Many buyers will use that as justification to reduce the valuation by $2M.  Demonstrating that the right team is currently in place will help sellers avoid this situation.

4. Run a Process

This will sound self-serving coming from us.  But it is true.  Running a formal sale process will almost always yield a better valuation for the seller.  Even if you have only one chosen buyer in mind (as opposed to marketing the business to multiple potential buyers), the fact that you are working with a skilled M&A advisor and there is a perceived threat of competition, the buyer will likely end up agreeing to pay a higher valuation than they would have otherwise.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]

Banker Insights: Behavioral Health

Behavioral Health

healthcare transactions

Outpatient Behavioral Health Remains a Hotbed of Investment

  • Investment in mental health services in the United States has increased significantly over the past few years; yet there remains a gap between inpatient care and outpatient care. This gap has created in influx of interest and capital into the outpatient treatment modalities as M&A in inpatient facilities cools off.
  • A growing number of providers are turning to acquiring intensive outpatient programs (IOPs) as an effort to provide sub-acute care after a stay in an inpatient program. Payors, who are looking to keep patients out of higher cost inpatient facilities, have expanded access to IOP programs, reducing the need for more acute care.
  • In July of this year, the U.S. Centers for Medicare & Medicaid Services proposed a new rule that would allow Medicare coverage of IOP programs for both mental health and substance use disorder treatment. This proposed rule would create an opportunity for clinicians to step-down care. Well established IOP programs are poised to capitalize on the industry momentum, as strategic and private equity backed platforms seek to expand their portfolio of wraparound care services. This broadening of step-down service offerings has resulted in the majority of acquisitions completed this year being follow-on investments rather than platform acquisitions by private equity.
  • M&A activity in the behavioral health industry peaked in 2021, with 266 transactions closed. 2022 experienced a modest decline in deal volume to 201 completed transactions coupled with an erosion of EV/EBITDA multiples paid for deals as the cost of capital increased and leverage covenants tightened. In 2023, deal flow has trended in-line with 2022, that said, we continue to see demand hold strong for outpatient treatment providers, including those offering IOP programs and a renewed interest in potential deals that didn’t make economic sense in 2021 when valuations were reaching frothy levels.
  • Given the favorable industry tailwinds from both the provider and payor sides, we expect demand for quality outpatient behavioral health companies to continue and drive an active M&A market for the foreseeable future.

For more information or questions, please contact the Healthcare Services team:

Paul Kacik, Managing Director: pkacik@hexagoncapitalalliance.com

Brad Erhart, Director: berhart@hexagoncapitalalliance.com

Daren Oddenino, Director: [email protected]