Health services deals insights: Midyear 2020

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Pockets of growth, sustained multiples

As expected, health services deal activity slowed in the first half of 2020. Deal volumes edged below 500 for the first time since 2015, but two sub-sectors grew year over year: Labs, MRI & Dialysis and Other Services (which includes medical office buildings). Long-Term Care was, again, the largest sub-sector by volume.

H1 2020 and H1 2019 looked similar with one megadeal apiece. And, at least one $1 billion-plus deal was announced in April, even as COVID-19 cases increased.

IPOs are a relatively rare occurrence in the sector but One Medical went public in January.

The sector-wide mean LTM EV/EBITDA multiple saw a slight increase, to 13.9x, buoyed by Home Health & Hospice.


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“Health services companies are meeting this uniquely challenging time with compassion and creativity. As they aim for resilience, deals are part of the equation of balancing growth and cost containment.”

Nick Donkar, US Health Services Deals Leader

High level trends and highlights, H1 2020 and Q2 2020

Volumes down, but levels not unprecedented

From 2016 to 2019, the health services sector routinely experienced more than 500 deals by the year’s halfway mark. H1 2020 fell just 3% short of that level, even amid the unprecedented challenges of the COVID-19 crisis. And, Q2 2020’s deal count is not far from 200, our long-held barometer of quarterly deals interest, and could be revised higher as companies continue to disclose past deals in the coming months.

In terms of deal values, it’s worth recalling that only about a third of health services transactions tend to have disclosed deal values in an average quarter, and Q1 and Q2 2020 were no different. Based on disclosed deal values, total H1 2020 deal value was notably lower year over year, excluding megadeals. However, in Q2 2020 non-megadeal value actually increased by about 8% over Q1 2020.


Long-Term Care largest sub-sector by volume

Comparing H1 2020 and H1 2019, deals volume mix was mostly consistent, with Long-Term Care, Other Services, and Physician Medical Groups remaining the three largest sub-sectors.

Long-Term Care has been the largest sub-sector since at least 2014, with about 35% of quarterly deal volume. This period was no different, ending with 59 deals in Q2 2020 (30% of the quarter) and 158 deals in H1 2020 (33% of the year to date).

Among deals with disclosed acquirers, several buyers were particularly active, with five to seven deals each, spanning Q1 and Q2. IRA Capital, a private equity real estate company, and Flagship Healthcare Properties, which manages a REIT, both targeted mainly medical office buildings, classified as Other Services deals. Tryko Partners LLC, a private equity investment firm, targeted mostly skilled nursing facilities, which are included in the Long-Term Care sub-sector.

In terms of share of H1 2020 deal value, the two largest sub-sectors were Labs, MRI & Dialysis (skewed upwards by the period’s megadeal) and Long-Term Care. In H1 2019, the largest sub-sectors were Managed Care (38% of deal value) and Other Services (19%).


Fewer large deals, but signs of appetite

Despite uncertainty and volatility in the market, there are signs that interest in deals continues. For example, Thermo Fisher Scientific Inc. acquired QIAGEN N.V., in the sixth-largest deal since at least 2015. With this transaction, H1 2020 and H1 2019 appear alike in terms of megadeal activity (defined as greater than $5 billion).

As an additional example, TPG Capital's $1.2 billion investment in LifeStance Health, Inc, a behavioral health care company, could suggest that 2020 will see additional large deals among those with capital to spend. Capabilities seeing COVID-accelerated importance - including behavioral care, virtual care, and other areas - could be of particular interest (see outlook).

Lastly, the period’s average deal size is not without precedent and suggests less of a dislocation of deals interest than might otherwise be assumed. Sector-wide average deal size was $145 million in H1 2020, compared to $141 million in H1 2016, among deals with disclosed deal values. 


Home Health & Hospice remains buoyant

The mean sector-wide LTM multiple remained elevated as of June 30, reaching 13.9x, a slight increase over the mean LTM 2019 multiple of 13.8x.

High and rising multiples in the Home Health & Hospice sub-sector were a key driver. Care outside hospital walls is increasingly of interest, and Medicare Advantage hospice coverage is changing.

Without this sub-sector, sector-wide multiples would have declined slightly, from 12.9x to 12.3x.

SNFs / ALFs / LTACHs saw the greatest decline in multiples, possibly due to the market’s perception of these facilities’ particular vulnerability to COVID-19 cases.

Even amid pandemic upheaval, four sub-sectors’ multiples were largely unchanged, with variations within positive or negative 0.5x.

Multiples remain comparatively low in Acute Care and Managed Care, as they have for years.


One IPO in H1 2020, larger than H1 2019’s

Over the past several years, health industry IPOs have tended to be either in the pharmaceuticals and life sciences sector, or tech-focused. After a multi-year drought, 2019 saw just two pure health services IPOs: IMAC Holdings (orthopedic rehabilitation) and Progyny (fertility benefits management).

In that context, the fact that there was just one health services IPO in H1 2020 is not unusual, and it would be a surprise to see many more in the second half of the year, independent of the pandemic. One Medical operates primary care clinics and its IPO was larger than either of 2019’s. 


Highlights of deal activity

Health services sub-sector analysis

H1 2020

Despite the challenging environment, two sub-sectors saw deal volumes increase in H1 2020, year over year: Other Services and Labs, MRI & Dialysis grew by 23% and 12% year over year, respectively. The Other Services sub-sector includes targets such as medical office buildings, outpatient facilities, pharmacy-related services, physician staffing services, and contract research organizations.

Labs, MRI & Dialysis saw also an increase in deal value due to the period’s megadeal.

Q2 2020

In Q2 2020, six sub-sectors’ deal volumes declined over Q1 2020, but the three remaining sub-sectors each saw near-identical absolute volumes: Hospitals, Managed Care, and Other Services.

In terms of Q2 2020 deal values versus Q2 2019, two sub-sectors saw increases, each driven by a single large deal. In the case of Managed Care (516%), the deal was Molina-Magellan Complete Care, and in the case of Labs, MRI & Dialysis (58%), it was the combination of Invitae Corporation and ArcherDX.

In terms of Q2 2020 deal values versus Q1 2020, three sub-sectors saw increases: Behavioral Care (900%), Hospitals (11%), and Physician Medical Groups (6%).

Health services deals outlook

Health services companies, long accustomed to a complex operating environment, now face particularly challenging circumstances. In addition to directly or indirectly supporting COVID-19 care, health services companies face economic disruptions of uncertain location, timing, and scale. Furthermore, the duration of crisis-driven deregulation such as that related to permissible care location is unknown. Companies are trying to balance cost containment imperatives while assessing growth segments and not missing opportunities.

Amid this uncertainty, three clear factors are likely to affect deal activity: (1) health services companies’ liquidity positions; (2) the short- and long-term needs COVID-19 creates; and (3) pre-existing market dynamics. In each case, deals can be a resilience strategy: a way to add strategic assets or relationships that preserve growth, profitability, or operational excellence; and/or a way to free up needed capital by shedding non-core assets.

In terms of liquidity, companies’ positions vary greatly, impacting their likely roles in deal making. Potential acquirers could include, for example, financial buyers who entered the crisis with a large amount of dry powder or managed care companies that have benefited from utilization declines in the short term but might face potential scrutiny for high capital levels. Potential targets could include hospitals and physician medical groups who are grappling with the impact of postponed elective procedures and office visits.

COVID-19-driven needs could impact the types of assets health services companies find valuable. For example, the pandemic has accelerated the shift to virtual health, home health, and remote work, making targets that enable these functions more attractive. Behavioral health is also seeing COVID-related demand, and Medicaid enrollment has increased, so capabilities in these areas could become more valuable. Solutions that ease social determinants of health remain a key focus, as food insecurity grows and social distancing complicates daily activities. On the flipside, current real estate footprints may be rethought due growth in remote care and work.

Pre-existing market dynamics – such as regulation, consumer needs, and competitive pressures – could impact health services companies’ overall deals strategies. For example, on the regulatory front, fall 2020 will bring the Supreme Court’s review of the Affordable Care Act, as well as the general election, both of which could influence strategic priorities in the last months of the year. In terms of consumer needs, health services companies must deploy technology that enhances experiences while improving efficiency, especially as interoperability gains importance. Lastly, competitive pressures persist both horizontally (for example, among regional health systems) and vertically (i.e., the combination of capabilities companies possess across the healthcare value chain), requiring health services companies to assess gaps between growth ambitions and current offerings.

As companies pursue deals, they will need to take particular care to evaluate partnership options and structures. For example, deals involving CARES Act fund recipients will need to be crafted carefully. Buyers may also need to consider potential targets’ exposure to COVID-related vulnerabilities. And, while companies might argue that economic conditions justify mergers, general antitrust scrutiny is likely to continue. Health services companies and private equity firms could seek strategic alliance models or other types of partnerships instead of outright mergers or acquisitions, if these alternatives help minimize integration disruption, debt, or antitrust scrutiny.

Looking ahead, there is cautious reason to think deal volumes could be sustained through the year end. For example, in addition to pockets of sub-sector growth in H1 2020, there was a slight uptick in deals volume in June compared with May. However, most likely, deal volumes will be uneven for the remainder of 2020, as potential deal makers try to determine paths forward. In pre-deal diligence, buyers may need to disentangle targets’ short-term challenges from their longer-term strategic potential. And, as deals proceed, investors are likely to try to balance the need to move quickly with planning for successful deal execution and integration.

About the data

Deal volume and value: We defined US M&A activity as mergers, acquisitions, shareholder spin-offs, capital infusions, consolidations, and restructurings where acquisition targets are primarily US-based companies acquired by US or foreign acquirers. Transactions are based on announcement date, excluding repurchases, rumors, withdrawals, and deals seeking buyers. We consider deals to be mergers or acquisitions when there’s a change of control or the makeup of the controlling interest changes. In the instance of an acquisition, one company takes effective control over another company or product. In a merger situation, two boards are combined and/or monies are combined. An affiliation or collaboration is neither considered a merger nor an acquisition. The merger and acquisition data contained in various charts and tables in this report has been included only with the permission of the publisher of Deal Search Online and All rights reserved.

Multiples: Data on EV/EBITDA multiples was sourced from S&P Capital IQ (a division of S&P Global) and includes publicly traded companies in the following sub-sectors: acute care, ambulatory care/rehab/dental, home health & hospice, labs/imaging/pharmacy, managed care, outsourcing, SNFs/ALFs/LTACHs. Information provided by or through third parties is provided “as is”, without any representations or warranties by PwC or such third party. PwC and such third parties disclaim any contractual or other duty, responsibility or liability to client and any person or entity that receives such information.

IPOs: IPO information was sourced from Dealogic Equity Capital Markets Analytics, for the following sectors: healthcare–practice management, hospitals/clinics, healthcare–miscellaneous services, outpatient care/home care, insurance–multiline.

Contact us

Nick Donkar

Nick Donkar

PwC Partner, US Health Services Deals Leader, PwC US

Kristan Chesnut

Kristan Chesnut

Deals Partner, PwC US

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