[vc_column_text line_height="0"]

Daily, the sale or merger of a company involved in a service industry grabs the headlines.  Whether a service provider to the healthcare, insurance or other industry, it feels like all companies and industries are in “play”.  The announcements of these sales or mergers are normally accompanied with assurances from management that the ownership change will not adversely affect employees or the level of service to customers.  Regardless how strong the promise, the fear associated with change is unsettling for many.  So while the pace of mergers and acquisitions (M&A) continues to increase, business owners in all industries must continue to keep a watchful eye and consider all options for succession of ownership, both external and internal.  One interesting option, which we’ll discuss further, may be the sale to an Employee Stock Ownership Plan (ESOP).

Global M&A deals across all industries exceeded $1.0 trillion during the second quarter of 2014, the highest level since 2007, according to Thompson Reuters.  Private equity groups and corporations, sitting on stockpiles of cash coupled with the ability to borrow at record low rates, are helping drive the acquisition spree.  The healthcare industry appears to be riding the coattails of the overall market activity. Through the first half of 2014 the healthcare sectors tracked by the PCE Industry Update – Healthcare show that 729 M&A transaction deals were announced or closed compared to only 631 in the same period in 2013.

The compounding pharmacy industry is ripe for consolidation and many anticipate a pickup in M&A activity. As compounding pharmacist head to Washington, DC to attend the industry insiders “IACP’s 20th Compounders on Capitol Hill 2014” summit later this month, it is worthwhile to provide insight on this subsector.

Is it the flu or a more chronic illness?  As measured by pre-2010 transaction activity, deals were plentiful in 2013.  However, most M&A professionals observed that 2013 ended with business owners and deal-makers on a more guarded note.  The recent tepid mood shift is evident in 4th quarter 2013 M&A activity.  Every sub-sector of healthcare experienced a drop in transaction volume except Equipment & Supply.  See “PCE Industry Update – Healthcare 4th Quarter 2013” report.

The President, Congress and supporters originally called the new healthcare legislation the Patient Protection and Affordable Care Act (PPACA).  It was then shortened or referred to as the Affordable Care Act (ACA), and is now lovingly or perhaps disparagingly referred to as Obamacare by supporters and naysayers.  Whatever you call the law, whatever you think about it, or whatever the final outcome, one thing is for certain, ACA has permanently changed the healthcare industry.  The law is driving consolidation among healthcare payers and has spurred change and consolidation among the healthcare supplier and service provider industries.

For a variety of reasons, the acquisition of medical practices by hospitals has become more attractive in recent years. The volume of acquisitions is increasing steadily and therefore physicians and their advisors need to understand the valuation process which drives the purchase price. Almost all hospitals hire a valuation firm that “represents” their interests. We believe that in order to level the playing field, each party should retain their own valuation experts.

The long-awaited opinion issued in late June by the U.S. Supreme Court clarified the constitutionality of the Patient Protection and Affordable Care Act of 2010 (“PPACA”).  The Court ruled that the requirement that every American carry health insurance is a tax and as a result, is constitutional.   The ruling permits the federal government to pursue a broad expansion of the Medicaid health program for the poor.

The healthcare industry is faced with slow revenue growth, uncertainties resulting from healthcare reform and the economy in general.  As a result, hospitals and healthcare providers are looking to cut expenses and increase efficiencies or to consolidate in the hopes of streamlining operations and gaining pull with the industry payors.  As strategic mergers and acquisitions in the sector continue, private equity firms are positioning to capitalize on this industry in transition.  BDO, the national accounting and consulting firm, recently released a study, which showed 21 percent of private equity professionals (the second largest percentage of all respondents) see the greatest opportunities for new investments, during the next 12 months, in the healthcare and biotech industries.

As we await the U.S. Supreme Court review of President Obama’s healthcare overhaul and find ourselves deep in the century-long American debate over healthcare, three issues seem clear for this industry in transition. First, regardless of the Supreme Court rulings, coverage as we have historically known it will expand and more Americans will be able to access that coverage. The issue is how much will this market grow. Second, cost and the containment of those costs must be streamlined across the healthcare value chain. And finally, businesses involved in all areas of the healthcare industry will continue to consolidate in an effort to lower cost and increase coverage or market share. Whatever one’s political views or vision of the future, these issues are the core strategic drivers of change and are at the center of driving mergers and acquisition in the U.S. healthcare industry. Obviously, the Supreme Court decision matters. Whatever the decision, these issues will continue to drive the transformation that has been set in place and will continue to fuel M&A.