Why You Should Expect More M&A in 2019

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By Amanda Baethke

While the trajectory of the healthcare sector is uncertain, pending the upcoming legislative changes, 2019 is expected to be laden with mergers and acquisitions as many of the driving forces that make the American healthcare market attractive to buyers and investors remain today. As aging in place and hospice care are expected to expand at a rapid pace, more businesses, both American and foreign, are capitalizing on new markets through investing in or partnerships with specialized care providers. 

The Rise in Foreign Investors 

As America’s largest population reaches retirement age, investors are predicting the healthcare spend will increase. The predicted spending boom coupled with competitive interest rates has led more foreign investors to invest in the American healthcare system.

Their intent to enter has led to an increased demand. Foreign entities are merging and acquiring companies to overcome one of the largest barriers of entry: insurance contracts. 

By merging with or acquiring businesses as a means to enter the market, foreign entities can build upon existing products and further research, develop, and launch their own medical equipment to address an influx of chronic diseases. 

The increased level of interest from local and foreign entities could mean the market should expect to see high valuations. 

How to Remain Successful Under Legislative Pressure  

Many small businesses struggle to remain profitable due to reimbursement pressure within the durable medical equipment (DME) space, especially as Medicare and other large insurers’ rates continue to decrease. As a result, many small businesses are forced to either pivot from their less profitable product lines or completely exit the market. With the high number of businesses exiting the market, remaining businesses are shifting to larger geographic regions and shifting focuses to profitable product lines.  

Failed attempts to repeal the Affordable Care Act (ACA), tax reforms, and large Medicare changes have made it clear to many stakeholders that it may be time to exit certain business sectors or exit healthcare altogether. The current climate in the market is adding additional pressure for mergers and acquisitions. Sellers are gaining additional capital, allowing them to re-shift their focus and attempt to find the buyers that will provide the highest quality care for their members. In return, buyers are afforded the opportunity to care for additional members who have been negatively impacted by these changes. With that in mind, M&A activity remains a useful solution for both buyers and sellers. 

Increasing Success With Mail Order Products 

As reimbursement pressure continues to increase, allowing insurers to become more competitive, medical equipment suppliers are being forced to adapt. As a result, there has been growing interest in shippable items such as continuous positive airway pressure (CPAP) machines and accessories, urology supplies and other respiratory equipment. 

Larger businesses are not able to easily compete in the local markets where they do not have a physical presence. The focus on M&A affords the opportunity to gain local leads at a significantly reduced cost, while smaller entities who are not afforded the benefits of economies of scale can shift from the less profitable lines. 

The high demand for shipping products is supported by the large volume of competitors. Because the products do not require a physical location, they have bidders from all regions. This has provided an additional benefit for sellers because, with the high competition, valuations remain strong. Alternatively, a focus on equipment that requires a physical presence means the buyer would need a local presence and will incur an additional expense. The sale of the shippable lines enable accelerated business transactions, so buyers and sellers are both able to act faster on their business and healthcare goals. 

More to Expect in 2019 

The market is changing as a result of legislative and reimbursement pressures coupled with an aging baby boomer population. Sellers are actively seeking opportunities to eliminate losing lines of business or exit the market completely. Valuations remain strong for shippable equipment because competition remains high. Combined, these factors will foster merger and acquisition activity that may very well surpass the deals we saw in 2018. 

Amanda Baethke is Corporate Development Director at Aeroflow Healthcare.

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