The Role of Healthcare Valuation Firms in M&A Transactions
Healthcare investment banking (IB) bankers provide merger, acquisition, and debt and equity capital issuance advice to biotech, pharmaceutical, medical device, and healthcare service/facility companies. Most banks divide their teams into industry groups, making healthcare a natural choice.
Hospitals and health systems are increasingly entering into joint ventures with private equity firms for financial flexibility, operational expertise, and a pathway to innovation. Valuation services are often the first step in these transactions.
Experience
Healthcare business valuation experts understand the industry’s unique regulatory environment. They can assist with various healthcare entities, compensation arrangements, tangible and intangible assets, and physician compensation for services. They analyze voluminous financial operation information and deliver fair market value opinions to ensure compliance with complex laws and regulations that may impact the underlying economics of the healthcare entity or arrangement.
M&A activity picked up after a slow start in 2021 and has continued to rise across all five healthcare sectors, with deals focusing on pharma companies buying to boost pipelines, medtech acquirers expanding capabilities, and healthcare services firms pursuing category leadership positions. As a result, healthcare M&A deal multiples remain high. This forces acquirers to become more creative in devising and planning a transaction’s value drivers and increases integration risk. This can result in a lower valuation outcome if not executed effectively.
Insight
Healthcare business valuation is an art that requires deep industry knowledge, solid technical skills, and practical experience. Healthcare valuation firms understand the unique and challenging environment in which healthcare organizations operate and the critical implications of market-based changes and regulatory nuances that can impact valuation outcomes.
As part of a healthcare M&A transaction, it is often necessary to value intangible assets such as physician relationships (management services agreements or clinical co-management arrangements) and other contractual arrangements. Regardless of the type of valuation involved in an M&A transaction, it is essential to have a healthcare business valuator with the expertise needed to address complex issues and challenges arising from these intangible assets.
Expertise
The unique nuances of healthcare valuations require experts with the experience to appraise healthcare businesses, services, and tangible and intangible assets accurately. This is because medical practices, hospitals, and ancillary facilities often operate within a highly regulated environment with specific legal pricing requirements.
Healthcare service and facility companies generate stable cash flow in various economic conditions. This makes them prime candidates for leveraged buyouts by private equity firms. In addition, healthcare drug and pharma companies are growing at double-digit rates despite the sluggish global economy.
However, the value of healthcare businesses in M&A transactions is often impacted by a range of factors, including industry trends and reimbursement environments. Revenue waterfall analysis is essential, as various types of revenue reimbursements, such as bundled payments and capitation, often impact the quality of earnings. Revenue and cash collection methodologies must be carefully aligned, as well. The sensitivity of earnings to changes in reimbursement models is also an important consideration when valuing healthcare companies.
Access
Modern healthcare providers operate under various business models, including fee-for-service, bundled payments, and capitation. Understanding how these models impact revenue recognition and expenses is critical in these industries’ quality of earnings (QoE) assessment.
In addition, the unique regulatory environment in which healthcare operates can complicate matters. For example, healthcare companies must adhere to strict privacy laws that can impact the reporting of revenues and incomes.
Lastly, because most pharmaceutical and medical device products are patent-protected for only a limited period, companies must constantly focus on innovation and developing new products to replace those whose patents have expired. This can cause sales to fluctuate yearly, making DCF not the best metric for such companies.
Fortunately, by scrutinizing data from large transactions, valuation experts can gain significant insight into current healthcare transaction market trends.
