Despite some market woes, private equity remained bullish in the healthcare market for the second quarter of 2023. Deal volume from PE hit 216 transactions, a significant increase from the 191 announced in the first quarter of 2023, according to data captured in the LevinPro HC platform. The surge in PE activity helped push overall M&A activity to 586 deals in Q2, an 8% jump from volume in the first quarter.
The pace of M&A might come as a surprise, considering some of the headwinds in the industry. Labor issues and high-interest rates have persisted throughout the year, and new reimbursement changes have hit the industry, especially some industry giants. Envision Healthcare, backed by PE giant KKR, filed for Chapter 11 Bankruptcy in May, citing declining patient volumes due to the COVID-19 pandemic, exclusion from health insurance networks, rising inflation and clinician shortages and a financial strain from the implementation of the No Surprises Act.
Envision’s bankruptcy filing arrived nearly five years after KKR acquired it for $9.9 billion.
Additionally, several recent studies and reports have found that once a PE firm takes over a hospital, nursing home or physician group, there is an increased focus on short-term revenue gains that end up harming the patient and reducing the quality of care. It’s a wave of negative news and attention that could have a lasting impact on PE’s reputation and whether or not a seller would want to partner with a firm in the future.
However, PE activity pressed on even with a series of negative press and market headwinds. As usual, PE firms were most active in the physician market, with 92 transactions. MB2 Dental Solutions, a national dentists services organization and a portfolio company of Charlesbank Capital Partners, closed 22 deals in the second quarter, by far the most aggressive buyer. PE interest in the dental market has surged in the past five years. Not only do dentist practices offer steady cash flows, but according to Huron, a global professional services firm, the dental market is poised to hit $163 billion in total revenue by 2025. Plus, the dental market remains highly fragmented, with approximately 70% comprising independent dental practices. Those numbers suggest the M&A market will remain active for years to come.
The largest physician deal, by disclosed price at least, was the acquisition of OneOncology Inc. by TPG Capital and AmerisourceBergen valued at $2.1 billion. AmerisourceBergen is only a minority investor in this transaction, buying a 35% ownership stake valued at $685 million in cash.
OneOncology is a national network of independent community oncologists assisting partner practices to expand their cancer care services. Its network includes 700 physicians practicing at more than 181 sites, serving approximately 280,000 patients annually. It was backed by General Atlantic, another private equity firm, which is exiting its investment in OneOncology after this deal.
PE firms found investment opportunities across the life sciences sectors as well. One of the largest deals was the purchase of Syneos Health, a national contract research organization (CRO). It was acquired by a consortium of private investment firm affiliates composed of Elliott Investment Management, Patient Square Capital and Veritas Capital. The deal was valued at $7.1 billion, or 1.3x and 10.9x Syneos’ 2022 revenue and EBITDA, respectively.
PE activity is typically focused on healthcare services, but there has been an uptick in investment in companies focused on drug discovery and development. Warburg Pincus and Advent International purchased Baxter International’s BioPharma Solutions division for $4.25 billion, or 6.6x the business’ revenue. BioPharma Solutions is a leading contract development manufacturing organization (CDMO). As more pharmaceutical and biotech companies outsource their drug research and development, there will be an increased demand for CROs, CDMOs and companies running clinical trials. PE firms have been pushing into this market to capitalize on these tailwinds. PE firms have already established a major presence in the healthcare services industry, so it was only a matter of time before they started to push into new areas.
