No year had as many twists and turns for health care private equity as 2020. To reflect on what the industry experienced and where it is headed, Winston & Strawn convened health care private equity leaders for a panel discussion as part of the firm's 2021 Health Care and Life Sciences Summit. The panel was moderated by Ari Markenson, Co- Chair of Winston's Health Care and Life Sciences Industry Group, who was joined by Shaunak Parikh, Partner, EW Health care Partners; Garrick Rice, Managing Partner, RiverGlade Capital; and Justin Unertl, Principal, Excellere Partners. Highlights of the conversation included the following:
AFTER THE DISRUPTION, DEALS
The pandemic shut down M&A last spring as both PE firms and strategics hunkered down to focus on cash flow, supply chains, and mission-critical execution to protect their holdings. But once balance sheets and operations stabilized and the altered health care landscape began to take shape, investors rewrote investment plans and shifted from defense to offense. At the same time, deal supply was strengthened by a cohort of founders looking for exits and enterprises hungry for capital—either to pursue growth opportunities or to manage the pandemic's disruptions. The result has been a deluge of transactions that began around Labor Day and hasn't let up.
HUMAN CAPITAL PAYS LARGE DIVIDENDS
The speed with which a PE firm could move from emergency management to big-picture strategizing depended upon the ability of portfolio company management to quickly read the crisis and respond accordingly. At times, this required the courage to make counterintuitive moves, such as bulking up inventory levels in the face of cries to cut spending to the bone. Similarly, enterprises with strong management teams and solid relationship networks with investors continued to attract capital even under unfavorable conditions.
RECOVERY SPEED DEPENDS ON MULTIPLE FACTORS
The path of a given sector's recovery from the pandemic has depended on a range of variables. Elective procedures and procedures administered in in-patient settings were particularly hard hit, as were specialties that were unable or reluctant to embrace telehealth and those dependent on in-person sales teams. There are also significant differences between geographic regions, depending on the pandemic's local impact and the regulatory response.
OPPORTUNITY BEGINS AT HOME
The pandemic provided a large-scale stress test for the U.S. health care system that exposed the cracks in a delivery model centered around institutional care. As a result, the shift by investors to outpatient facilities, telehealth, and home-based care, which had begun before the pandemic, has accelerated. Specialized pediatric care, geriatric care, and behavioral health have seen particularly strong growth.
TURBULENCE CONTINUES FOR PHYSICIAN PRACTICES
With the pandemic adding even more hurdles to the task of merely keeping the lights on, even large regional practices are looking to hand the reins over to third-party professional management. The reluctance of patients to return to doctors' offices, the rise of telehealth, and the expectations of millennials and Generation Z for personalized, on demand service add additional challenges. However, with the exception of certain specialties such as retinal care, GI, and orthopedics, the PPM market is nearing saturation for investors.
NEW ITEMS TOP INVESTOR SHOPPING LISTS
The market for infection prevention products that eliminate pathogens from surfaces or purify the air has expanded from hospitals to hospitality and beyond, attracting considerable investor attention—although the post-pandemic demand for this category remains an open question. Other opportunities are presented by sectors reaching inflection points. For example, as the number of cell and gene therapy drugs in the pipeline expands, investors are focused on CDMO organizations that can handle the highly specialized development and manufacturing requirements of those therapies. Clinical decision support and other data-driven services present synergies with the rise of telehealth and the increased adoption of technology by both providers and patients.
HIGH VALUATIONS LEAD TO STRUCTURED DEALS
Assets with real differentiators and solid organic growth prospects continue to command healthy multiples— particularly if they have shown themselves to be resistant to the sort of disruption caused by the pandemic. Milestone earnouts are increasingly used to bridge the gap between what sellers expect and what buyers will pay. Deals are also giving founders greater upside and a meaningful minority stake at the rollover. Remember that the regulatory implications of these creative provisions need to be addressed early on.
HEALTH CARE CRISIS OVERSHADOWS HEALTH CARE POLICY
Health care enters 2021 with much-needed clarity around E&M reform and "surprise billing" regulations. However, any ambitions the new Biden administration has for making systemic change to the health care system are likely to be delayed for some time, given the twin domestic challenges of ending the pandemic and shoring up the economy. What policy is advanced is likely to center around the themes of health care equity, access, and engagement.
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