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EBITDA levels soar for well-managed healthcare technology companies

As the consultancy.eu website reported last May, private equity buyout deals in the healthcare sector rose to USD63 billion in 2018, a near 50 per cent year-on-year increase, with North America leading the way. And in Europe, PE healthcare specialist investor Global Healthcare Opportunities (GHO Capital Partners) are tapping in to investor demand; its GHO Capital Fund II, which closed in November 2019, attracted EUR975 million, some 50 per cent larger than its inaugural fund in 2015.

As the consultancy.eu website reported last May, private equity buyout deals in the healthcare sector rose to USD63 billion in 2018, a near 50 per cent year-on-year increase, with North America leading the way. And in Europe, PE healthcare specialist investor Global Healthcare Opportunities (GHO Capital Partners) are tapping in to investor demand; its GHO Capital Fund II, which closed in November 2019, attracted EUR975 million, some 50 per cent larger than its inaugural fund in 2015.

With so much innovation and disruption taking place in healthcare and biotechnology, PE groups are working feverishly to uncover value opportunities. And as Jeffrey Stevenson, Managing Partner of US private equity group VSS explains, technology innovation driven by AI, robotics and big data is really driving change in the US healthcare market.  

“Robotics, for instance, is being increasingly used to perform more precise, safer, and less-invasive treatments,” says Stevenson. “AI applications, such as predictive analytics for patient monitoring, provide significant financial savings and help reduce risk through discovering those in need of medical intervention and creating custom care plans for them, and by delivering personalised automated reminders.” 

The use of big data in electronic health records, he says, is expected to provide holistic personalised care to patients by accessing patients’ medical history, diagnoses, treatment plans, test results, and other details, “as well as offer pharmaceutical companies with real-world evidence outside traditional randomised clinical trials. Similarly, there is expected to be a shortage of 120,000 physicians by 2030. Telemedicine is also rapidly redefining healthcare by helping patients consult physicians anytime and anywhere.”

Today, the US healthcare industry is under pressure to lower costs and adjust to value-based care models. Increasingly, digital IT and health businesses are using healthcare data analytics to improve treatment options. 

Asked how this technological revolution is influencing the way VSS thinks about identifying potential mid-market target acquisitions, Stevenson says: “We are focused on supporting experienced healthcare executives with flexible capital solutions that can evolve within a technology-driven landscape to take their businesses to the next level. 

“Our healthcare portfolio reflects this through our investments in solution providers that help hospitals improve their financial and operational performance, along with achieving compliance integrity.”

The healthcare sector has become a rich hunting ground for PE groups to identify potential acquisitions, and as a sector-specific strategy, healthcare-focused funds have stood out, performance-wise. According to Cambridge Associates, investments made by specialists in the sector generated an average IRR of 34.4 per cent, whereas generalist funds returned 19.2 per cent, based on data from 2001 to 2014. 

One of the more pertinent risks for any PE groups investing in the Healthcare industry is the potential for regulatory change. Managers like VSS generally invest in broader macro trends that are well known, such as cost containment and value-based care, to mitigate potential risk to the portfolio. Still, as Stevenson points out: 

“Overall, the healthcare industry is exposed to intense competition, particularly among pharmaceuticals and young health-tech companies offering solutions in niche markets, making a potential target vulnerable to disruption.”

Asked to cite one example of a healthcare investment made by VSS that is availing of next generation technology, Stevenson refers to Caravan Health, which helps providers and community health systems make the transition to value-based healthcare by building and managing accountable care organisations (“ACOs”) – to support physicians and community hospitals in improving patient care, clinician satisfaction, and financial performance. 

“Caravan Health helps ACOs create, operate and manage successful population health programs to achieve savings, exceed quality scores, and confidently take on Medicare risk,” states Stevenson.

He goes on to suggest that technologies such as AI, virtual healthcare, Nanomedicine, virtual reality and even 3D printing, all have the potential to transform and drive growth in US healthcare companies:

“For instance, the value of VR in medicine and healthcare is expected to grow over 30x to USD285 million in 2022. Virtual healthcare practices for annual patient visits are expected to save USD7 billion in economic value. 

“Also, between 2010 and 2016, the number of US hospitals with a 3D printing facility grew 3,200 per cent. We expect AI healthcare applications such as robot-assisted surgery and virtual nursing assistants can save up to USD150 billion annually for the US healthcare economy by 2026.”

Given the enormous depth and breadth of potential investment opportunities in US healthcare, VSS trains its sights very much on lower-middle market companies that have an enterprise value of less than USD150 million, which Stevenson feels is an under-funded area as more PE firms move up-market. 

“We provide flexible capital solutions, such as mezzanine, subordinated debt, preferred equity, and common equity that are tailored to facilitate the unique needs and goals of each company,” he says. “We participate on their Boards of Directors and help them in devising strategies and achieving growth. We are likely to focus on investing in businesses that enable healthcare providers to make better data-driven reimbursement decisions. Our operating partners offer valuable, experience-based insights to the management teams of our portfolio companies.”

In terms of sub-segments that still offer attractive entry price multiples, he believes that maturing healthcare tech companies could be good targets, pointing out that the healthcare technology industry is projected to grow at 14 per cent per year through 2023. 

“On average, healthcare companies with a strong technology component are valued at 15 to 17x earnings compared with an average of 12 to 15x across the industry, with lower multiples for companies without strong technological components. 

“In recent years, well-managed healthcare tech companies have performed even better with valuations of 23 to 25x EBITDA. We see the best value in lower middle market companies that serve large markets and provide the opportunity for further growth through add-on acquisition,” concludes Stevenson. 
 

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