The healthcare and life sciences industries have entered new stages in their growth fueled by private equity (PE) investment acquisition. The pace of new platform formation and consolidation has begun to see the increase in mergers and acquisitions (M&A) activity since 2019 as a new normal in several areas of health tech and life science tech, though every year isn’t going to be like 2022.
Growth stage companies are reaching maturity and beginning inorganic growth at much earlier points, and the idea of early exit but continued growth with PE backing has changed the shape and expectations for new founders. On top of this are a number of new variables, particularly in the use of advanced technologies, as reporting and analytics moved from an incremental aspect of product/platform to a key differentiator and area improved efficiency and even new revenue stream through monetization brought on by rapid advances in data and artificial intelligence.
West Monroe is a digital services and advisory firm with focuses in several industries, including healthcare and life sciences. In an interview, Nathan Ray, a partner with the healthcare and life sciences practice who oversees M&A/PE – related work in that industry for West Monroe, highlighted how his firm works with companies to drive due diligence for clients, and help acquired companies address issues and differentiate during holds. Customers include financial and strategic investors, from PE to strategics large or small, and includes looking at businesses across the spectrum from early stage to mature/scaled corporations.
Ray said the best way to think of diligence from both the buyer and seller perspective is something like a health check, a combination of what a buyer needs and a checklist for a company post-acquisition.
“In any period of time, whether it’s days or weeks before you start the sales process or 10 years, there are things that you can do that can help improve how you speak and think about your company and best show the value you’ve created during hold in an intentional way. For example, large, transformational projects don’t need to be fully done but you do need to show that the organization is taking them seriously, planning and making progress and that you’re investing for success. That could include replacement of significant technology, operational change, or just a plan for the rollout of a new product or the next generation of a solution. You need to make sure that’s understood by your customer base.”
West Monroe also advises PE and strategic clients who are often buying platforms in a sector or subsector that they haven’t purchased in before. They can help educate clients on “what good looks like” in those areas, strong investments in that sector, and what they should do to retain advantage or to be more competitive. They also advise clients on how to navigate major headwinds (industry, regulatory, technical, customer, organization, cost) and how those are reflected in the investment, potential performance, and value creation.
Healthcare sector dynamics
Many companies aren’t quite ready for the speed and intensity of the current processes particularly due to sharper analysis due to tightening macro and competitive dynamics that’s particularly most evident across a variety of digital health companies (telehealth, new entrant health plans, wearable devices) that have come and gone or are struggling to turn a profit, Ray said.
“There little interest, as opposed to not long ago, in throwing money at digital health opportunities in favor of making sure that we’re truly solving problems and following a roadmap for growth. Some of this overzealousness was magnified by the low cost lending spurred consumer investment wave and related growth in unique investment structures like SPACs. The challenge right now is that investors need businesses that can survive, are profitable and have an idea of how they’re going to create differentiation and grab market share.”
One of the areas that continues to fair well coming through the pandemic-led investment surge is that interest in life sciences investments including pharmacy, lab, manufacturing, clinical research/clinical trials and all the related supporting technologies.
We really changed many things during the pandemic that don’t get enough discussion. For example, at home testing has totally rewritten how we think about our own health and how we use data to make decisions. Self-administering a diagnostic test for an illness pretty unheard of four years ago. Now you can keep a stock of tests and truly determine what your illness is in certain situations.
“I think as we move forward, the ability to self-diagnose through over-the-counter [tests] means the ability to actually drive your healthcare through data and then to drive decisioning around that data through systems that can accurately tell you how you should process or think about that [information] just in time for all the AI excitement,” Ray said.
The last few years have also shown the market’s interest in healthcare and life sciences with more funds emerging focused on healthcare and many with a healthcare focus going into life sciences as well. Healthcare is now such a major driver of the economy that its almost impossible to be an investor without some exposure, Ray said.
Among the niches that Ray highlights are specialty benefits administration, including services focused on enabling employer groups to tinker with their benefits, take on more risk or allow individuals or members to have better services. In provider spaces, he points to niches within healthcare data access, interoperability and value-based care, providing ease of access to clinical data.
“There’s been growth of a number of data sharing services and health information exchanges that have existed for a while but are now getting to the place where they’re really gaining momentum due to both regulatory and technology tailwinds in terms of data accessibility. These have created sort of an inflection point, particularly brought on by some of the regulation like TEFCA,” he said, referring to the Trusted Exchange Framework and Common Agreement.
The strategic roadmap
Ray advises companies to prepare a strategic roadmap and take action on the things that are going to provide the most clarity on any or all of the three essential considerations: the market, competitor technology, or workforce differentiation. Those are often the same things that West Monroe brings up in due diligence, Ray said.
He noted that 12-24 months out from exit is the best time to put a strategic roadmap together. The baseline for those efforts are the same risk baselines that West Monroe covers as hygiene issues in diligence. A checklist might look a little like this:
- Make sure you’re aware of your risks within your people/organization, processes, product, operations, or technology environment.
- Assess your effectiveness in using technology and your strategy toward identifying and building operating advantage or solution differentiation
- Create a value capture plan to outline and prioritize what things can change in the time before sale that will have good ROI.
- Have a dedicated team (internal or 3rd party) thinking of and executing on projects to reduce risk and grow value – for example rationalizing old technology to improve your bottom line.
- Get started on that feature/data/analytics/automation/AI internal capability and team you know the market and buyers will be expecting to see.
When strategic plans go bad
Some big companies have struggled to make good on their ambition, some have struggled to survive as profitability and return on investment has come into sharper focus. Others have bitten off product launches/migrations or consolidations they were not ready for. But in most cases a strategic plan goes bad when people stop updating their plan and weighing approaching risks, Ray said.
“Across the landscape, you can find big and small successes and failures. What ultimately matters to most is: Have you continued to create value? You see companies with these great accumulations of assets and not really any idea of what it was trying to do. Haven was too ambitious, Amazon Care was too point in time practical, sometime you just need to look at the financials a bit harder and try to understand when or if they’ll ever make sense (Livongo, Bright and Oscar, Envision), or just ask your doctor how they feel about the value they are seeing,” Ray explained.
Sometimes the really big businesses figure out times like these are the right strategic timing to start a new plan, to focus on the core and maybe shed a business that could do better separated.
The consolidation trend in healthcare has led to companies with diverse businesses that do not always work in harmony. Carve-outs offer a useful way to extract some of these businesses and inject new life into them while creating a more cohesive and productive company with segments that are more unified, according to Ray.
“In those types of deals, we’re first still trying to answer the core business risk questions of the maturity, scalability, and extensibility of the technology as well as its functional capability and its competitive state,” Ray said. “But we’re also trying to answer the question of what it’s going to cost to pull this out and stand it up on its own or pull this out and attach it to a new company. With a lot of time spent on understanding how data, systems and people are shared in the current integrated business and which of these we must keep and which we can cut to separate the companies. These ‘entanglements’ are often the reason carveouts aren’t always thought of, as they are often very difficult to separate, but they also provide great opportunity to those willing to push through and provide parent capital to invest and provide fresh air and opportunity to the separated company.”
Ray said these types of situations are where West Monroe’s expertise comes in, because he and his colleagues ask the right questions and spot where key vendors, technology, and data assets need are integral to each company to ensure when the carve-out or separation occurs with appropriate planning and resources and timelines are well thought out and appropriately motivated, this insures both parent and target’s business health are not impacted and the expected value of the transaction is realized.
“Carve-outs and mergers can be difficult,” Ray observed. “It is really important to have some idea of the costs to succeed going into the deal. Some of the biggest issues occur when there’s a little too much emphasis on getting a merger or carve-out done as quickly as possible and there’s not appropriate due diligence to figure out what the company needs to invest to make sure it’s successful.”
“The ability to both tell the story of how [the company] got there, but even more clearly show the intention of how they’re investing to realize their growth objectives is a clear signal on how successful a lot of these things will be,” he added.
Success doesn’t have to be perfection
Ray pointed to vertically integrated payer-pharmacy towers such as Optum, CVS Health, and Walgreens. Although they “seem to be doing the right things,” they have not yet succeeded in tying everything together in a complex, full optimized vertically integrated, value-producing way. Buying assets, letting some of them operate as distinct companies and buying others and integrating them in a more purposeful way can all be effective strategies.
“Creating a picture for the next buyer and getting the best valuation for an exit isn’t about having everything done and giving an absolutely perfect exam score,” Ray concluded. “It’s showing that you are living and working in a dynamic business and – that you clearly understand what is driving, holding back, or motivating your growth and how you’re actioning on those levers.”
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