Independent Thinking^®

Emerging Opportunities in Healthcare

 
Editor’s note: Matthew McAskin is a Senior Managing Director at Evercore and co-head of the firm’s growing healthcare services business, advising clients on public and private transactions in the hospital, managed care, healthcare information technology, physician services, and outsourced medical services sectors.

He joined Evercore in 2013 from Goldman Sachs and has spent the last 20 years focused on the healthcare services sector. Here are extracts from a recent conversation with Independent Thinking.

A Massive and Rapidly Changing Industry

Healthcare is a fascinating industry, but one that is also amazingly complex. With the possible exception of education, it is hard to find a sector that elicits such strong personal emotions, and also raises so many social, political, religious and financial issues. Dating back to the introduction of Medicare in the 1960s and, more recently, the continued arguments concerning Obamacare, there are not many topics that seem to garner such passionate attention. As a healthcare research equity analyst once put it, “we are all unwilling participants in this maddening system from the cradle to the grave.”
 
Some of the themes that we are seeing now in the transformation of the healthcare sector are not new, although the pace of change has increased significantly over the past five years. We are rapidly shifting from a traditional fee-for-service healthcare delivery system to one that focuses on value-based care, lowering costs and improving quality.
 
A renewed focus on wellness, the rise of consumerism, and re-emerging population health management solutions are all playing a role in forcing many constituents to break down traditional structural and communication barriers to jointly deliver higher quality care. Hospitals, caregivers, payors, corporations, and consumers collectively need to change their mindset, to think about coordinated care management and longer-term outcomes, instead of focusing primarily on the costs of individual tests, surgeries and procedures. This change in philosophy is forcing many of our clients to reconsider sometimes decades-old operating strategies.
 

The M&A and Financing Market Outlook in Healthcare

Healthcare is one of the most active sectors for mergers and acquisitions. In addition to healthcare services, the pharmaceutical, biotech and medical device sectors are all experiencing a tremendous amount of strategic activity, as well as capital raising. The management of many public companies has been applauded by investors for using their cash and stock to pursue expansion through M&A, instead of retaining or returning cash to shareholders.
 
Some of the macro factors driving healthcare utilization and rising costs are well known. Healthcare is an almost $3 trillion industry in the United States, or approximately 18% of our GDP. We have an aging population that will increasingly utilize more healthcare services. Still, healthcare remains highly fragmented and is mostly organized by local delivery systems.
 
So, it is no surprise to most that new investor dollars continue to flow rapidly into the healthcare services sector. There are various types of organizations prepared to invest anywhere from $1 million to $1 billion or more in individual, privately held companies. Corporate-backed accelerators, traditional venture capital, private equity, family endowment funds, pension funds, and institutional equity funds are all vying to invest in opportunities that range from start-up companies to mature multibillion-dollar healthcare companies.
 

The Evercore Healthcare Services Practice

We are often asked where and how we spend our time. Traditionally, healthcare services has been a middle-market focused sector, with hundreds of mostly private companies across 20-30 subsectors that traditionally range from $200 million to $3 billion in size. More recently, as our clients have been expanding their service offerings and trying to capitalize on trends, we have seen the smaller and larger ends of this spectrum widen. In other words, clients are seeking earlier stage opportunities, so we need to stay close to emerging growth, digital health and health care information technology businesses, as well as some of our larger corporate relationships asking us to evaluate larger, transformative transactions that may represent a departure from their traditional service offerings.
 
In addition to our M&A advisory capabilities, many of our corporate and private equity clients turn to us for advice regarding capital market transactions. Evercore ISI gives us a very strong investment research team to join with our existing capital markets platform, which is very important across the healthcare sector. And with the re-emergence of IPOs as a viable alternative for private companies, this has increasingly been an area of focus for many of our clients.
 

Investing In Scale

When looking at publicly held companies it is important to note that the top ten companies in the U.S. healthcare services sector comprise about 70% of the overall market capitalization. Traditional sector leaders and bellwethers include United Health Group (UNH), Cardinal Health (CAH) and Hospital Corporation of America (HCA). Instead of resting on their leading market positions, these companies and others have been actively expanding their business offerings to adapt to the rapidly changing landscape and to also position themselves for sustainable long-term growth in multiple areas further away from their traditional core offerings. They have been some of the more notable participants in using strong balance sheets and improving public currencies to aggressively pursue acquisitions as a significant strategic tool.
 
At the other end of the spectrum, there are smaller-cap companies that may have a more narrow focus on a specific subsector. Examples include healthcare information technology providers, post-acute care (home health/hospice), surgery centers, clinical labs, renal dialysis, and behavioral health companies. These sectors may only have between two and five publicly traded companies each, so they may be more difficult for the individual investor to identify and track, especially as they may not be household names. However, many of these companies represent high-growth opportunities in underserved or less followed sectors.
 

Challenges for Individual Investors in Healthcare Services

There has been a demand-supply imbalance for public investors, and it can be a challenge to invest in new, innovative models. We estimate that over $300 billion of equity has disappeared from the publicly traded healthcare services market over the past 10 years as a result of public-to-private transactions with private equity, corporate stock buybacks and, most significantly, M&A transactions that were financed in cash. Coupled with a slower IPO market and a very active environment for companies to partner with private equity over the last 10-15 years, there were very few new stories that individual investors could find to invest alongside. Although we have recently seen a renewed interest in IPOs, the potential for a strategic sale or a recapitalization with a private equity partner remain strong competing alternatives.
 
It is also important to remember that a significant portion of healthcare services companies is comprised of national and regional not-for-profit healthcare services providers. Institutions such as the Cleveland Clinic in Ohio, Kaiser Permanente in California and Aurora Health Care in Wisconsin represent blue-chip organizations that are viewed as innovative integrated delivery models. An individual investor cannot invest in the equity of these organizations, however, given their private or not-for-profit status.
 
In addition, some of the larger best-in-class private healthcare services companies that may not be household names, such as Multiplan or CHG Healthcare, are majority owned by leading private equity institutions, which may not be accessible to the private investor unless they were to pursue an IPO or join forces with a larger, publicly traded strategic party.
 
It is truly a remarkable time to participate in this sector. Not only do we all have a vested interest in our personal healthcare decisions, but supporting some of the leading private, public and not-for-profit healthcare companies and caregivers that are trying to transform healthcare can also be incredibly rewarding.