Contributors: Blake Madden and Savanna Dinkel

VMG Health has completed its review of healthcare Q1 earnings season and subsequent investor presentations, which is particularly interesting given the quarter’s insight into COVID-19’s impact on healthcare payors and providers.

In a four-part series over the coming weeks, VMG Health will be summarizing key observations and common themes regarding the following four major themes from public healthcare firms:

Historically, during times of financial shock or economic distress, the healthcare sector has fared more favorably than others. Typically, during these times, strong players in the healthcare industry are willing and able to capitalize on favorable valuations of smaller companies that are less able to weather the storm. Not surprisingly, the COVID-19 pandemic has affected the industry more pointedly than past shocks. As the healthcare industry treads these uncharted waters, executives are optimistic of the M&A opportunities on the other side but seem hesitant to pursue them as quickly and actively as they might have before the pandemic.

Hospitals

“I think reality, what it’s done in this near term is paused everything, just given everybody is focused on providing the services and making it through this kind of response and recovery period we’re going to be in. And then ultimately, my view is that I think, depending on how this settles out, it may provide some catalyst for other health care providers to look at some transaction … I think we’ll just have to wait to see. But if more health care providers have some financial or economic challenges, then that has proven historically to be a catalyst for more M&A … So yes, I think there is that potential [for M&A]. We’ll just have to see how the environment plays out over the next 12 to 24 months.”

William B. Rutherford, Executive VP & CFO, HCA Healthcare, Inc. Presents at BofA Securities 2020 Health Care Conference (May 12, 2020)

Home Health & Hospice

“We like home health. We thought there’d be more of a shakeout. We were prepared for that. We had 50 deals on the table that we were evaluating that were actually rescued – they were going out of business due to PDGM. With all the support systems [i.e. CMS payments and grants] that came in, they’ve all disappeared. We still got three or four done. But we anticipate we’ll see this time next year. If all these props are removed, that we’ll see a lot of home health at very, very good rates.”

Paul Berthold Kusserow, Chairman, President & CEO, Amedisys, Inc. Presents at UBS Virtual Global Healthcare Conference (May 18, 2020)

“The other impact it’s had, as we had mentioned in some of our previous public discourses, that there were a number of large — there are a number of larger hospice providers that are in the hands of private equity players. And coming into the year, those private equity sponsors had indicated they might be looking to take those properties to market during the course of 2020. Well, for the most part, they’ve elected to defer on those transactions given the overall environment, both in terms of the disruption to this business and then some of the volatility that’s occurred in the leveraged finance market. So that may be delayed by six months or a year. But again, we would expect to see those [profits] available sometime at least in [2020].

Ultimately, we think both home health and hospice remain prime candidates for consolidation, and it’s our intent to continue to build scale in both of those business lines.”

Douglas E. Coltharp, Executive VP & CFO, Encompass Health Corporation Presents at BMO 2020 Prescriptions for Success Healthcare Conference (June 23, 3030)

Outpatient Care

“The [ASC] M&A landscape, as we said before, pre-COVID was very favorable. But obviously, we put most of the M&A activity on hold until we get to a point where we can ramp back up our existing operations … we continue to have a strong pipeline. But of course, our primary focus is going to be ramping back up our existing operations … we believe that once we get back to the level of normalcy I was alluding to, I think we’ll be in a pretty good position to refocus on the M&A activity that we stopped in the middle of March.”

Brett P. Brodnax, President & CEO of USPI, Tenet Q1 2020 Earnings Call

“The M&A pipeline was as strong as it’s ever been coming into this. We feel like it’s only going to get stronger. So we’ll be continuing to talk about that.”

Eric Evans, CEO & Director, Surgery Partners Q1 2020 Earnings Call

Clinical Laboratories

“There are other transactions in the pipeline that we were very close to announcing before the crisis. While they are on hold, our strong conviction is that these discussions will resume, which will be in the third quarter and will be a very good position at that point to complete those transactions … At the same time, we know that many smaller regional labs have had their own challenges. This could produce opportunities for tuck-in acquisitions. If any, the crisis could be an additional catalyst to drive the consolidation we’ve been forecasting for several years.”

Stephen H. Rusckowski, Chairman, President & CEO, Quest Diagnostics Q1 2020 Earnings Call

Imaging

“Most of our competitors are small radiologist-owned operators who lack the scale, capital and human resources to emerge from the COVID-19 period with the same financial and operating strength that we will. As a result, we think that there will be more M&A opportunity for us in the post-COVID period at multiples that were more aligned with the prices we have paid in the past.”

Howard G. Berger, Chairman, President, CEO & Treasurer, RadNet Q1 2020 Earnings Call

Behavioral Health

“I think our experience has been that when there are financial shocks to either the acute care or the behavioral systems [particularly] … very often, that will prompt a period of an elevated M&A activity … I think that this period that we’re in certainly may have that impact. … And so it’s not like we’re seeing [or] we’re having a million conversations with a bunch of different hospital systems, because I think it’s pretty early for that to be happening. But do we have an expectation that there’ll be more of that over the course of the next 3, 6, 9, 12 months? I think so. I think because this has been a significant — and will continue to be, quite frankly, a significant shock to many hospitals and hospital systems.”

Steve G. Filton, Executive VP, CFO & Secretary, Universal Health Services, Inc. Presents at BMO 2020 Prescriptions for Success Healthcare Conference (June 23, 2020)

Wrap-Up Conclusion

As noted above, healthcare operators recognize the opportunities for consolidation as smaller healthcare companies try to navigate COVID’s challenges. While these prospects may exist, most companies, large and small, seemed to be focused on navigating through the remainder of the pandemic before allocating capital to or seriously considering new M&A opportunities. As such, for now, the healthcare M&A market seems to be slowing but expect these large players to capitalize quickly on potentially depressed valuations once the pandemic’s impact to business operations nears its end.