We may be nearing an inflection point in home medical equipment M&A. After 20 plus years of consistent and substantial cuts in reimbursement, acquisition demand and transaction volumes have clearly fallen. And with competitive bid-like pricing rolling out nationally in 2016, there will no longer be any islands of higher margin to target for acquisition. At the same time, however, the sector will be approaching its lowest (i.e. most attractive) risk profile, as the threat of further cuts, at least over the near term, will be the lowest we’ve seen since the mid-90s. Profitability will be more difficult to achieve. But acquisition interest in those that succeed could very well rise. And private equity – sensing the opportunity to reengineer the model – appears to be bird dogging the space.
Home Medical Equipmentbraff-admin
Given the roll-out of competitive bidding and substantially reduced pricing, it’s little surprise that mergers & acquisitions activity in home medical equipment is trending downward. But buried in these trends is a bit of good news. When competitive bidding was initiated in 2008 in 10 MSAs, deal volume fell precipitously. However, on the way toward adding another 92 MSAs in 2012, activity began to rise as buyers became more comfortable with the program and private equity saw opportunity in the market disruption. With bid pricing being rolled out nationwide in 2016, we are once again seeing stirrings from the PE community which may help to halt the slide (see PE chart below).
As we indicated in the chart on home medical equipment deal trends, seeing opportunity in the market disruption caused by competitive bidding, private equity platform and follow-on activity peaked in 2012. Although aggregate PE sponsored deal flow has fallen since, if we isolate market entry platform deals, 2015 activity alone looks pretty decent. In fact, with five new platform investments, the sector posted the third highest tally over the past decade. With the roll out of competitive bidding nationwide in 2016, much like what we saw leading up to 2012, we may be in the early stages of a second wave of investment activity (see quarterly chart below).
As indicated in previous graphs, the home medical equipment sector may be at the front edge of modest rebound in deal flow. Although we can’t draw strong conclusions based on a single period, we note that fourth quarter 2015 deal flow was up after two consecutive periods of decline. When our mid-year data is complete, we should be able to assess whether the uptick was an anomaly, or an early indicator of a positive trend.