An improving prognosis

One of the big narratives surrounding Obamacare in the US was that the law’s push to change healthcare models and create new tax rules would stifle innovation in the sector. Yet valuations for healthcare companies in the US are hitting new highs, driving activity and high-profile exits.

One such exit happened last month, with Madison Dearborn Partners’ successful sale of Ikaria to Ireland-based Mallinckrodt Pharmaceuticals after just over a year of ownership. Madison Dearborn acquired Ikaria in a $1.6 billion take-private deal in late 2013, as the company was spinning out its research arm and refocusing on core competencies. Mallinckrodt picked up the company in a $2.3 billion all-cash deal, representing a 2.8x return for its private equity backers.

Sources tell PEI that this exit is representative of a move by private equity toward investment in niche companies and specialist carve-outs providing specific treatments that are growing in demand.

Ikaria is a global critical care company focused on the development of treatments for critically ill infants in hospital. The company also makes INOmax, a treatment for infants with hypoxic respiratory failure. “With this expansion into respiratory neonatal critical care, we expect to further broaden our touchpoints in the hospital market, and at the same time diversify our portfolio with durable assets that play vital roles in the treatment of vulnerable patient populations,” Mark Trudeau, president and CEO of Mallinckrodt, said of the deal.

Madison Dearborn is a generalist buyout firm with a significant healthcare vertical, and a history of doing carve-out deals. In January, the firm backed the spinout of Walgreens Infusion Services from Walgreens Boots Alliance. Walgreens will maintain a minority interest on the board of the new privately held entity, which will operate independently and provide home and alternate treatment site infusion services throughout the US. That transaction is expected to close in the second quarter of this year.

Other firms, for example Chicago-based GTCR, are taking a slightly different approach by partnering with management teams to build companies that will accelerate the growth of these new technologies through acquisition.

By way of example, Constantine ‘Dean’ Mihas, a managing director at GTCR and head of the healthcare group, points to the firm’s most recent buy-and-build efforts – Cedar Gate Technologies and Maravai Life Sciences. “With Cedar Gate we are focusing on health IT, buying and building technologies that are responsive to the shift away from a fee-for-service model and toward a risk-sharing model in healthcare. This is driven by the accountable care organisations mandate and we see a lot of interest in the market for technologies that help providers understand risk management and patient treatment better,” says Mihas.

“With Maravai we are looking at life sciences and diagnostics. We have done three other deals in this area, in the last year. The valuations are high, but the demand is there.”
He notes that the market is likely to see a continuation of the spinout trend, which dominated so much of 2014. “There is still a lot of room for more M&A activity in pharma, we also see carve-out opportunity there from the biggest pharma companies.”

The political wrangling over provisions of the Affordable Care Act (ACA) is not having much of an effect in terms of slowing things down either. “With the ACA, healthcare spend is likely to keep going up because now more people are covered, so they are going to be making use of the healthcare system. The challenge for investors in this space will be to find those sweet spots at the nexus of innovation and regulatory change – that landscape is going to keep shifting as we work through new realities,” Mihas says. ?