US healthcare deals abound amid uncertainty

The future of the US healthcare system is uncertain, but GPs remain optimistic about investment opportunities.

The raging debate in the US about the future of the healthcare system has some private equity players in the sector uncertain about the future, but that hasn’t stopped a flurry of deal activity in the latter half of the year.

US Congress has been debating the best form of a national healthcare plan since President Barack Obama took office in January. While the political debate rages on, private equity firms have been quietly striking healthcare deals over the past few months. The consensus among healthcare dealmakers is that while the future is uncertain, any kind of reform will bring more people into the system, forcing the system to expand and increasing investment opportunities.

A report from accounting giant Ernst & Young showed that global pharmaceutical deal value has increased to about $135 billion for 2009, the highest annual deal value in the industry since 2000.

The accounting firm expects to see deal activity in certain subsectors of the healthcare sector, like life sciences, to “continue to be strong … driven by long-term strategic trends and private equity’s growing interest. As many blockbuster drugs lose patent protection, large pharma and biotech companies need to replenish their drug development pipelines and to leverage their regulatory approval and commercialisation capabilities,” E&Y said.

The possibility of reduced reimbursement from the government has been driving companies to find ways to cut costs, according to E&Y.

The money
doctor is in

Some firms are watching the healthcare debate closely to figure out what areas of the sector will emerge as the most attractive. Some believe reduced government reimbursements in certain areas of healthcare – like that of home and hospice care – will lessen the attraction of those areas.

While The Riverside Company believes home care and hospice are attractive investments over the long term, the firm is watching this area carefully for reimbursement and reform legislation.

“We’re trying to understand the winners or losers that will become apparent when the reform legislation becomes codified,” said Joseph Ibrahim, a principal with Riverside on the healthcare team. “Because there will be an estimated 11 million more individuals that will have traditional access to healthcare, the investment thesis would be larger healthcare providers with more scale and infrastructure will survive, and they would represent attractive investment opportunities.”

Riverside earlier this month invested an undisclosed amount in PharmMD Solutions, which provides software that helps identify medication overuse, underuse and misuse.

TA Associates earlier this month exited medical cost management company One Call Medical with a sale to fellow private equity firm Odyssey Investment Partners. The firm did not disclose details of the transaction.

“Certainly you can’t talk about healthcare in 2009 without talking about the ongoing debates in Washington, DC,” said Jennifer Mulloy, a director with TA Associates. “Depending on how that sorts through, there will be potential change, but there are always risks and opportunities that go with that.”

The economic downturn and the uncertainty surrounding the future of healthcare in the US have caused some big pharmaceutical companies to expand their offerings into new areas, specifically into the later stages of drugs. Bigger companies have been trying to cash in on the opportunities that arise when the patent of a drug runs out, opening the door for production of generic versions.

Drug makers also have been working to bolster their drug development pipelines, E&Y said in the study.

“Pharmaceutical companies are looking to have an influence at every stage of the product cycle, not just the [research and development] and the early marketing,” Ken Macleod, a partner with Paul Capital Healthcare, which provides financing to healthcare companies. “There’s enormous change going on, and all that comes with opportunity.”