Anjana D. Patel, Member of the Firm in the Health Care & Life Sciences practice, in firm’s the Newark office, co-authored an article in Medical Economics, titled “2023: Robust Valuations for Physician Practices Continue Despite Turbulent Market Conditions.”
Following is an excerpt:
In recent years, there has been a tremendous growth in the number of physician practice transactions with private equity across multiple specialties. In fact, 2021 saw the highest number of deals in this sector, fueled in part by low interest rates, pent-up volume from the 2020 COVID backlog and a fear of change in the capital gains tax rates from a change to the Biden Administration. In our view, valuations during this time were at an all-time high and added more fuel to deal volume. A change in macroeconomic factors in the latter part of 2022 and into 2023, has impacted deal volume, but valuations remain strong despite these changes. This article discusses these recent valuation trends and our predictions for 2023.
Market Backdrop
Consolidation in the physician practice management space began over 30 years ago with the trend being catalyzed by the ‘roll-ups’ of the 1990s. While the concept was widely celebrated, most roll-ups ultimately failed as promises to unify practices by providing business support never materialized. Despite these early failures, private equity investors eventually tried a management services organization (MSO) model designed to provide non-clinical, administrative support services to acquired physician practices. This model proved effective and investors achieved widespread success across specialties like dental, dermatology, and veterinary from the early 2000s through the mid-2010s. The success of private equity investors in these sectors prompted many physicians to eventually take notice and explore ways to participate in the opportunity. The model evolved from an all-cash buy-out to a partnership framework, where doctors retain some equity (or roll-over equity) as part of the transaction consideration.
As the partnership model gained momentum during the mid-to-late 2010s, private equity investors began entering into other unconsolidated medical specialties like urology, ophthalmology, gastroenterology, ENT and allergy, orthopedics and cardiology. From 2015 to 2019, transaction volume for physician practices increased over 25% year-over-year. However, the impact of COVID-19 caused transaction volume to plateau in 2020 with the U.S. government mandating temporary closures of physician practices for all non-emergent procedures. As the world paused, so did the M&A volume. This pause created massive pent-up demand by private equity investors needing to deploy a large amount of amassed capital into health care companies.
Once practices reopened after the height of the pandemic, we observed private equity investors flood the market resulting in a resurgence of M&A activity. Sellers were the net beneficiaries as the supply-demand imbalance drove transaction multiples well beyond previous all-time high levels. Transaction volume nearly doubled from already historic levels in 2019 and 2020. Robust transaction volume continued from 2021 into early 2022, fueled by record low borrowing costs, demand from private equity ready to deploy capital into health care companies, and the impending fear of changes to the federal tax code.
