1. What are the most common challenges that investors, clinics or other care providers encounter when looking to create larger platforms via merger or acquisition?
The biggest challenges of the past few years include incongruent clinic and/or provider selection, cultural collaboration, and/or creating appropriate synergies pre- and post-merger. Clients of ours who have gone through a merger or an acquisition realize that the process is not for the faint of heart.
The loss of culture, the over- or underinflation of value, integration misses or misalignment should all be addressed long before the larger scale platform, merger or acquisition is designed, developed or created.
2. What are some of the best practices for overcoming these hurdles that you’ve encountered in your practice?
As simplistic as it may sound, the most critical best practice for overcoming hurdles in M&A or large strategic integration is to plan ahead. The integration and cultural immersion process should begin long before the actual deal or acquisition is ever announced. A careful assessment of each target entity can be very important to determine cultural fit, potential scalability issues, prioritization, key employee issues and leadership objectives.
implementation is the failure to analyze cultural fit upfront. Every entity has its own culture, standards and attitudes. The ability or lack thereof to address this upfront can lead to immediate or long-term failure, neither of which serves for a good situation post-merger. With the emotion, stress and varying agendas of stakeholders involved in any deal, leaders may become complacent with or distracted by the larger issues and forget that the seemingly small stuff can make or break a deal.
3. In which sectors of the healthcare industry does technology investment appear to be picking up more rapidly, and how do you see the adoption of emerging tech factoring into M&A going forward?
Your question is somewhat difficult to answer, as technology investment is increasing across all healthcare sectors right now. The investment in electronic medical records, claims data initiatives, population health management and artificial intelligence are all affecting healthcare, pharmaceutical and life sciences company opportunities right now.
Meanwhile, Google, Alphabet, Amazon and Apple continue to make news as they compete for the next generation of healthcare wearables, devices and breakthroughs. In a recent speech at the 2019 HIMSS Conference, Seema Verma, administrator of the Centers for Medicare and Medicaid Services, stated that actuaries are predicting that if nothing is done to better control healthcare costs, by 2026 we will be spending one in every five dollars on healthcare. As a result of this large opportunity to cut costs and create efficiencies, technology investments in healthcare is going to be tremendous.
4. What impacts do you anticipate from FDA’s acceleration of approval processes and push for frameworks around digital health?
The FDA’s certification process for new technologies has been too slow for entrepreneurs to access and therefore innovate within digital healthcare. As of the FDA’s FY2019 budget, there is now room for the implementation of a Center of Excellence for Digital Health, which establishes a pre-certification process for innovations in digital health. This will not only expand the FDA’s reach to entrepreneurs with a more rapid certification process but also keep digital health innovation at the forefront.
While the FDA may be making it easier for developers to get certification, the frameworks the FDA are executing around digital health will ensure that patient safety is kept a priority while also continuing to motivate innovation. Additionally, it pivots the FDA’s focus to the software developers in digital health and technology, rather than the product, which incentivizes developers to innovate within this field while allowing the FDA direct access to fixing and updating the software.
Healthcare in the future is going to be driven by new and innovative healthcare technologies that consumers will engage with on a daily basis. Even today we are seeing wearable devices, over-the- counter genetic testing and apps to track our activities becoming more popular and prevalent than ever before. I expect to see a massive pool of data generated by these everyday technologies from which consumers will gain greater personalized insights. This data will also be something that doctors will be able to use for providing a more holistic and reliable overview of a patient’s health over a vast period of time. Rather than documenting a patient’s blood pressure on that day and having to compare it to the last measurement from months prior, doctors will no longer have to fill in the gaps using guesswork. Instead, they will gain a more complete, comprehensive and certified measurement of the patient’s health. Additionally, consumers of these technologies will become stakeholders in their own health in a way that is not accessible to them today, empowering people to gain knowledge about their own bodies and bear witness to the changes of a healthier lifestyle.
5. What are the most salient differences in how financial sponsors and strategics approach dealmaking in healthcare? How have these evolved over time in your experience?
The most significant differences between strategic and financial acquirers is how they work to evaluate a healthcare entity or business. Strategic buyers focus heavily on synergies and integration capabilities, while financial buyers tend to look at standalone cash-generating capabilities and the capacity for earnings growth.
Financial buyers also often buy healthcare entities partially with debt, which causes them to scrutinize the business’ capacity to generate cash flow to service a debt load. The biggest evolution around strategics vs. financial buyers in healthcare has been that not all buyers can be neatly categorized due to the evolutions and synergies happening across healthcare. As a result of this trend, “strategics” may be looking to boost their earnings and end up acting like financials as they approach a target. Other times, “financials” already own a medical practice or healthcare company in a specific space and are looking to make strategic add-ons, so they will evaluate a business more like a strategic. The other large-scale change that is occurring right now is that we are seeing a unique synergy of “complementary” businesses vs. “like” businesses. This trend is causing some interesting dealmaking and deal flow that are very custom and unlike anything I have seen previously. The synergies of physician practices, payor entities, electronic medical record companies and drug delivery companies are an example of the meld of deal flow that looks nothing like past strategic or financial sponsor acquisition or deal strategy.
Strategic buyers focus heavily on synergies and integration capabilities, while financial buyers tend to look at standalone cash- generating capabilities and the capacity for earnings. growth.
6. What best practices around integration have you observed post-transaction in the course of your practice?
There are five best practices we suggest around deal integration related to post-transaction success. The critical component driving best-practice deal flow success hinges on strategic discipline. Deal flow leadership can help to mitigate the risks of an inherently risky business.
Other than preparing for the post- transaction phase well in advance, the following five categories home in on the practices that separate the “best” deals and dealmakers from those that are subpar or unsuccessful:
- Define your success factors: How will you measure success, maintain customer or patient focus, and align strategies, processes and systems? How will you ensure stability, customer and employee communication and operational continuity?
- Integration plan: Do you have a plan for your systems to integrate? Are there specific systems that need to be built for your “go live” on day one? What does the operative structure look like on the first day the combined entity acts as one company or strategic partnership?
- Leadership: How do you define and communicate the logic behind the deal? How do you manage shareholder expectations? How does the new entity create systems or make decisions? What is the new operating agreement and/or are the expectations of the board or C-Suite?
- Define the integration process: What does the first 30, 60, 90 days look like? How do you define success in year 1, 3, 5 and beyond? Who holds the roadmap outlining the strategy behind your successes?
- Reporting metrics: What reports are available to you, your team and the leadership to create rigor and accountability? At a minimum you should have leadership dashboards or reports, management reports, KPIs for key staff, integration reports and post-mortem reporting on the deal.
- Culture and consideration: How do you gauge if the cultures are a fit? How isyour leadership operating on a day-to-day basis? What is the communication strategy with the staff? How do you know the culture is conducive to short- and long- term success?
*Special thanks to Katie Cahn, Wesleyan University ‘ 20, for her contribution to this article.
Questions? Contact Dana Jacoby at Djacoby@djiconsulting.com or 202.997.6974