M&A market buzzes in lead up to gap period

YARMOUTH, Maine - A flurry of M&A deals closed in the fourth quarter of 2018, making it one of the busiest quarters in the past several years, say analysts.

A big reason for that: CMS's decision to pause competitive bidding for two years, while it makes substantive changes to the program.

“Volume is up, inquiries are up,” said Don Davis, president of Duckridge Advisors. “There's a lull from Medicare (in competitive bidding) and people are thinking more about their businesses. I suspect they will have more discussions as to what makes the most sense for smaller businesses going forward.”

On Jan. 1, CMS implemented an any willing provider provision that allows any Medicare-enrolled provider to supply DMEPOS until a new round of bidding starts.

Besides the pause in bidding, first announced in July, there is a belief that the industry has nowhere to go but up, says Jonathan Sadock, managing partner and CEO at Paragon Ventures, which had its busiest fourth quarter in 25 years.

“I think the majority of pricing declines and reimbursement changes—the substantial ones—are behind us,” he said. “It's easier for providers to wrap their heads around revenue trends and profitability of the companies.”

Although respiratory remains “king” from an M&A standpoint, there is strong interest in other sectors, as well, says Pat Clifford, managing director, The Braff Group.

“You've got private equity going after urologicals and pick, pack and ship type companies,” he said. “Or take non-invasive vents: There are folks that like to go after the pediatric market, and folks that just want the adults. There's a little something for everyone.”

To that point, relative newcomer Solara Medical Supplies made three acquisitions in 2018, as a flood of new technology is changing the way patients manage their chronic diseases; and Pediatric Health Service obtained PE backing for the first time in its 30-year history last year. Meanwhile, companies like Aeroflow Healthcare, National Seating & Mobility and Numotion continued rolling up smaller companies.

The companies left standing are stronger than in years past, analysts say, the result of competitive bidding forcing providers to adapt or close their doors.

“Rarely do I come across companies anymore that are weak,” said Brad Smith, managing director/partner at Vertess. “People now have scale and they are sophisticated, running good processes and procedures, running lean and leveraging technology. They are much stronger than in, say, 2009.”