Preparing for 2005 & beyond

Medicare cuts spur acquisitions, creative thinking YARMOUTH, Maine - 2004 was a banner year for acquisitions, and 2005 doesn't look like it will cool down any, especially now that Rotech is back in the game. With large Medicare reimbursement cuts scheduled for 2005, Apria (which closed an “unprecedented” number of acquisitions in the third quarter of 2004), Lincare, Air Products and other publicly traded providers must prove to Wall Street that they are still growth companies. To do that, they'll continue to acquire businesses to offset the cuts, say industry M&A experts. “The buyers I've talked to say they don't intend to slow down, and we've had some new players come into the market in the last six months, and that means a strong 2005,” said Jonathan Sadock, CEO/partner, Paragon Ventures, Wayne, Pa. For most of the past few years, while Lincare and Apria snapped up independent providers right and left, Rotech sat on the M&A sidelines retooling operations. In November, Rotech announced that it had hired away from Apria the highly respected acquisitions expert Jeff Freedman. At Apria, Freedman worked under Bob Abood as vice president of acquisitions. Prior to being hired by Apria about 21/2 years ago, Freedman, who is an attorney, honed his M&A skills at Lincare, where he worked for about three years. At Rotech, he'll serve under the title of chief development officer and be responsible for acquisitions and establishing new branches. “I can't say enough good things about Mike,” said broker Regina Bienkowski, vice president, Ultimate Resource in Newtown, Pa. “He understands the companies, and he is very good to work with.” In an effort to prepare for competitive bidding, look for Rotech to acquire companies that round out its geographic coverage. As its M&A program gathers momentum, its budget for acquisitions should also increase, say industry sources. As far as Rotech's renewed M&A program goes, brokers say the more buyers the merrier. Typically, to accommodate reimbursement cuts, a buyer will adjust their bid downward. That will probably happen in 2005 when Medicare's FEHBP cuts kick in, but it's not a given. While the cuts will exert a downward pressure on valuations, a steady and increasing demand could offset that. “We would not be too surprised to see valuations similar to what they have been,” said Bob Leonard, an associate with the Braff Group in Pittsburgh, Pa. Even the market for neb-med companies, which all but disappeared this year due to uncertainty surrounding Medicare reimbursement, has rebounded. That's because in November CMS established a monthly $57 dispensing fee for respiratory medications. That allows potential buyers to put a value on what kind of profits a med company will generate in 2005. “It's less lucrative than it had been, but less onerous than it might have been,” Leonard said. “It's worth it to be in the business, and that was uncertain before. It's easier to plan now that the facts are out.”