24 annual health sciences tax conference - ernst & · pdf file24th annual health sciences...

24th Annual Health Sciences Tax ConferenceMergers, acquisitions, joint ventures and other transactions: trends and issues

December 8, 2014

Mergers, acquisitions, joint ventures and other transactions: trends and issues

Disclaimer

EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young LLP is a client-serving member firm of Ernst & Young Global Limited operating in the U.S.

This presentation is © 2014 Ernst & Young LLP. All rights reserved. No part of this document may be reproduced, transmitted or otherwise distributed in any form or by any means, electronic or mechanical, including by photocopying, facsimile transmission, recording, rekeying, or using any information storage and retrieval system, without written permission from Ernst & Young LLP. Any reproduction, transmission or distribution of this form or any of the material herein is prohibited and is in violation of U.S. and international law. Ernst & Young LLP expressly disclaims any liability in connection with use of this presentation or its contents by any third party.

Views expressed in this presentation are those of the speakers and do not necessarily represent the views of Ernst & Young LLP.

This presentation is provided solely for the purpose of enhancing knowledge on tax matters. It does not provide tax advice to any taxpayer because it does not take into account any specific taxpayer’s facts and circumstances.

These slides are for educational purposes only and are not intended, and should not be relied upon, as accounting advice.


Presenters

Erik ReynoldsErnst & Young LLPDenver, [email protected]+1 720 931 4575

Bridget BourgeoisErnst & Young LLP Atlanta, [email protected]+1 404 817 5765

Gary HorowitzErnst & Young LLPIselin, [email protected]+1 732 516 4328

Cindy LeonVP, Legal Transactions & TaxCatholic Health InitiativesDenver, CO


Health care delivery today

Source: EY

Results

Annual physical

Lab tests

Inpatient care

Wait to hear

Hospital

Doctor’s office

RxDiagnosis

Home

Opaque paradigm

Periodic measurement

Treatment of disease

Providers have control


Increasing usage of technologies

0

1,000

2,000

3,000

4,000

5,000

6,000

Europe Americas Asia Rest of the world

2010 2015 2020

Increasing usage of technologies

Mobile subscription projections (in millions – 2020)

Life sciences companies, tech start-ups and providers are leveraging the use of smart phones to provide remote monitoring to patients worldwide.


Health care delivery tomorrow

Patient’s home

Medicalized consumer devices

Consumerized medical devices

Caregivers, other health care plans

Providers

Social media

Source: EY

Transparent paradigm

Continuous monitoring

Prevention, behavior

Patients have control

Next frontier in personalized medicine

Smartphone apps


Health care transaction trends

Alignment of coordinated care partners

Alliances and mergers between care delivery, research and financial partners to create coordinated care networks that provide at-risk population health management to employers and consumers

The transactions they are pursuing involve much more than just increasing scale, which raises the stakes for effective due diligence, valuation and integration.

Tuck-in/bolt-on

Consolidators

Portfolio builders

Industry disrupters

High

HighLowLow

Customer impact

Deg

ree

of c

hang

e to

bus

ines

s or

ope

ratin

g m

odel


Emerging trends in health care

ProviderTransitioning to value-based medicineContinued migration of health care services to lower-cost settings of careHospital services outsourcingConvergence and consolidation across the value chain (and with non-traditional players) – joint venture (JV) and mergers and acquisitions (M&A)Looming resourcing and access to care issuesIncreased centralization and business-led decision-making within providersOngoing capital stresses in smaller and not-for-profit provider segmentContinued investment in health care information technology

PayerEvolving dynamics of employer-sponsored health insuranceAdoption of public and private exchangesChallenges and opportunities from the expanded government role in health careConvergence with providerHealthcare Information Technology (HCIT) and analytics

PatientIncreased consumer decision-making with high-deductible health care plans and greater patient awareness and engagementPersonalized diagnostics and health care delivery


Source: Capital IQ; LTM as of August 31, 2014

Deal value and volume trend

Global health careM&A trends in health care

Volume by buyer type –last 12 months

Value by buyer type –last 12 months

Strategic buyer85%

Financial buyer15%

Strategic buyer82%

Financial buyer18%

4,45

7 8,46

8

6,86

3

4,01

0

3,88

3

12,8

71

1,12

5

1,41

4

7,85

9

4,79

0

4,74

6

27,9

51

020406080100120140160180200

0

4,000

8,000

12,000

16,000

20,000

24,000

28,000

Sep

13

Oct

13

Nov

13

Dec

13

Jan1

4

Feb1

4

Mar

14

Apr

14

May

14

Jun1

4

Jul1

4

Aug

14

Dea

l vol

ume

$m

Deal Value Deal Volume

2,52

1 7,20

9

6,22

1

2,73

8

3,13

5 8,27

3

782

1,31

5 6,60

6

3,11

0

3,87

0

26,7

88

020406080100120140160180

0

5,000

10,000

15,000

20,000

25,000

30,000

Sep

13

Oct

13

Nov

13

Dec

13

Jan1

4

Feb1

4

Mar

14

Apr

14

May

14

Jun1

4

Jul1

4

Aug

14

Dea

l vol

ume

$m


1,93

6

1,25

9

642 1,

272

748

4,59

9

343

99

1,25

2

1,68

0

875 1,16

3

0510152025303540

0500

1,0001,5002,0002,5003,0003,5004,0004,5005,000

Sep

13

Oct

13

Nov

13

Dec

13

Jan1

4

Feb1

4

Mar

14

Apr

14

May

14

Jun1

4

Jul1

4

Aug

14

Dea

l vol

ume

$m


Strategic deals trend Financial deals trend

Deal value Deal volume




New trends in health care

Number of US PE investments, 1995–2013 PE investments in health care (US), 2000–2013

Health care represents approximately 15% of private equity (PE) transactions in a given year and investments are often trying to capitalize on sector trends and new business models

Info/internet

Pharma/ biotech

Health productsHealth

products

Medical devices

Per

cent

age

of to

tal h

ealth

car

e de

als

OtherHealth care

Num

ber o

f PE

inve

stm

ents


Health care trading comparablesSector analysis

Health care information technology continues to enjoy premium valuations relative to other health care services subsectors.

Comparable company valuation analysis by subsector (enterprise value/2014 estimated earnings before interest, taxes, depreciation and amortization (EBITDA))

Source: Capital IQ as of August 31, 2014

15.1x

13.4x 12.9x 12.9x12.1x 11.7x 11.4x 11.2x 11.0x 10.5x 10.4x 9.9x 9.7x 9.7x 9.5x 9.3x 8.9x 8.5x 8.3x 8.0x 7.9x

0.0x

2.0x

4.0x

6.0x

8.0x

10.0x

12.0x

14.0x

16.0x

HC

IT

Cor

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iona

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Sur

gery

Cen

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ehav

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Med

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New trends in health careTrend #1: The transition to value-based reimbursement is disrupting the health care business model

Although the health insurance exchangeprovisions of the Affordable Care Act have received more attention, the provisions that accelerate the transition to value-based reimbursementwill have a significantly more disruptive effect on the US health care business model.


New trends in health careTrend #1: This transition is forcing the actors in the health care ecosystem to become co-dependents vs. competitors

Coordinated andaccountable care

capable health care enterprise

Care delivery partners(Expanded integrated delivery network:

wellness, counseling,primary, secondary, tertiary,

post-acute, home care, hospice)

Operations partners (Staffing firms, business

process outsourcing, information technology

outsourcing, group purchasing organizations, disaster

recovery/business continuity plan, etc.)

Compliance and risk partners(Law firms, audit,

liability insurance, etc.)

Research partners (Medical schools,

pharma, biotech, etc.)

Technology, connectivity and

data mgmt. partners (Health information exchange, electronic

medical records, devices, analytics and digital assistants, mobility, apps and social media,

infrastructure, etc.)

Channel/referral partners(Exchanges, health plans, employers)

Financial partners (Payers, financial institutions,revenue cycle management

service providers, etc.)

Intellectual propertysharing?

Health outcome accountability?

Revenue sharing?

Financialrisk sharing?

Compliance and regulatory risk sharing?

Ops disruption/failure risk sharing?

Functionality, security and data

requirements?


New trends in health careTrend #1: You can expect to see more novel transactions as these actors experiment with different partnerships to build and acquire the capabilities they need

Health plans and health systems are aligning to pool data and develop population health management capabilities designed to reduce health care consumption.Managed service providers, technology vendors and health care providers are aligning to integrate mobile health devices, monitoring technologies and predictive analytics into the continuum of care.Retailers, health plans and health care providers are aligning to transform the patient experience.

Examples of disruptive transactions to create codependency

Tuck-in/bolt-on

Consolidators

Portfolio builders

Industry disrupters

High

HighLowLow

Customer impact

Deg

ree

of c

hang

e to

bus

ines

s or

ope

ratin

g m

odel


Representative health care strategic activityCommercial and alliance

Commercial AllianceSelected key

themes

Trading volume for brand and

monetizing

Cost cutting

Geographic expansion

Service line expansion

Access anddiversification

Forming integrated care

networks

Control

Stakeholder potential

Risk Lower

Lower

Lower

Cleveland Clinic Mayo Clinic AllSpire Health Partners Qualcare Inc. Healthfirst


Representative health care strategic activityJV and PE

JV PESelected key

themes

Cost cutting




Control


Risk Medium to higher

Lower to medium

Lower to higher


monetizing


networks

Cooper University Hospital

AmeriHealth

Walgreens

AmerisourceBergen

Dignity Health

OptumHealth

IASIS Healthcare

Aurora Health Care

Evolent Health

TPG

Ascension HealthOak Hill Capital

Partners


Representative health care strategic activityM&A

M&ASelected key

themes

Cost cutting




Control


Risk Higher

Highest

Highest


monetizing


networks

Surgery Partners

Symbion Healthcare

Amsurg

Sheridan

Aetna

Coventry Health Care

CHS Community Health Systems

Health Management Associates

Tenet

Vanguard Health Systems

DaVita

HealthCare Partners Medical Group and

Affiliated Physicians

Baylor Health Care System

Scott & White

SSM Health Care

Dean


Dialysis (n=5,460)

Hospitals (n=6,904)

Urgent care (n=8,700)

Independent diagnostic testing facilities (n=6,414)

New trends in health careTrend #2: Health care delivery continues to shift to lower-cost settings


$570

$166 $156

$110

$0

$100

$200

$300

$400

$500

$600

Emergencydepartments

Physician offices Urgent carecenters

Retail clinics

New trends in health careTrend #2: Cost differentials across setting of care will continue to drive this phenomenon

Cost comparison for three common treatments among outpatient facility types

Cost comparison among inpatient facility types

$1,479

$303

$135$50

$0

$400

$800

$1,200

$1,600

Hospitals Skilled nursingfacility care

Hospice care Home care


Case studies


Questions?

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Ernst & Young LLP is a client-serving member firm ofErnst & Young Global Limited operating in the US.

© 2014 Ernst & Young LLP.All Rights Reserved.

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