If you understand how past events have shaped valuation over time, you can examine the landscape in front of you, and reasonably project how it is likely to change in the future – perhaps the most salient consideration in putting together a consolidation or exit strategy (or, perhaps more importantly, choosing which one is the best path for you). Toward that end, we examine how valuation has changed in behavioral health since 2005. Moreover, we offer reasons why, and what this suggests for the future. First, a quick word about the figure on the following page. The chart is intended to represent relative changes in valuation multiples over time – they are not absolute in nature. Similarly, the interplay of these changes with the timeline is proximal. While cause and effect are quite real, the timing is not necessarily direct. Furthermore, while many variables contribute to these ebbs and flows, we’ve focused on those that we believe have had the greatest effect. The beginning. In the lead up to 2005, the “next big thing” was arguably programs targeted to at-risk-youth, particularly wilder- ness programs. Several private equity groups had aggressively entered the space, driving up both demand and valuation. So the chart begins with this segment at the top of the valuation food chain. Waud Capital forms Acadia. This turned into a seminal event in behavioral health M&A. Acadia started life with an executive SPECIAL EDITION VALUATIONS IN BEHAVIORAL HEALTH CARE WHERE THEY’VE BEEN AND WHERE THEY’RE HEADED marketWATCH thebraffgroup.com Intelligent Dealmaking in Health Care M&A PROPRIETARY DATA. PROPRIETARY INSIGHT. BEHAVIORAL HEALTH and an investment thesis to aggressively consolidate the mental health sector, with an initial focus on psychiatric hospitals. Since entering the acquisition arena, Waud has acquired 36 companies, elevating both the visibility and valuation of the mental health sector (and later, addictions treatment as well). Wilderness programs come under fire. Around 2007, stories began to surface about mistreatment of adolescents in wilder- ness programs – including some that led to deaths. High profile providers came under investigation, which quickly cooled a hot market, sending valuations downward. But this segment’s loss was another’s gain, as investors still interested in high margin, private pay, behavioral health services soon began to redirect acquisition demand toward addictions and substance abuse providers – notably high-end programs with high-end profitability. Mental Health Parity and Addictions Equity Act. Perhaps the largest boost to behavioral health M&A has been parity legisla- tion with its promise of increased utilization. While it took many years for specific rules to be written, and is still being resisted by insurance providers, the mere promise of greater access has been a rallying cry for the industry – and an investment thesis for buyers. Home health begins to slide. Up until 2008-2009, a disproportion- ate share of interest for investors targeting health care services was being directed towards Medicare reimbursed home health. The sector moved from cost-based reimbursement to one that allowed for profits. Private equity seized on this transition, driving
Transcript
If you understand how past events have shaped valuation over time, you can examine the landscape in front of you, and reasonably project how it is likely to change in the future – perhaps the most salient consideration in putting together a consolidation or exit strategy (or, perhaps more importantly, choosing which one is the best path for you).
Toward that end, we examine how valuation has changed in behavioral health since 2005. Moreover, we offer reasons why, and what this suggests for the future.
First, a quick word about the figure on the following page. The chart is intended to represent relative changes in valuation multiples over time – they are not absolute in nature. Similarly, the interplay of these changes with the timeline is proximal. While cause and effect are quite real, the timing is not necessarily direct. Furthermore, while many variables contribute to these ebbs and flows, we’ve focused on those that we believe have had the greatest effect.
The beginning. In the lead up to 2005, the “next big thing” was arguably programs targeted to at-risk-youth, particularly wilder-ness programs. Several private equity groups had aggressively entered the space, driving up both demand and valuation. So the chart begins with this segment at the top of the valuation food chain.
Waud Capital forms Acadia. This turned into a seminal event in behavioral health M&A. Acadia started life with an executive
SPECIAL EDITION Valuations in BehaVioral health CareWhere they’Ve Been and Where they’re headed
marketWATCH
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BehaVioral health
and an investment thesis to aggressively consolidate the mental health sector, with an initial focus on psychiatric hospitals. Since entering the acquisition arena, Waud has acquired 36 companies, elevating both the visibility and valuation of the mental health sector (and later, addictions treatment as well).
Wilderness programs come under fire. Around 2007, stories began to surface about mistreatment of adolescents in wilder-ness programs – including some that led to deaths. High profile providers came under investigation, which quickly cooled a hot market, sending valuations downward. But this segment’s loss was another’s gain, as investors still interested in high margin, private pay, behavioral health services soon began to redirect acquisition demand toward addictions and substance abuse providers – notably high-end programs with high-end profitability.
Mental Health Parity and Addictions Equity Act. Perhaps the largest boost to behavioral health M&A has been parity legisla-tion with its promise of increased utilization. While it took many years for specific rules to be written, and is still being resisted by insurance providers, the mere promise of greater access has been a rallying cry for the industry – and an investment thesis for buyers.
Home health begins to slide. Up until 2008-2009, a disproportion-ate share of interest for investors targeting health care services was being directed towards Medicare reimbursed home health. The sector moved from cost-based reimbursement to one that allowed for profits. Private equity seized on this transition, driving
up demand, and drawing other buyers to the sector. But around 2010-2011, some of the largest publicly traded players came under investigation for various compliance failures regarding patient qualification, over-utilization, and other infractions. Virtually overnight, the appetite for big deals in the space evaporated, leaving a gaping void in health care M&A.
Enter behavioral health. Due, in large part, to the eclectic nature of behavioral health programs and services which makes it more difficult to identify, evaluate, and integrate acquisitions, the sector was still largely virgin territory from an M&A perspective through 2009. But with home health on the skids, “seed-like” activity already bubbling in mental health and addictions, and the promise of parity, behavioral health in general quickly became the next “next-big-thing,” setting the table for four consecutive years of record breaking deal volume.
Credit markets begin to recover. Heading into 2011, the credit markets began to show real signs of recovery. And with their oh-so-leverageable real estate components, capital began to flow to finance acquisitions of psychiatric hospitals and resi-dential substance abuse programs, further juicing acquisition demand and valuation.
Acadia completes successful public offering. After completing what amounted to a reverse merger with publicly traded Pioneer Behavioral Health, the firm completed a secondary offering at the end of 2011 with shares initially priced at $7.50 per share. Since then, the share price has risen to more than $72.00, yielding a compound annual growth rate of more than 60% per year. This added visibility pushed up valuations even further, but with its substantial bricks and mortar, not quite into “bubble” territory.
Private equity sponsors make seven platform investments between Q4 2012 and Q3 2013. Although arguably a bit late in divining the residential addiction tea leaves, there was a rush of PE activity between 2012 and 2013. With acquisition demand far exceeding supply, pricing quickly escalated to a full-on market bubble as valuations eclipsed the risk-return fundamentals of a somewhat fragile sector that is short on evidence-based protocols and outcomes, and long on dependence on cash outlays from the one percenters or out-of-network pricing.
CMS issues final rule on the implementation of parity. While parity had already been largely priced in behavioral health, the issuance of the final rule made the promise more palpable.
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How Valuation in Behavioral Health has Changed Since 2005
at risk youth
Mental health
addictions & substance abuse
non-residential addictions treatment
individuals with developmental disabilities
i/dd - autism
Source: The Braff Group
deal flow in I/DD remains dynamic, valuation has been anything but, until just recently, with the breakout of acquisition demand for autism services. With new buyers (unshackled by long held rules of thumb) aggressively seeking footholds in this promising segment, both demand and valuation have rocketed in ASD (for more insight on this development, see our marketALERT, Autism Explodes on the M&A Scene).
Based on all of the above, we expect the following to develop over the near-term:
One more thing. We predict that industry insiders will remain torn as to whether health care should be one word or two.
Some things are just unknowable.
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BeHAvIoRAL HeALTH SeRvICeS — FALL 2015
Acadia acquires CRC. This transaction left its mark on the M&A environment in behavioral health in two distinct ways. First, the $1.5B acquisition of an addictions treatment provider was a resounding departure from Acadia’s previous focus on psychiatric hospitals. Second, with CRC’s large presence in methadone treatment, the deal increased the visibility of medication assisted treatment programs (see previous page).
American Addictions Centers completes successful IPO despite rising fears regarding specter of in-network pricing. We paired these two developments together to illustrate the disconnect that began to emerge in substance abuse. While American Addictions (which indicated in its offering prospectus that it derived “sub-stantial” revenues from out-of-network reimbursement) saw its post IPO valuation soar to a dizzying 40 x EBITDA, buyers began to articulate concerns regarding the fragility of out-of-network pricing. So at the same time that the public markets zigged, the M&A market zagged, and some air began to leak from the bubble in the high-end residential addictions.
Medication assisted treatment deal flow spikes. The M&A response to the above was, quite predictably, a shift towards non-residential addiction programs. And first up was medication assisted treatment programs which, following the high profile Acadia-CRC deal, garnered six equity investments in the first six months of 2015 alone (for more information on the rise in MAT deal flow, see our marketALERT, MAT Deals Signal a Shift in Addictions M&A).
American Addictions draws scrutiny. In August, AAC disclosed that the company’s president was facing criminal charges stemming from the death of one of the centers’ patients in 2010. Add to this the recently released documentary, “The Business of Addictions,” which calls into question the efficacy of many substance abuse programs, and you have the makings of what could develop into a public relations crisis that may spill over to the entire industry.
The valuation anomaly in individuals with developmental disabilities. Until now, there’s been no mention of I/DD. And for good reason. For the most part, despite many of the market developments cited above which could have boosted valuations in I/DD, the largely group home segment remains mired in rules of thumb long established – and cherished – by its dominant buyers – ResCare and The Mentor Network (now Civitas). With combined revenues of $3 billion, there has been limited appetite for new players to jump in and shake up the status quo. So while
As the most active buyer in mental health shifts its attention toward addictions treatment programs, psychiatric hospital valuations may slip but remain comparably high.
While we expect demand to remain high, given out-of-network concerns and recent bad press, valuations of high-end resi-dential addictions treatment programs will be under pressure.
The yang to this yin is that we fully anticipate a substantial rise in demand for residential programs that are predominately in-network, and even those that receive government funding. What’s more, we expect demand to ramp up for medication assisted treatment providers, and more broadly, other community-based, out-patient addiction services.
As buyers reconfigure their behavioral health consolidation strategy and perhaps consider building out a more diversified portfolio of services consistent with broad efforts to coordinate care, we may see an uptick in acquisition demand for at-risk-youth programs and services.
Autism services will hold on to much of its recent gains. But as a niche within a niche that simply can’t sustain a long run of activity, we anticipate at least some softening of valuation.
Finally, valuations in traditional I/DD will keep humming along as is. You can make bank on that one.
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thebraffgroup.com Intelligent Dealmaking in Health Care M&A
Reg BlackburnAtlanta
866-455-9198
Bob LeonardFt. Lauderdale
888-922-1836
Steven BraffPalm Springs
888-922-1833
Mark A. KulikAtlanta
888-922-1838
Pat CliffordChicago
888-922-1834
Behavioral Health
Nancy WeislingChicago
888-290-7237
FOR MORE INSIGHT INTO THE M&A MARKET FOR BEHAVIORAL HEALTH AND WHAT IT MAY MEAN TO YOU, CONTACT OUR BEHAVIORAL HEALTH TEAM:
INTELLIGENT DEALMAKING IN BEHAVIORAL HEALTH CARE M&A
The Braff Group is the leading health care services mergers and acquisitions advisory firm with a
team of dealmakers focused exclusively on behavioral health care.
For more than five years, we have provided sell-side only transaction services to the mental health,
addictions and substance abuse, autism services, I/DD, at-risk-youth, and acquired brain injury
provider community.
With more than 250 transactions completed, The Braff Group is ranked #1 in health care mergers
& acquisitions.1
But we never forget that your deal is the one that matters to you.
Let us make it a great one.
1 Source: Thomson Reuters, based on number of deals between 2008 and 2014.
