JV dealmaking gains steam across US healthcare

August 2017  |  FEATURE  |  MERGERS & ACQUISITIONS

Financier Worldwide Magazine

August 2017 Issue

Always an arena subject to disruption, the US healthcare industry has recently experienced a convergence of unsettling developments which have led to an expansion of dealmaking activity, with joint venture (JV) transactions particularly conspicuous.

Indeed, along with mergers & acquisitions (M&A), consortia, non-equity alliances and other contractual arrangements, a JV has become a popular choice for healthcare companies looking to overcome obstacles and achieve their goals. According to David Ernst, founder and managing director at Water Street Partners, JVs have become “a survival tool for US healthcare companies due to transformative industry change, structural pressures from an aging population and hard-to-predict revisions to government programmes at the federal and state level”.

In the context of this uncertainty – heightened by efforts to repeal and replace the Affordable Care Act (ACA), including the introduction of the American Health Care Act (AHCA) and the Better Care Reconciliation Act (BCRA) – US healthcare is undoubtedly a challenging environment, with the exploration of JV opportunities an effective means of addressment. “Healthcare providers and suppliers have wrestled with the fate of the ACA for several years,” says Bill Langbein, a senior life sciences and healthcare journalist at Mergermarket. “With increasing demand for services, older segments of healthcare, such as hospitals, are seeking to JV and partner with local providers to build a web of services around the hospital.”

Why undertake a JV?

“Health plans and providers use deals to mitigate risks to their core businesses, targeting the benefits of consolidation, coordination and diversification,” explains Mr Ernst. “Examples of consolidation deals include the blocked ‘mega-mergers’ between publicly traded health plans, the acquisition and joint venture sprees by large hospital systems like Ascension and HCA, and JVs between providers to more effectively operate key assets like home health.”

Furthermore, health plans and providers are also seeking out the benefits generated by tighter coordination, with a substantial number of payer-provider partnerships having been agreed. “The intent here is to better align incentives and reduce frictions to enable a more seamless consumer experience, higher quality and better coordinated care at lower costs, and more efficient back-office systems and operations,” says Mr Ernst. “The forms of such deals vary substantially across companies, and most are too young for there to be sufficient data on successes and failures.”

According to Mr Langbein, different segments of the US healthcare industry have adopted new approaches to broaden their reach. For example, branded pharmaceutical companies are entering biologics, while over-the-counter drug stores are leveraging their retail footprint. “These moves are in response to a marketplace where more people are eligible for healthcare in the US, but reimbursement by private payers and the US government is becoming more restrictive. As in any market consolidation, the participants adjust.”

Notable JVs

Among the JVs which have garnered particular attention is the agreement struck between Walgreen Company and Prime Therapeutics LLC – a JV to form a combined central specialty pharmacy and mail services company which reached completion in April 2017. “This strategic alliance is still too young to be considered an undisputed success, though there are indications of early accomplishments. For example, the parent companies announced that 50 percent of Prime Therapeutics had already transitioned into Walgreens pharmacy networks, which is a key operational milestone,” says Mr Ernst.

Additional JVs that have been having an impact on US healthcare include a number undertaken by national insurer Aetna. These include regionally-scoped 50:50 equity joint ventures with leading regional health systems such as those agreed with Inova, Texas Health Resources, Banner and Allina. Another 50:50 JV, Guidewell’s agreement with Organización Sanitas Internacional (OSI) to operate primary care clinics customised to the needs of Hispanic communities has expanded rapidly, growing beyond its original footprint.

“JVs between for-profit and non-profit hospitals continue to succeed in the US, as each party seeks to combine resources in major cities where more care is delivered outside of the hospital,” affirms Mr Langbein. “In addition, the emergence of practical advances in technology, deep learning and artificial intelligence has begun to penetrate medical practice and drug development significantly.”

JV outlook

Although US healthcare providers have struggled to get to grips with the machinations of the ACA – perhaps the biggest disruptor in modern US healthcare history – for several years, the outlook, however, is for a substantial volume of new JVs, as companies make the transition from volume to value. “Efforts to repeal and replace legislation have understandably injected greater uncertainty into the industry, but are unlikely to reverse the course, and, if anything, may result in certain types of partnerships and JVs becoming more prevalent,” concludes Mr Ernst.

With most companies expecting the marketplace to continue to grow and for spending to increase, the landscape of the US healthcare industry is being fundamentally reshaped, with JVs playing a significant role in this transformation.

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Fraser Tennant