As technology becomes more integral to healthcare and valuations continue to climb, the margin for error is razor-thin when it comes to assessing the health of a target company’s technology, dealmakers say.
If issues are not vetted in advance of a sale process, it can result in “very significant hits to valuations, and buyers walking away,” says Amherst Partners Managing Director John Patterson, who was speaking publicly at iiBIG’s Investment and M&A Opportunities in Healthcare conference in Chicago last week.
Patterson, whose firm specializes in middle-market advisory, and other panelists say that while technology has resulted in a flood of healthcare IT assets hitting the market, it has also made sale processes that much more complex.
“The need for external help to assess technology has increased,” says Edward Francis, senior director in consulting firm West Monroe Partners’ Healthcare & Life Sciences practice. Buyers are working hard to determine whether a target’s technology offering is sustainable, and whether the company will have to invest in remediating regulatory compliance issues, he adds.
As the reimbursement and regulatory environment has become more onerous, so have compliance, privacy and cybersecurity issues, they say.
Patterson says dealmakers are responding by turning to subject matter experts more often, and notes that quality-of-earnings work has become more widespread even in lower-middle market processes.
Chad Neale, managing director at cybersecurity and technology risk assessment firm ACA Aponix, says buyers must focus on addressing federal HIPAA (Health Insurance Portability and Accountability Act) compliance issues in the first 90 days, noting that the presence of privacy and security experts, and a sound vendor management program are key.
As an example of the risks, Michael Sullivan, a managing director at consulting firm Berkeley Research Group, cites electronic health records (EHR) vendor eClinicalWorks, which paid $155 million last year to settle US Department of Justice charges that it falsely obtained certification for its EHR software. The DOJ said the software had an incomplete database of drug codes and drug interaction checks, and could not accurately track lab results, among other flaws.
That settlement depressed competing EHR vendor Practice Fusion’svaluation, according to media reports. Practice Fusion, which sold to Allscripts in January for $100 million, reportedly received suitor offers for as much as $250 million in 2017 – offers that were pulled shortly after news broke about its competitor’s noncompliance.
“There’s more pressure on providers to capture information in a more efficient way,” Sullivan says.
“It’s a plus for technology companies, but providers who take on risk are exposed to more regulatory scrutiny.”