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Braff Analysts: Understanding M&A Activity for SUD Programs Requires Drill-Down Examination
To understand the state of the mergers and acquisitions (M&A) landscape within the substance use disorder (SUD) sector specifically, examine the M&A market from the top down, analysts from the Braff Group told attendees of the Treatment Center Investment & Valuation Retreat on Monday in Scottsdale, Arizona.
Braff Group Managing Director Steve Garbon and Senior Advisor Nancy Weisling guided TCIV attendees through the state of M&A from the broad market overall to healthcare, behavioral health, and finally SUD programs.
“The last 30 months have been crazy, whether it’s COVID or tax changes or interest rates rising as quickly as they have,” Garbon said. “But there are more and more deals being done, and trends remain strong.”
Including debt financing, broad M&A activity involving private equity firms is on track to finish the year about 4% off the sizzling pace set in 2021. Average deal values per transaction are also seeing a drop, from a little more than $160 million in the third quarter of 2021 to just over $120 million in the third quarter of 2022.
Within the healthcare services sector, deals are down 25% year-over-year. However, 2022 figures are still on pace to be up about 5% from 2020, the Braff Group analysts said. Drilling down further, the behavioral healthcare sector has a similar story: a 22% year-over-year decline in deals, but a slight increase from 2 years ago—figures that include a 21% year-over-year decline in deals involving private equity, but a 4% increase from 2020.
Merger and acquisition activity involving substance use disorder treatment providers, down 31% year-over-year, but up 9% from 2020, has been punctuated by “an inevitable shift to multidisciplinary services,” according to Garbon and Weisling.
Given the clinical efficacy of treating SUD as a chronic condition that often requires different services and sites of care at various stages of the treatment process, and global payment systems that reward a more holistic treatment protocol, the hard boundaries between programs are being chipped away, Garbon and Weisling told TCIV attendees. As such, the Braff Group is seeing far more cross-program consolidation.
With the exception of staffing, medication-assisted treatment (MAT) is the only active healthcare service segment that is on pace to exceed M&A results from 2021, with a projected 31 deals, up from 29 in 2021.
Meanwhile, continuing a trend that Dexter Braff, MBA, MS, Braff Group president, outlined for TCIV attendees in 2021, acquisition interest in high-end residential addiction treatment programs has continued to decline dramatically as buyers are turning their focus to more affordable private pay, in-network, and Medicaid-reimbursed SUD treatment programs. Whereas Braff analysts had expected the continued decline in high-end residential program deals, mid-range residential deal flow is heading toward a larger-than-expected drop-off for 2022, barring an unforeseen surge to finish the year. Still, the projected 20 deals involving mid-range programs for 2022 would continue an upward trendline from 2020, the analysts noted on Monday.
Toward the end of their presentation, the Braff analysts shared several other M&A developments observed in 2022:
- Partial hospitalization program (PHP) and intensive outpatient program (IOP) deals have seen an “inexplicably large drop-off,” according to the Braff executives, although they did posit that the decline could be a function of the increasing number of multidisciplinary programs. PHP and IOP services could be embedded in other residential and community-based programs.
- Consisting primarily of providers focusing on the treatment of eating disorders, demand is high for specialty programs, but the number of acquisition candidates heading into 2023 is limited.
- Aggregate SUD treatment program deal flow through 3 quarters in 2022 is down year-over-year, however, it remains on pace to exceed 2019 and 2020.
- Private equity activity in the SUD space has been down after record volume in 2021—a decline that Braff analysts attribute to concerns regarding interest rates, a general economic slowdown, and unrest in eastern Europe. A decline in deal volume is not too surprising after a 10-year ramp up, the analysts said. And despite the decline in activity, PE firms still account for more than 50% of SUD deal flow.
Looking Ahead
The Braff Group analysts concluded their presentation by offering up the following series of M&A trends to watch in 2023:
- An inevitable shift to multidisciplinary services
- Technology-enabled, home-based medication-assisted treatment and SUD treatment
- A reduction in regulatory barriers to dispensing MAT
- A rise in psychedelic-assisted therapy
- An integration of primary and behavioral healthcare into whole-person, value-based care alternative treatment and payment models
References
Garbon S, Weisling N. State of the industry: the M&A landscape for substance use disorder programs. Presented at Treatment Center Investment & Valuation Retreat; December 5-7; Scottsdale, Arizona.
