Braff Group: ‘Dramatic’ Rise and Fall in M&A Deals for HME

PITTSBURGH–A recent report from merger-and-acquisition
specialist The Braff Group reflects the effects of both competitive
bidding and the Deficit Reduction Act’s 36-month oxygen rental cap
on the HME market.

The annual transaction activity record, which tallies M&A
deals in the home health, infusion, specialty pharmacy, hospice,
health care staffing and HME sectors, found that total deal volume
from 2006 remained steady in 2007. But despite that finding,
according to the report, “no other sector … has
experienced such a dramatic rise and fall in merger-and-acquisition
activity over the past seven years as home medical
equipment.”

Between 2004 and 2005, HME saw 95 transactions, but that number
fell by 37 percent to 60 the following year. In 2007, the number
dropped another 28 percent, reflecting only 43 deals for the year.
While concern about competitive bidding is one reason for the
decline, uncertainty surrounding implementation of the 36-month
rental cap on home oxygen is even more unsettling, according to the
report.

“Shortly after the 36-month cap was introduced, the
president and Congress began introducing legislation to pare the
cap down to as few as 13 months, creating extraordinary risk
‘overhang’ that dwarfs the somewhat predictable reimbursement
declines likely to come from [national competitive bidding],”
the report said.

While round one competitive bidding rates average 26 percent
reductions in reimbursement, Braff said the aftermath could trigger
more activity this year: “We may see an up-tick in activity
in the initial 10 bid areas as losing bidders try to make up for
their loss by acquiring a winning player, or simply decide to
divest.”

In terms of year-over-year deal volume growth, infusion therapy
lead all sectors with 25 recorded transactions, a 32 percent
increase over 2006, with five of Braff’s top 10 deals of 2007 in
the infusion segment. Notable among them were Walgreen’s $850
million purchase of Option Care (HomeCare Monday, July 9, 2007) and
Apria’s $350 million acquisition of Coram (HomeCare Monday, Oct. 22, 2007).

In other sectors, the home health industry recorded a
record-setting 107 transactions, up 14 percent from last year’s 94,
making this sector the first to top the 100-deal mark since the
inception of Braff’s report in 1991.

Activity in specialty pharmacy services remained constant,
despite the fact that of 17 transactions in 2007, nine were
completed by one buyer–Triad Isotopes, a private equity-sponsored
consolidator.

The hospice sector saw a “particularly slow year”
with only 10 transactions, down 33 percent from 15 a year ago. The
report noted, however, that with a surge in hospice spending now
estimated at about $10 billion and a spike in new for-profit
hospices entering the market, Braff expects a “slow but
steady increase in new acquisition candidates as these start-ups
begin to mature and seek an exit strategy.”