HME Transactions Continue Decline in Face of the Unknown

PITTSBURGH–The battered HME market continues to show
wear-and-tear when it comes to mergers and acquisitions, according
to a third-quarter report released by The Braff Group.

Figures from the Pittsburgh-based M&A firm show HME
transactions fell 7.1 percent, from 14 to 13 in the third quarter;
year to date, they toppled from 46 in 2006 to 33 in 2007, a 28.3
percent decline.

The reason?

“Reimbursement, reimbursement, reimbursement,” said Bob Leonard,
Braff’s managing director. “It’s all about reimbursement. There’s
been sort of an endless barrage of cuts and threats [to the HME
industry], some of which have taken hold and some of which are not
yet effective.”

Leonard said buyers are sitting on the sidelines as they wait
for the industry’s unknowns to play out.

“There’s the specter of competitive bidding; no one really knows
what the outcome of the cuts will be,” Leonard said. “The other big
thing–and it’s the biggest–is the oxygen cap.”

The cap currently stands at 36 months and would be livable for
most HME providers, he said. But Congress has bandied about the
idea of an 18-month cap; the president has called for a 13-month
cap.

“So what you have is a huge unknown, since oxygen is such a big
piece of the world of HME,” Leonard explained. “And it’s
[historically] carried some of the less popular sectors on its
coattails. But now, you can’t even model it … It could be all or
most of next year before all or most of the unknowns are
known.”

Leonard’s comment reflected what company President Dexter Braff
told an audience at a Medtrade seminar last month. “If you reflect
on the merger and acquisition market of the past, what were buyers
buying?” he asked. “Oxygen.”

But with the threat of a much more restrictive cap, buyers are
uncertain of their return on investment, and “‘unknown’ is the
threat that drives up risk,” Braff said. “We don’t know what the
market for our home care products is going to be. Buyers are out
there, but they are feeling very paralyzed by what’s going on.”

Leonard said his advice to HME providers is largely, “hold on
and ride that pony into the ground. Making what you can out of the
business over however long might yield more money than selling it
today.”

Not so in the infusion segment of the home care market, however.
In that arena, transactions for the third quarter doubled from four
to eight, and the 20 deals logged so far this year surpassed a
record of 19 deals set for the entire year of 2006, according to
the report.

“Acquisition interest for infusion therapy is growing
exponentially, and much like the home health sector, is coming from
multiple directions,” said Chuck Gaetano, the company’s managing
director for infusion therapy and specialty pharmacy. “While
private equity continues to dominate the landscape, completing six
of the eight deals announced in the third quarter, the largest
transaction was Walgreen’s blockbuster acquisition of
OptionCare.

“Moreover,” he continued, “dialysis provider DaVita’s
acquisition of HomeChoice Partners, and home medical equipment
provider Apria’s early fourth-quarter announcement of its
acquisition of Coram demonstrate the interest of ancillary
providers to stimulate growth through infusion therapy.”

The report also showed home health agencies to be holding
relatively steady, with 68 year-to-date transactions for both 2006
and 2007. While the third quarter showed a 40 percent dip in
activity–from five transactions in 2006 to three for the same
quarter this year–“the sector remains in reach of last year’s
record-setting 96 transactions,” the report said.

Overall, the home health market, including hospice, home health
care, infusion, specialty pharmacy, HME and medical device pharmacy
and staffing, was down 7.4 percent from last quarter and 10.7
percent compared to the same period last year, according to the
report. Year-to-date transaction volume is down 10.5 percent
compared to 2006.