ANALYSIS: Merger Advisors Again Target Addiction Treatment Centers PDF  | Print |  E-mail
Addiction Treatment Industry Newswire

03/17/2012 -ATIN- In an indication of how the addiction treatment center, alcohol rehab and drug rehab industry has once again become a magnet for investors across the nation, the Braff Group, a mergers and acquisition boutique that has been a player nationwide in niche medical M&A, is targeting behavioral health with a specialty practice. "It took a while, but we have brought in the necessary expertise to really have a go at this sector," says CEO Dexter Braff. "We identified over 70 transactions in behavioral health last year, up from around 45 the year before. And we feel that addiction treatment center valuations are on clear upswing, and could be the real M&A sweet spot going forward." It is indeed true that M&A activity is on the rise, with acquisitive Promises owner Elements Behavioral buying South Florida's The Recovery Place late last year. Many dozens of private investors are also actively looking again, with Clearview Capital purchasing Pennsylvania's Pyramid Healthcare and looking to do add-on acquisitions. The Braff Group is just one of about at least a dozen players, most independent operators with experience in the addictions and behavioral health buy-side M&A scene, seeking to put themselves in the middle of transactions by supposedly offering value for treatment center owners, the sell-side

High Barriers?...Yes and No

Bankers like Braff are again pointing out that addictions is fragmented and ripe for consolidation - a state the industry has been in pretty much forever - and several, including Braff, make the claim that the industry has high barriers to entry, which no doubt provides heft to "buy" side of the "buy vs. build" entrepreneurial conundrum. However, there are high barriers to entry in addiction treatment only in certain locations - irrelevant considering some people don't think twice about getting on a plane to go for care, making residential a national market - and typically only when insurance reimbursement comes in to play. In the last several years there have been hundreds of new center openings across the nation - mostly centered in the usual South Florida and Southern California locations - where regulators welcome entrepreneurs and it is quite easy, and requires relatively little capital, to open a new facility that is focused on cash pay reimbursement. And while there are certainly greater capital requirements in the insurance reimbursement side of the treatment game, raising barriers to entry, buying centers in this arena of addictions care is to some extent essentially making a bet that insurance carriers will start to more generously reimburse addictions. That's is a bet that has been wrong for a very long time - commercial insurance reimbursements as a percentage of industry revenues have been declining for over 20 years - and one that depends to a large extent for growth on parity legislation and Obamacare forcing insurers to be more generous, which Treatment Magazine believes to a problematic proposition at best. 

Consolidation Caution

Consolidation plays in the industry have been fraught with difficulty, their outcomes ranging from the disastrous in the case of Parkside, and many others, in the wake of managed care, to decidedly mixed in the case of CRC Health Corp. The most recent, and most visible, case of an addictions industry consolidation play - and one which brought major investor attention to the sector and sparked a near frenzy of interest just before the 2008 financial crisis - CRC has been at it almost fifteen years, still isn't close to reaching the magic billion dollar revenue mark and still accounts for a tiny percent of industry assets - probably quite a bit less than five percent. CRC relies to a large extent on very profitable methadone distribution - not addiction treatment - to pay its vast debt costs and has an entirely new management team that has been preoccupied with a costly foray into youth therapeutic schools - the 2006 Aspen Education purchase. Initiated with great fanfare by founder Barry Karlin, the Aspen buy moved CRC away from the core addictions strategic focus and was quite simply an effort by Karlin to quickly gain scale amid a paucity of large addictions targets. It was a purchase for which CRC vastly overpaid that had, admittedly, very unlucky timing. Aware of the CRC cautionary tale, bankers point out that the smart consolidation play may be in organizing complimentary assets with great care and precision, with a target of medium size being the goal.


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Top 8 Drug Rehab Centers in the world
written by Top 8 Drug Rehab Centers in the world, January 29, 2015
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