For the past two years, the addiction treatment industry has been riding a wave of investment and attention from buyers, many of whom belong to the private equity world. But now, the tides have started to turn.
Financiers looking to supply capital are eyeing the autism services sector with increased attention.
The new focus comes amid a rise in diagnoses of children on the autism spectrum, along with an expansion in insurance coverage for those receiving therapy.
Both are good news for providers operating in the space, allowing them to command unprecedented valuations and seek new funding sources to expand their services.
“The market is incredibly robust,” Patrick Krause, a San Francisco-based director and co-head of healthcare services for MHT Partners, a Dallas-based mid-market investment firm, told Behavioral Health Business.
“You have an expanding [autism] demographic population, you have commercial insurance lined up to cover it and there are not a lot of [providers] doing it on a large scale,” Krause said. “It checks all the boxes you would expect for private equity being interested in it.”
About 1 in 59 children have been diagnosed with some degree of autism spectrum disorder (ASD), according to data published last year by the Centers for Disease Control and Prevention. That’s more than double compared to a decade earlier.
At the same time, autism services have seen growing coverage from state-regulated insurance plans, with Wyoming and Tennessee this year becoming the last two states to enact legislation mandating funding for applied behavioral analysis (ABA) therapy, which the large majority of the behavioral health providers tout as the most effective treatment method for individuals with ASD.
While current valuations of the sector vary, financial firms agree one thing: The industry is only getting bigger.
One report last year from research publisher Marketdata valued American autism services at $1.87 billion in 2017, with an expected jump to $2.23 billion in 2022, though the report stressed that numbers may be conservative and not reflective of increased insurance coverage. Another report released in May by Market Research Future estimated that the global ASD treatment market will be worth almost $7.27 billion by 2023.
Ronit Molko — the founder and head of Empowering Synergy, a Culver City, California-based behavioral health consultancy for investors — is even more bullish on the sector’s domestic value. She places the current worth of the market around $7 billion, with the possibility of it eventually surpassing $50 billion.
“We have actually seen significant investment in the past five years, with the past two being very active,” Molko, who also is a clinical psychologist and board certified behavioral analyst (BCBA), told BHB.
Overall transaction activity in the sector – such as M&A amongst providers, outright purchases of platform companies by private equity firms and strategic private equity investments in smaller firms – still has some catching up to do when compared to the addiction treatment market.
Since the first quarter of 2018, addiction services transactions have bested those of autism services by a sizable margin – 79 to 48 – according to a recent report by healthcare M&A firm Mertz Taggart.
In Q3 2019, however, there were more transactions in autism services than addiction treatment (nine versus seven), marking the first time that has occurred during the aforementioned period.
The same report points to even more private equity transactions ahead for autism services due to a plethora of small operators in a fragmented market lacking publicly traded providers.
“I don’t think the multiples ever really reached in the traditional substance abuse/addiction services market where they have in autism services,” Kevin Taggart, managing partner of Fort Myers, Florida-based M&A firm Mertz Taggart, told BHB. “A small autism services company can command a 10-plus multiple, which is really high and commands $1 million in EBITDA.”
Ted Jordan, managing director of Pittsburgh-based healthcare M&A firm The Braff Group, expressed similar sentiments.
“The reason there is so much interest is that there is a growth story there,” Jordan told BHB.
The Braff Group itself has been one of the many M&A firms active in sector transactions. In October 2018, the firm was the sell-side advisor to Mishwaka, Indiana-based Lighthouse Autism Center in a strategic investment made by Boston-based Abry Partners.
“More people need it, there’s a way to pay for it and there’s also a sympathetic population [requiring services],” Jordan added. “People like working with children, and if you can do well by doing good, so much the better.”
It may be too soon to know how long the sector will continue captivating the interests of private equity firms and other buyers, and it’s currently unknown as to what – if any – impact the frequency of transaction activity will ultimately have on the quality of services delivered to patients.
However, those like Molko, who are in the unique position of being both a clinician and business consultant, advise private equity firms to heed extra sensitivity to the mission and work of autism services providers when scouting out investment opportunities.
“We are working with very young children and are responsible for helping to shape their brain development, their skill acquisition and their day to day functioning,” Molko said. “The quality of service providers’ intervention will determine the long-term outcomes for these kids. This is an awesome responsibility. It’s not just about the growth and the numbers.”
Written by Kyle Coward