Key Takeaways:

• Portfolio diversification, strategic exit interest, and exposure to the pharmaceutical market are the main drivers of rising infusion investments as they allow investors to build diverse, strategic portfolios in the health care system.
• The value of infusion investments is influenced by the quality of revenue, the quality of earnings, and profit pool construction, all of which work together to drive transaction appeal for buyers.
• Infusion providers, investors, and other care organizations should monitor factors like IRA-related policy changes and partnerships within health systems as they navigate the broader pharmaceutical market and build infusion-related businesses.

In this interview, Colby Catania, MS, managing director at Houlihan Lokey, gives insight into the pharmaceutical supply chain and how it is being influenced by the infusion market. He explains the economics of infusion investments, focusing on primary drivers that can bolster a portfolio and allow investors to build a business around infusion providers.

Transcript

Colby Catania, MS: My name is Colby Catania. I’m a managing director in our health care group at Houlihan Lokey where I lead coverage verticals. I’ve been with Houlihan for almost 10 years and 12 plus in banking. My focus has been on health care, specifically health care services.

Most relevant for this conversation would be the pharmacy supply chain, which includes infusion. This has been an incredibly active area for our franchise over the last several years. I’ve been actively covering the space since my early associate days. We have clients that we’ve transacted multiple times over a 7- to 8-year period. It’s been exciting to see the space develop. Since 2024, our team has executed 14 transactions, buy-side and sell-side, in the pharmacy supply chain. Nine or 10 of those have been related to the infusion industry. Many of today’s market-leading platforms we have advised in some capacity, and it’s something we’re definitely proud of.

Private equity investment in infusion providers has remained strong despite some broader market uncertainty. What is making the infusion sector so attractive to investors right now, in your opinion? What trends do you expect to shape Mergers and Acquisitions (M&A) activity in the near future?

Catania: For a while, health care investors had gotten overweight in terms of portfolio construction with the broader multi-site health care ecosystem, whether it be dental, other specialty physician services, or urgent care. There has been a lot of transaction activity across all those subsectors.

One driver of interest in this category has been portfolio diversification. When I think about what investors have been looking for to diversify their portfolios, it has been businesses with strong organic growth and underlying macro tailwinds. Infusion checks the box there. You’re looking at market growth rates in the high single digits, plus. Depending on the subsector and channel, it could be well into the mid-teens in terms of overall market growth rates. If that’s the floor on organic growth in your business, then you’re sitting in a meaningfully different position than what you would be in a regular multi-site business.

Two would be businesses with strong strategic exit interest, which has been harder to come by in health care services. Historically, if I build a big business, Optum is going to want to buy it at some point. If I build a big business, there will be some strategic archetype out there that will want to buy the company. Those exits have been harder to come by over the last couple of years. Payers, drug wholesalers, and larger sponsor-backed strategics continue to look for M&A opportunities, infusion in particular. That’s answered this question that investors have been forced to address over the last couple of years and other sub-segments in their portfolio.

People have been looking for ways to get exposure to the broader pharma pipeline. Infusion is an indirect/direct way to do that. If you’re a health care services investor, the business is familiar in that it is reimbursed health care. You’re not going too far from the field and getting into Contract Research Organizations (CROs) and Contract Development and Manufacturing Organizations (CDMOs) and pharma services territory. But at the same time, benefiting from all the same talents from a research and development (R&D) and drug pipeline perspective. Putting those 3 things together, infusion has been checking boxes that investors have been looking for and lacking in areas in their portfolio. That’s what has driven a lot of the activity.

As providers prepare for potential transactions, what operational or financial characteristics have become the biggest drivers of valuation? And are there common mistakes that can diminish a company’s appeal to buyers?

Catania: One is quality of revenue. Two would be quality of earnings. Three would be profit pool construction. These 3 things are interconnected. With quality of revenue, oftentimes you have a situation where folks are recognizing revenue at a certain level and assuming a certain level of bad debt. In a QV-related analysis, it turns out that the bad debt rate that’s been accruing should be higher. That impacts the earnings of the business.

On the quality of earnings side, there are adjustments in profit and loss (P&L) where people must think about pro formas related to de novo ramp adjustments and future things to come, which creates more need-to beliefs for an investor. That has impacted people’s perception on the quality of the earnings being marketed.

Within those 2 things, there’s profit pool concentration, which is where most of the diligence is done in these businesses. The complexion of the business by therapeutic area, drug, payer, referral source, sales representative, etc. What do all those pie charts look like? Is there meaningful concentration in any specific area? To the extent of concentration, it means that an investor is going to think about that with a different type of risk profile than they might with well diversified profit pools. It creates more insulation from things that might occur in the future that might impact the business.

There have been situations where a company is getting reimbursed at a certain level from a payer for a certain drug that’s significantly above what they might be getting reimbursed in another market for the same drug, sometimes even from the same payer. By drug and payer level analyses, investors are assessing the durability and overall risk profile of these businesses. Over the last couple of years, the market has become more efficient at digesting that information. Those would be the biggest things that are driving valuation.

One other thing to mention is the sales engine of the business. How are representatives compensated? What does their compensation plan look like? Is there a proven track record of developing representatives internally? Are you hiring representatives from other businesses and bringing them into your own? Are there internal mechanisms to create alignment with your top performing representatives, either through equity incentives or otherwise, that de-risk the aspect of a representative leaving and, therefore, some piece of your business leaving? There has been a lot of focus around these areas in recent transactions.

The infusion market is being reshaped by physician office integration, joint ventures, biosimilars, and IRA-related policy changes. How are those forces influencing care delivery and what should managed care organizations be paying the closest attention to?

Catania: From a care delivery standpoint, certainly. There have been many conversations surrounding physician office integration and joint ventures, either with physicians or even hospital systems. Opportunities Industrialization Center (OIC) models help physicians stand up infusion operations in their office. They provide all the necessary support services and charge them a fee split to engage in the business.

Joint venture conversations have focused more on the hospital system. The dynamic with hospital systems over the last several years is that they have been leaking business to independent infusion providers. The hospital system is looking to retain more of its business, but the independent infusion providers are looking at that market dynamic and saying, is there a way where we can partner with these groups versus just compete with them? Forward progress could come from folks looking to partner with hospital systems in a mutually beneficial situation.

On the biosimilar front, that will continue to be dynamic in the industry. Infusion providers often end up with situations where the gross margin percentages on a biosimilar product go up as compared to a branded product, which leads to a lower gross profit dollar contribution. An area with some real interest from the market has been in the employer-sponsored cost containment environment within pharmacy and infusion. Independent infusion providers can be a catalyst to help self-insured employers better manage overall pharmacy spending for members, which is oftentimes done through site of care shift initiatives that determine where it is clinically appropriate to shift patients from a branded product to a biosimilar. Depending on the vantage point, there will be a lot of growth in that employer channel as infusion and the market continue to evolve.

The Individual Retirement Account (IRA) and other related policy changes have been a major focus for the last couple of years. People understand them well enough to appreciate the potential impact on the business. There is more to learn from how the IRA Part B dynamic is going to come to fruition in the industry in 2028. There is more visibility on how it’s working, given we are 6 to 7 months into the first wave of Part D drugs. At the end of the day, it goes back to profit pool construction and diversification. The more diversified a business, the more insulated you are to biosimilar impacts and regulatory policy changes.

For infusion providers that are not actively pursuing a sale, do you have any strategies you’d recommend for remaining competitive and financially resilient as the market continues to evolve?

Catania: It would be like building a business for the long term. Don’t take shortcuts. Do the things that you would do if you thought you were going to be the owner of the business for 10 years, not 3 years. All that goes to building a diversified, durable business even if it means maybe not maximizing the profitability of your P&L today. There is always time to do that. You could optimize the margin profile of your business as you get closer to a sales stage. Making the right decisions where you are not leaning too heavily into one area of business and finding yourself in a position of maximum profitability but a higher risk profile is the right way to think about business building in this category.

Is there anything else you would like to add or any other key points that you think weren't communicated?

Catania: It’s an exciting industry. There’s a lot of future growth. We often get asked what inning we are in. In this category, we are in the early innings. People who have been operating in this industry for 25, 30 plus years would say that 25, 30 years ago, people had been talking about the infusion market segmentation and how 50% of the market at that point in time was still inside the hospital. Today has the same composition of the market. It’s amazing that all these independents have entered the market; it means the industry has grown such that both independents and hospital system businesses continue to grow.

Oncology and rare disease are potential pathways that people are going to start exploring, particularly in the ambulatory market. There is an opportunity in the ambulatory environment to pursue clinical trials in a more meaningful way. It has exciting attributes and considerations around it as it relates to what these businesses might look like in the future. Infusion companies are getting paid by pharma upstream instead of all their dollars coming from patients and payers, which is another interesting growth avenue. Expect transaction activity to remain high and active and look forward to seeing how things play out.