Mergers and acquisitions are a powerful tool for companies who seek growth and value generation. M&A brings numerous benefits including exploration of new markets, increased profits, and a possibility to reach a larger market share. That’s exactly why many companies consider M&A to stay the course during transformational times. And M&A activity figures in recent years are proof of that: in the last 10 years, global M&A value was exponentially growing, reaching its $5.2 trillion peak in 2021.
Bearing this in mind, the M&A Community is creating a series of articles to help businesses and executives take the first steps to dealmaking activity, supporting our global members to capture benefits beyond the expected synergies.
The pandemic outcomes transformed the world in ways that are still undiscovered; this statement is especially applicable to the main frontline player: the healthcare industry and life sciences M&A.
With this article, we want to provide you with a general overview of the healthcare sector in 2022 and the main factors influencing its growth in 2023.
A general overview of the healthcare M&A industry
There have been more than 790,000 M&A transactions since 2000. Their total value amounts to over $57 trillion. The leading sectors are industrials, technology, and finance with 13.9%, 12.9%, and 12.2%, respectively. Healthcare takes 5.5%. To be more specific:
- Healthcare equipment and supplies: over 15,000 transactions with a total value of $1,093 million.
- Healthcare providers and services: over 13,000 transactions with a total value of $773 billion.
In general, the healthcare industry is booming, and specialists expect to see even bigger growth. For example, the total transaction value was $250 billion in 2020. It increased toIn general, the healthcare industry is booming, and specialists expect to see even bigger growth. For example, the total healthcare M&A transaction value was $250 billion in 2020. In 2021, It increased to $436 billion, i.e. almost 56% more. And according to White & Case, in 2022, the total value of M&A healthcare deals was $375.1 billion with megadeals included.
Top healthcare M&A trends impacting the sector
Here are the main growth drivers for healthcare M&A:
- Development of biopharmaceuticals
The global biopharmaceutical market size is predicted to reach $856 billion by 2030. At the same time, traditional chemical medicines are slowing down.
2. Pharmaceutical e-commerce growth
Because of Covid-19 and social distancing, the use of online pharmacies increased by 17%. That’s why investments in the pharmaceutical M&A e-commerce business have been increasing since 2021.
3. Population growth
The current world population is about 7.7 billion people. It’s expected to reach 9.7 billion by 2025. Therefore, healthcare companies will have to provide services for more and more people.
4. Longer life expectancy
Globally, life expectancy has improved from 46.5 years in 1950 to 71.7 years in 2022. It leads to the growth in consumption of healthcare services, which impacts the whole healthcare industry and M&A in it.
The impact of Covid-19 was huge. For example, new treatment technologies appeared, like RNA technology for more efficient vaccines. Besides, there’s a fast adoption of virtual care. Undoubtedly, healthcare is developing, attracting more M&A deals.
6. Covid-19’s ongoing impact
Despite getting closer to the post-pandemic era, Covid-19 keeps impacting the healthcare sector and elective surgery, in particular. This trend is likely to continue in the near future on a domestic basis in mental health hospitals, nursing homes, and ophthalmological institutions.
Healthcare M&A trends 2022 overview
Here are key factors and trends that impacted M&A dealmaking in 2022:
- Decline in deal volumes
Unlike 2021, which was the year of the rebound for healthcare M&A, 2022 saw a dramatic downturn. The deal volumes in healthcare private equity were declining.
- Interest rates and economic uncertainty
Healthcare private equity investors faced a reduced supply of assets they can invest in. Besides, they had to deal with rising interest rates and general economic uncertainty.
- Supply chain, prices, and shortages
Other challenges were constrictions in the global supply chain, raised prices, and enormous shortages. They were caused by the pandemic and multiplied because of Russia’s invasion of Ukraine.
- Large deals
Pfizer and Amgen were the most active pharma companies in terms of M&A during 2022. Both companies scored large deals that allowed them to boost their assets or enrich their portfolio.
- Constant investments
Private equity firms were unenthusiastic toward hospitals and health systems in 2022. All because investors were discouraged by rising interest rates and labour costs. However, interest in physician practices and healthcare technology remained constant.
- Healthcare costs reduction in the U.S.
The research shows more M&A deals in the healthcare industry should be expected in the U.S. The main reason is that the White House started working on reducing healthcare costs. The Biden administration signed an order aimed at reviewing merger guidelines for hospitals. It’ll ultimately result in more local M&A transactions.
Top markets of healthcare M&A in 2022
M&A activity differs among healthcare segments and depends on the type of healthcare provider. Here’s where buyers should look for healthcare M&A deals in 2022:
- Behavioral health market
Behavioral health M&A has soared over the past decade. This was especially well seen in 2021 when 149 behavioral health transactions took place. This is 34% more than it was in 2020, even despite the pandemic. In 2022, this is the most sought-after sector in healthcare services, especially for startups looking to enter the market.
2. Home care market
Care beyond inpatient settings has been gaining more prominence lately. The U.S. Centers for Medicare & Medicaid Services increased payments for home health services in 2022. That’s why going after deals in the home care market turned out to be a good idea in 2022.
3. Long-term care market
In comparison with 2021, the deal value in the long-term care market increased by 2% to $19.6 billion in 2022. The main reason for that is the aging population. However, there are several challenges it faces. Among them are shortages of staff and skilled nursing facilities.
4. Physician groups market
The physician medical group M&A market rocketed in the final quarter of 2021 and continued to be of particular interest in 2022. Through May 15, 482 deals took place with a total value of $5.7 billion.
Top 3 healthcare M&A deals of 2022
Though the M&A deal activity in the healthcare sector wasn’t booming in 2022, there were a number of large deals that made the general year’s outcomes quite satisfying. The top 3 healthcare deals of 2022 are listed below.
1. Advocate Aurora Health and Atrium Health
Advocate Aurora Health and Atrium Health, healthcare systems and hospital networks, announced their intention to merge on 11 May 2022. Together, they aimed to create a leading health and wellness delivery system to meet the patients’ needs in the best way possible. For this, they planned to redefine how, where, and when the care is delivered.
The companies finalized the $27 billion deal in December. As a result, the combined healthcare system, called Advocate Health, has become the fifth-largest non-profit integrated health system in the United States. It comprises over 1,000 sites of care and 67 hospitals with more than 21,000 physicians and 42,000 nurses, which allows them to serve about 6 million patients annually. Advocate Health delivers about $5 million in annual community benefits.
2. Amgen and Horizon Therapeutics
The deal was estimated at $28.3 billion and was one of the top healthcare acquisitions of 2022. Its key goal is for Amgen to boost its therapeutics portfolio by adding a complementary portfolio of therapies in rare diseases. The deal also aims to facilitate the usage of the commercial and medical legacy of Amgen and its international influence in order to foster the development of Horizon’s portfolio.
Additionally, Horizon can benefit from Amgen’s research and development and global manufacturing capabilities to improve its biological medicine therapies.
3. Pfizer and Biohaven
On 10 May 2022, Pfizer announced its plans to acquire outstanding shares of Biohaven that it didn’t already own. The focus was on the company’s CGRP inhibitor portfolio, and the migraine drug Nurtec ODT, considered to be the main jewel of the deal.
On October 3, 2022, Pfizer announced the deal’s completion worth $11.6 billion.
By this acquisition, Pfizer expects to grow the CGRP franchise of Biohaven to more than $6 billion in peak sales.
M&A healthcare outlook for 2023
Below are the key forecasts that expectedly will be shaping healthcare sectors and influencing pharma companies in 2023:
- New technologies
According to the survey of C-executives conducted by Deloitte, artificial intelligence (AI), machine learning (ML), business intelligence, and analytics are likely to have an essential role in healthcare market development.
Due to inflation, which however appears to be stabilizing, the cost of consumer goods will be higher, making it impossible for some people to pay for medical services and care. Thus, companies and member firms that will be able to make costs for their products more affordable might get big attention.
- Supply chain
PwC predicts 2023 to bring more onshoring, nearshoring, and “friendshoring” of supply chains by means of M&A deals as a strategy to reduce lead times. This is because companies adopt and reassess risks after the last tough years.
Environment, social, and governance (ESG) compliance will keep being in focus and a broader range of dealmakers is expected to continue incorporating ESG practices into their businesses and investment strategies.
- Increased interest
Due to increased capital constraints and stricter lenders, the market will likely witness an increased interest in potential target company financial health and renewed interest in solvency and bankruptcy issues. Probably, more creative de-risking M&A strategies will occur.
- Cash flow
Contract research organizations (CROs), contract development and manufacturing organizations (CDMOs), and medical technology companies will probably be of high investment interest due to strong cash flow.
Predictions for the biopharma market
As per the biopharma sector in particular, the main forecasted trends are as follows:
- Building consumers’ trust as a part of a strategy
According to Deloitte’s executives’ survey, more than 70% of biopharma executives state that improving consumers’ trust will be one of their top priorities. This is because it’s usually hard for the public to understand how research and development shape investments and financial returns and how it can influence the pricing, which can lead to reduction in the number of customers.
- New regulations as market drivers
Most executives believe that expected regulatory changes such as the Inflation Reduction Act will greatly influence their organization’s development and investment strategies.
- Growth in next-generation therapies
Deloitte’s executives’ survey demonstrates that most biopharma executives intend to make the development of next-gen therapies and other innovative products their top priority for the coming year.
Predictions for the medtech market
As per the medtech M&A (or biotech M&A) sector, the predictions for 2023 are as follows:
- Technology companies in focus
The lines between medtech devices and consumer-targeted health care devices (like wearables) will be blurred, making the medtech sector seek to improve their digital, AI, and ML technologies.
- Research and development (R&D) as a top priority
According to Deloitte’s executives’ survey, the development of innovative products is likely to be a top priority for surveyed medtech executives. Respondents also noted they’re likely to invest in companies that can bring digital innovations.
- Demand for talented digital staff
Due to the recent huge layoffs in technological companies, medtech companies now will have a chance to recruit data scientists and other professionals with expertise in digital technologies, which will allow them to improve their digitalization strategies.
Let’s summarize the main facts to know about healthcare M&A deals:
- Healthcare currently takes 5.5% of the total number of global M&A transactions among all industries.
- Though experiencing a slight decline, the deal volume of mergers and acquisitions in the healthcare industry was still satisfying in 2022: the total value of M&A healthcare deals was $375.1 billion with megadeals included.
- The main factors influencing the growth are Covid-19, longer life expectancy, population growth, innovation, and technology.
- The main markets for M&A in healthcare were behavioral health, home care, long-term care, and physicians groups markets.
- Top 3 healthcare deals in 2022 were Advocate Aurora Health and Atrium Health, Amgen and Horizon Therapeutic, and Pfizer and Biohaven.
- Top healthcare trends for M&A to watch in 2023 include increased demand for AI, ML, and other digital technologies, reassessment of supply chains and development processes, ongoing attention to ESG principles, and search for creating de-risking M&A strategies.
- Virtual healthcare solutions are not merely a temporary answer to the Covid-situation but are now a significant part of a global change in the industry.
- Connections via specialized social networks are becoming increasingly important for healthcare and pharmaceutical businesses.
- Digital ‘remote’ options are transforming the traditional approach to clinical trials aimed at increased efficiency and better participant retention.
With several new coronavirus strains circulating, it is hardly likely that the healthcare industry will soon escape from this period of uncertainty. Specialists are turning to other forms of care, telehealth resources being among the most popular.
In April 2020 in the US, an HHS report showed that 43.5% of Medicare primary care visits relied on telehealth models rather than in-person visits. Among the top benefits of telehealth over in-person options is the reduction of contact between patients, healthcare workers, and other patients. Another significant issue is cost reduction. Additionally, tech advancements in wearables give healthcare providers the ideal opportunity to get real-time information on staying-at-home patient data.
During the M&A Community webinar, our panelists dived deeper into the topic of ‘remote’ healthcare and the other business trends in this segment.
Telemedicine as a long-term solution
Virtual healthcare may indeed become part of a long-term solution, as West Monroe’s national survey of 1,500 US residents show. 82% of the respondents said they are open to using telemedicine as an alternative to in-person appointments. For which purposes are people more willing to use telemedicine? The poll showed the following options:
- Lifestyle support (46%)
- Routine illnesses requiring visits (44%)
- Primary care (42%)
- Mental health (41%).
Among the least popular variants, the survey showed care for the elderly (24%), specialist visits (26%), and chronic disease care (28%). ‘What we are seeing is that telemedicine is a long-term trend, but it is rather only part of the solution rather than a replacement of traditional ways people treat healthcare,’ says Michael Buchanio, Senior Principal, Healthcare M&A, at West Monroe Partners.
‘Another big activity to note in the life sciences industry is the acquisition of patient-centric social networks and other types of websites that focus on therapeutic issues,’ he says. Such M&As allow pharmaceutical companies to reach out to patients and provide them with necessary information about medications, conduct surveys, or recruit patients to clinical trials. ‘Being more connected to these social networks is crucial.’
‘At-home’ care gets better with tech
‘What we’re seeing now is a direct pivot of how telehealth is being applied in very unique ways as Covid has arrived on the scene,’ says Troy Crabtree, Founder of Navita (TeleMate). As his company is on the provider side of telehealth services, he names the two significant trends happening ‘on the ground,’ namely adaption and adoption.
‘Two years ago, we had to have long discussions with primary care physicians’ or home health specialists to convince them that telehealth is necessary, and how it would benefit their service. Now, it is a completely different discussion. This technology is today part of the business and operational model. It is going to be a necessity in the future,’ Crabtree explains.
Navita’s founder mentions another significant trend in the industry, the so-called ‘at-home admission.’ That is, via digital services, a person can be admitted to the hospital while physically staying at home. ‘The level of touch, the level of care, in this case, is completely different from our historical approach to the home health environment,’ he adds.
This model is also suitable for fighting HAIS, healthcare-associated infections, especially during the Covid-situation, by reducing exposure. Virtual care may be applied even within facilities. For instance, Crabtree says, nurses’ stations could have connections and platforms to observe patients in their rooms, tackling the risk of spreading viruses, etc.
Assisted living is another developing trend of telemedicine. During the pandemic, patients in residence were heavily isolated. That resulted in growing levels of depression and anxiety. Virtual care for such patients helps to address the issues of behavioral health. For instance, platforms allowing residents to play games that maintain their cognitive abilities; or visiting online classes that help them to stay connected in the community.
More efficient clinical trials
Buchanio says that another trend in the healthcare M&A field aims to make clinical trials more adjusted to the ‘new normal’, as well as being more patient-friendly and efficient.
‘Why is this important? About 80 to 90% of clinical trials fail because they do not retain enough patients. Several studies show that a 30% dropout rate is rather common with most studies.’ Inconvenient scheduling or locations, a misunderstanding of instructions for processes are among the top reasons for patients to leave studies.
Digital technologies can tackle those issues, Buchanio believes, serving as a one-stop-shop for the participants. With the application of tools like EDC (Electronic Data Capture) and CTMS (Clinical Trial Management System), life sciences and pharmaceutical industries can substantially boost their R&D processes.
According to West Monroe, these platforms can:
- Cut recruitment time by 40%;
- Reduce the dropout rate of ca. 30% across trials;
- Increase data collection by up to 75x more (for instance, from wearables);
- Decrease costs by ~50% per participant for virtual trials compared with on-site practices.
‘Even the large players will be spending the next 2-3 years either rebuilding their digital architecture or buying other solutions and integrating them with their current platforms,’ our panelist concludes.
- A new wave of consolidations in the healthcare industry to come.
- Technological solutions are already changing the ways patients are treated, and how new drugs are developed.
- The adoption of digital technologies in the health and life sciences sector is not going to be rapid.
As the Covid-19 vaccines are starting to roll out across several countries, the global health industry is still trying to overcome the disruptions caused by the coronavirus. Though this market’s technological segment has been slowly growing in the past, the pandemic-caused limitations have pushed the innovations to the fore. Digital tools, like AI or secure video conferencing, have become critical to tackle the challenges of the ‘new normal.’
Pharmaceutical and life sciences companies have found out that several of their activities can be done remotely, thus cutting costs. 38% of industry executives expect that more than a quarter of their clinical trials will be virtual by 2025, PwC’s Health Research Institute survey shows.
During the M&A Community webinar, we discussed how the next normal could present itself with emerging opportunities, challenges, and new use cases in the US, and globally.
Tech advancements to change patient treatment
2021 is going to be a fantastic year for the health industry, believes Dr. Gary Epler, Associate Professor of Medicine at the Harvard Medical School, and Managing Director at Gracewater Capital. He explains that Covid has caused two significant changes in the health sphere.Some companies are flourishing, showing better results than ever before. Thus, these businesses will be looking for acquisition opportunities. Others, facing disruptions in supply chains or customer base, will be looking to be acquired.
- Healthcare development: New molecular diagnostic tools, enhancements of MRI imagery, etc. With genome-based biotech, Dr. Epler stresses that the number of treatment options is larger than ever.
- In terms of M&A, our panelist lists some of the most lucrative industries to look at.
- MedTech. ‘This is the place for big players, namely GE Healthcare, Medtronic, and several others. They are looking to increase the size of their R&D departments to develop new products and services,’ Dr. Epler explains.
- Digital Health. Simply put, this industry deals with the digitalization of any process in healthcare. It started with electronic medical records–and this challenge still doesn’t have an efficient solution, the professor says. There is a lot to do in terms of improving processes around patient care and organizing hospitals’ work, he believes.
- Artificial Intelligence (AI) / Internet of Things (IoT) for medical devices and wearables. For instance, monitoring patients’ health to detect serious illnesses (like deep vein thrombosis) that can be treated if diagnosed in a timely manner. ‘AI can monitor hundreds of health parameters, 24/7, it doesn’t need a coffee break. It is efficient, and inexpensive, and can save lives as it is able to detect symptoms before doctors and nurses notice them.’
- BioTech. Here, Dr. Epler says, humanity can create drugs that are on a more of a molecular level to tackle the most complex diseases, like cancer. Nevertheless, he adds, these advancements require several years and billions of dollars of investments, not to mention specialized equipment and powerful R&D teams.
Digitalization to transform operations
Covid-19 and drug price uncertainty has helped transform drug development lifecycles, says Michael Buchanio, Senior Principal, Healthcare M&A, at West Monroe Partners. ‘Due to the pandemic disruptions across the spectrum, especially around limited patient encounters, the routine and non-urgent care visits have dramatically decreased.’
According to Buchanio, the following factors are crucial to drive digital transformation and innovations in the US healthcare industry.
- Limited clinical resources
Lack of care and management personnel in outpatient settings, and a ‘general reluctance for travel’ has caused many ongoing research projects to be delayed. Some cases were even stopped due to patient recruitment issues.
- Increased price scrutiny
US drug prices are nearly 4 times higher than in similarly situated countries. In Japan, our panelist says, the average drug price is more than 6 times less than US prices. Both parties support drug pricing policies, ignited by cases of rapid price surges to generics and brands, like the infamous 5300% rise by Martin Shkreli’s pharmaceutical company.
- Drug development costs rise, timelines stagnate
Buchanio says, the average cost to bring a drug to market is estimated at $2.6B high, with $1–1.3B being the mean investment. Timelines, meanwhile, remain flat, as a new drug or a vaccine takes 7-8 years to get FDA approval (Phases I to III).
Solutions to these issues can be found via the end-to-end adoption of digital technologies. They are already improving the patient experience and compliance while reducing costs and shortening time to market. For instance, Buchanio says, secure video conferencing and e-signatures tackle the issue of informed consent as well as prescreening and remote monitoring. Clinical trials are thus becoming decentralized.
‘Do I think that such technologies will be fully adopted in the near future? Probably not. But we see all the technology players making huge investments in this space. And we’re seeing a lot of pharmaceutical companies doing their trials with this decentralized approach,’ adds Buchanio.