Economic headwinds led to 2022 slowdown
Strong investor demand carried over from 2021 evidenced by a strong first quarter for deal volumes in 2022 (see Fig.1). As the year progressed and geopolitical tensions heightened, the sector was impacted by a skyrocketing increase in the overall cost of capital which in turn led to an inflated valuation landscape. The sector faced a significant decline in deal volume as a result, particularly in Q4 2022 (as evidenced in Fig.1).
Fig. 1: Number of transactions completed in Healthcare sector – Jan – Dec 2022
Source: Mergermarket[i]
Investor / seller priority shift leads to market pause
Fast forwarding to today, we’ve observed an overall risk averse sentiment among market players. Many existing processes have been put on hold off the back of 2022, while others were pushed out to 2023.
A new dealmaking landscape is falling into place, and seller / investor priorities have shifted:
- Sellers are ‘holding out’ for a return to the outsized valuation trends witnessed in the second halves of 2021 and 2022. But we anticipate a resetting of seller expectations, albeit later in the year
- Investment appetite has shifted towards assets with a proven track record of organic growth opportunities vs a legacy emphasis on opportunities for growth via M&A
Key investment trends / dealflow drivers to note
- Industry consolidation: current macroeconomic conditions may motivate operators to consolidate. This includes many physician-specialty sectors such as Dermatology and Ophthalmology. Emerging areas such as Cardiology, Orthopedics, MedSpa and Specialty Dental have generated substantial investment interest from both strategic and financial buyer groups given significant fragmentation across these sub-sectors
- Vertical and horizontal integration: large-scale aggregator companies are emerging drivers that create strategic combinations of alliances to enhance the delivery of healthcare services. Most recent examples of this trend include:
- Alternative deal structures: alternative transaction vehicles / structures to facilitate recapitalizations without a ‘traditional’ exit is becoming increasingly popular amongst dealmakers. Trends include continuation fund strategies, minority investments, structured capital solutions and strategic mergers ahead of sale event
- Human Capital Management: healthcare operators may need to prioritize managing the workforce that will be necessary to support their operational objectives in light of both increased labor costs and overall shortages of trained staff and personnel
What does this mean for healthcare M&A in 2023?
We are presently advising our clients to take advantage of this market pause by getting their house in order and optimally preparing for the increased wave of M&A volume we anticipate in the second half of this calendar year. - Hector Torres, Managing Director
Evidenced by an impressive turnout at the conference, accompanied with the robust nature of the sector, we anticipate strong demand for healthcare services continuing in 2023, despite current seller ‘pullback’.
We continue to witness strong demand for healthcare services investment opportunities from international buyer and investment groups seeking exposure to the U.S. healthcare eco-system. Overall, we believe that healthcare services M&A activity will ramp up in the second half of 2023, bolstered in part by an ever-increasing pipeline of companies being prepared for sale.
To discuss the outputs in more detail, or for more information on the Healthcare M&A landscape, please contact Hector Torres >
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Sources
[i] https://www.jpmorgan.com/solutions/cib/insights/health-care-conference
[i] Target or Buyer or Seller sector is Agricultural/animal biotechnology or Biotechnology production equipment or Biotechnology related research or Industrial biotechnology or Biotechnology or Handicap aids and basic healthcare supplies or Health institutions or Hospital management or Medical or Medical or Drug development or Drug manufacture or Drug supply or Medical: Pharmaceuticals, transactions located in USA, value is between USD (m) 75 and 500 (undisclosed value deals are included) and transaction completed between 01/01/2022 - 31/12/2022
[ii] https://www.beckershospitalreview.com/strategy/villagemd-completes-8-9b-summit-health-buy.html
[iii] https://seekingalpha.com/news/3939049-amazon-closes-39b-acquisition-of-one-medical
[iv] https://www.mergersight.com/post/cvs-8bn-acquisition-of-signify-health#:~:text=In%20the%20deal%2C%20CVS%20said,clinicians%20across%20all%2050%20states.
[v] https://hospicenews.com/2023/02/22/unitedhealth-group-closes-5-5-billion-lhc-group-acquisition/
[vi] https://www.cbinsights.com/company/kelsey-seybold
