Healthcare is constantly evolving in response to new technologies, groundbreaking research and changing societal needs. Whether times are good or bad, people always need care, medication and medical devices. For this reason, investment in healthcare is a popular option for investors looking to build diverse portfolios within an area of broadly stable demand. The trick is knowing which healthcare sectors and investments are likely to provide the most significant returns.
Looking back at 2022
Before exploring the outlook for 2023, we need to briefly look back at how healthcare fared in 2022. Like almost all sectors, healthcare did not perform as well in 2022 as it did in 2021. In 2021, 2979 healthcare deals were announced globally. In 2022, that dropped to 2852 deals. However, it’s important to note that 2021 was a record-breaking year, meaning it was always going to be a difficult year to beat. There were signs that the sector was starting to struggle. For example, the overall healthcare deal volume declined by almost 50 per cent in Q3 2022 compared to the quarterly average in 2021.
Despite this, 2022 did have its upsides, as several major deals were announced or completed. For example, UnitedHealth acquired Change Healthcare for $8 billion to help streamline administrative and payment processes. CVS Health acquired Signify Health for a similar sum, with the intention of advancing healthcare services strategies. Overall, 2022 saw the industry return to something of a baseline after a record-breaking 2021.
The outlook for 2023
Investors are struggling to predict future outcomes for healthcare M&A due to mixed signals through 2022. Many of the problems we all experienced during Q3 and Q4 remain—inflation, geopolitical uncertainty, supply chain disruptions, high interest rates, and the ongoing labour shortages continue to dampen investor confidence. Investors are treading cautiously, as all of these problems affect company performance and reduce buyer’s leverage.
However, there is a silver lining. The 2023 outlook for healthcare is looking up as investors expect more M&A activity in the sector this year. Sixty per cent of investors expect more healthcare deals this year than in 2022, with just eight per cent predicting that deal volume will fall.
2023 sector highlights
Industry commentators are feeling particularly positive about several healthcare subsectors:
Health systems and hospitals
Hospitals are struggling with the increasing cost of supplies and labour, meaning many are operating on extremely narrow (or sometimes negative) margins. As a result, some are considering M&A and non-traditional partnerships to increase capital.
IT
In 2023, there will be less of a focus on consumers and telehealth (which dominated much of 2021) as investors focus more on revenue cycle management, advanced analytics and value-based care.
Biopharma
A focus on developing early-stage cell and gene therapies and other similar drugs in 2022 resulted in plentiful licensing deals, product acquisitions and strategic research and development partnerships. Despite a few large deals, smaller transactions accounted for most of the activity in this area.
Medical devices
Rapid innovation in various areas, including cardiology, diabetic care, robotic surgery and wearable devices, continues to draw attention from investors looking to bolster their portfolios.
Challenges For Healthcare Deals
We’ve established that there are plenty of M&A opportunities out there. However, investors face several challenges regarding healthcare M&A deals this year:
Limited funds
Various global issues have meant there are limited funds compared to previous years. For example, as of February 2023, inflation in the US is 6.4 per cent, 10.1 per cent in the UK and 8.5 per cent in the Euro area. Inflation and limited funds may prevent some companies from dabbling in healthcare M&A.
Potential solution
Some businesses are turning to private equity to overcome this problem, as record amounts of dry powder remain.
The Palladium Group works with private equity firms, offering services such as market mapping to full commercial diligence to help validate all commercial aspects of potential healthcare investments, allowing our clients to spend their time and resources on only the most viable deals.
Lack of clear growth rationale
The success of healthcare M&A transactions depends on whether the purchasing company has a clear vision for growth. Without a comprehensive growth plan, M&A deals may not yield the purchaser’s desired results. Companies need to be careful not to rush into acquisitions with growth in mind without first establishing a clear roadmap.
Potential solution
Value creation and growth go hand-in-hand. Companies that create value for their customers can attract new customers and generate more revenue in the process. Suitable value creation strategies will differ between companies, with some leaning toward technology and IT transformations while others explore untapped white space.
The Palladium Group can assist healthcare companies by both strategising and conducting digital transformation, data maturity and digital capabilities analysis and audits, R&D validation and stress tests and commercial headroom modelling.
Antitrust concerns
In the US, there has been a push by the Department of Justice to prevent monopolies in the healthcare sector. As a result, some healthcare deals are facing significant resistance. However, companies with the legal strength to take on the government are more likely to obtain final approval for M&A deals.
Potential solution
Conduct in-depth due diligence on the target company’s operations, finances, and legal and regulatory compliance to avoid acquiring assets that the Department of Justice are likely to view as anti-competitive.
The Palladium Group supports investors and brands through the entire M&A lifecycle. Our data-led, tech-enabled approach to commercial due diligence enables us to deliver robust and reliable diligence on the buy and sell side.
Final Thoughts
The healthcare industry is constantly evolving, and investor interest in specific healthcare subsectors changes as the sector advances. Additionally, 2023 has presented a unique set of challenges for healthcare M&A, including cautious investors and limited funds. Despite these challenges, there are solutions for investors and companies to overcome these obstacles. The Palladium Group is well-positioned to assist healthcare companies looking to sell and companies looking to acquire healthcare businesses to expand into new geographic markets or service areas, reduce costs, increase market share and acquire new talent.
For more information on Palladium Digital’s service, please don’t hesitate to contact us.
