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Healthcare Deal Sourcing

Globally, it’s been a busy year for healthcare M&A activity, with Life Science M&A spent hitting a record high in 2019.

You might have already heard about the heightened activity in the healthcare business over the last year given so much is happening in the life sciences front especially. We too couldn’t avoid noticing this trend as middle-market deal activity in 2019 soared on our platform echoing the general industry trend.

Globally, mergers and acquisitions in the life sciences industry set a record high in 2019 by exceeding the $300 billion mark (as recorded by multiple industry sources) and surpassed a previous high that was set in 2014 (as per 2020 EY M&A Firepower report).

2020 too is expected to be an active year in terms of M&A, although activity may not reach the same level of deal value as 2019. Mid-sized companies and Private Equity firms have been key drivers of deal activity and are expected to continue this trend.

We summarize key factors that are encouraging companies to look for new M&A targets and driving private equity interest in the healthcare sector:

Record levels of investable capital: Private Equity firms are encouraged about 2020 due to the availability of record levels of investable capital. As per data from Prequin, $1.5 trillion of capital was available with Private Equity at the end of 2019 that could drive dealmaking in 2020. Already, healthcare accounts for about 13% of all private equity buy-out deals, according to Preqin. The industry is witnessing high interest from both strategic and financial buyers given the available financial capacity for deals in the market. This appetite has driven valuations up, which Private Equity firms are trying to fix by proactively looking for deals to bridge the gap between buyers’ and sellers’ value expectations.

Resilience to economic slowdown: Along with this high amount of capital, there is the fear of a looming economic slowdown. Private Equity firms are hence reluctant to invest in cyclical assets and are on the lookout for recession-proof deals. Given the nature of its services and inelasticity of demand, the healthcare sector is insulated from the effects of a slowdown and is proving to be an attractive hedge. Moreover, other factors like the aging population and a projected increase in healthcare spending (according to PWC) make the sector resilient to any potential market volatility.

Need for consolidation: The healthcare sector is fragmented, which makes it even more attractive for Private Equity firms giving them an opportunity to increase size and scale through vertical integration. This fragmentation is most visible in the provider-based sub-sectors where Private Equity firms are deploying the ‘buy-and-built’ strategy to increase their returns and are also bringing in consolidation to the industry. There is a high interest in Digital Health as PE Firms are investing in healthcare IT and acquiring platform providers.

Need for innovation and digitization: Healthcare companies are using M&A’s to bring more efficiencies in the organization and acquisition of relevant technologies, which seems to be quite natural for an industry that is being revolutionized by technology. There is an increased interest from Private Equity firms to invest in such innovation-driven deals.

Pharma and biotech companies are sourcing R&D assets in pursuit of expanding their portfolios and bolstering development pipeline through inorganic growth. There is a preference for early-stage assets as this stage of development requires significant funding. Companies are announcing deals to acquire new products/services that align with their business strategies and therapy areas or to acquire new digital capabilities. These trends pose an opportunity for small or mid-sized companies with a niche, as large life sciences players are looking for ‘bolt-on’ acquisition opportunities to benefit from unique attributes.

Industry-players say

As per a survey conducted by PWC: “40% of health executives said their companies are somewhat or very likely to acquire, partner or collaborate across healthcare sectors in 2020.”

In another survey conducted by EY-Parthenon: “90% of those we surveyed said PE involvement with their company has been positive overall, with over 80% of those surveyed highly likely to consider PE investments in the future.”

Bottom line

We should expect an explosion of deals that can benefit small/mid-sized firms in the life sciences space as large players scan for scope deals. However, investment in life sciences comes with its fair share of challenges given its complexity, vulnerability to disruption, high multiples, and complex due diligence. To ensure success firms need to source and evaluate deals judiciously and thoroughly.


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