2023 Will Be a Big Year for U.S. Healthcare M&A

Today we're looking at the biggest trends in U.S. Healthcare M&A as discussed at the recently held J.P. Morgan Healthcare Conference.

“We can expect this to be a big year for M&A for Pharmaceutical and medical device companies,” says our guest Rebecca Wenzel, a senior reporter for Mergermarket. “They are sitting on piles of cash that they’re ready to deploy, though one of the differences we’ll see is that they’re going to be more selective about their roster of assets and assets will be met with more due diligence.”

Listen to learn about:

• The rise of bolt-on deals in Biopharma and medical devices
• Expected wave of Healthcare IT deals at reset valuations
• Consolidation in private practice management
• How financing challenges are affecting deals

Dealcast is presented by Mergermarket and SS&C Intralinks.

Transcript

[MUSIC PLAYING] JULIE-ANNA NEEDHAM: Hello, and welcome to Dealcast, the weekly M&A podcast presented to you by Mergermarket and SS&C Intralinks. I'm Julie-Anna Needham. I'm a business journalist who's been covering M&A for a decade.

In this episode, we're looking at some of the big trends in healthcare M&A following on from a major healthcare conference in the U.S. Joining me is Rebecca Wenzel, who's a senior reporter for Mergermarket.

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Hi, Rebecca. Thanks very much for joining me today.

REBECCA WENZEL: Hi. Thank you, Julie-Anna, for having me.

JULIE-ANNA NEEDHAM: So you went to the JP Morgan Healthcare Conference recently. What was the sentiment at that event for expectations for this year?

REBECCA WENZEL: Yeah, it was a great conference. Lots of energy and excitement around the year, especially after not having the conference for a couple of years. I think the sentiment is that we can expect this to be a big year for M&A for pharmaceutical and medical device companies. They are sitting on piles of cash that they're ready to deploy. Though, one of the differences I think we'll see is they're going to be more selective about their roster of assets, and assets will be met with more due diligence. But we'll definitely going to see deals.

Primarily, bolt-on deals should headline what we see in the market. And by bolt-on, I mean USD 40 billion or less in enterprise value for biopharma, and then enterprise value of $10 billion or less for medical device-size deals.

Additionally, I think we're going to see a lot of healthcare information technology, or healthcare IT, as it's called, deals. We'll continue to see a wave of deals flowing there, though the valuations have drastically reset.

So, in the high flier days of 2021, we were seeing deals in the 30x to 35x annual recurring revenue. Those have definitely fallen away. And now they're resetting around 10 times future revenue for healthcare IT and software as a service players. So, I think it's going to be an exciting year for companies that are out there looking for M&A.

I had the pleasure of speaking, along with my colleague, to many companies there about what their M&A plans are, and so some of the headlines for that and in companies that are going to be active this year.

In the biomedical device, Bausch + Lomb has said that they're seeking acquisitions of under USD 100 million. And Medtronic has said that they're going to likely spend over USD two billion on acquisitions this year. In healthcare IT, Simpler is actively consolidating the market and they've said that they have a deep pipeline of M&A targets that they're reviewing. And Zealous Healthcare has also been fielding strategic interest as it is building via buys.

Additionally, we're going to see lots of consolidation in the private practice management space. Companies like Apollo Medical may look at transformational acquisitions. And then a company such as Surgery Partners, they have at least USD 200 million that they're looking to deploy this year for their M&A strategy. So a lot of companies out there, lots of activity and it'll be exciting to see what deals close this year.

JULIE-ANNA NEEDHAM: Great. Thank you. And looking slightly away from M&A, how are companies viewing plans for a public debut? And do you have any names in the frame?

REBECCA WENZEL: Sure. So I think that we're going to see companies think about M&A more than IPOs as the markets have not rebounded as quickly as we would like. Some companies that maybe had planned to IPO maybe are now looking at selling instead as opposed to their original IPO plans.

Though, there are some companies that we were able to interview that are looking more towards the 2024 time frame for IPO if they can withstand the market. So some of the companies that maybe will look to IPO in that longer-term time frame include Color Health, Candela Medical, Hinge Health, Eversana, and Quantum Health.

JULIE-ANNA NEEDHAM: Great. Thank you. And looking at biopharma, can you tell me what's driving biopharma deal flow, please?

REBECCA WENZEL: Sure. So there's kind of this thing happening called a patent cliff with these larger biopharma companies. They have a lack of R&D. And they have USD 200 billion worth of patents expiring. And they don't have enough in their own R&D pipelines to make up for that deficit. So they have to execute on M&A. So that's one of the reasons that we're going to see deal flow in this sector.

JULIE-ANNA NEEDHAM: Great. Thank you. And what about the reasons that deals are failing to get done? Could you run through one of the main reasons, please?

REBECCA WENZEL: Yes. So the major reason for deals not finishing are the lending and debt markets. They are a pretty staggering hurdle to surpass and continue to be the number one factor in deals not closing. There have been a few recent deals such as Dentive, but many are not able to secure financing amid the capital markets.

JULIE-ANNA NEEDHAM: Great. And I guess link to that, what shifts are you seeing in the market now compared to the M&A flurry in 2021? Because that was a bumper year for M&A more generally. How has it changed?

REBECCA WENZEL: So the biggest change is the type of assets that are able to transact in this type of market. So it's no longer about the quantity of assets to acquire but more the quality of assets. So you're definitely still seeing strong assets with growth, and profitability are able to transact.

But it's those tier 2 and tier 3 assets that are not performing as well. Those are the ones that are not able to secure buyers. So a stark contrast is the post-COVID days when underperforming healthcare IT companies were able to sell for 8 to 10 times EBITDA, but now bankers are saying that they can't even give these companies away.

JULIE-ANNA NEEDHAM: So you mentioned biopharma earlier, but what are the other hot sectors we can expect to see deals in this year?

REBECCA WENZEL: So hot sectors include computational bio, which are ones that utilize artificial intelligence and machine learning. And we're also going to see a lot of deal flow in the gene therapy space. Oncology continues to be a hot sector for those offering early cancer detection.

Other areas include autoimmune. And respiratory are also now seeing new interest from private equity, as these players are reaching later-stage trial phases. Additionally, we mentioned healthcare IT that's going to definitely continue. And also, the post-acute care market will also see a surge of deals as we have 10,000 adults turning 65 every day. So there's a huge market opportunity there.

JULIE-ANNA NEEDHAM: And so what are you hearing from dealmakers? What are they advising their clients to do given the market headwinds? And linked to that, what do companies need to do in order to secure a successful exit in this sector?

REBECCA WENZEL: Sure. So bankers are prepping their companies to be ready for an IPO in the next 12 to 24 months. So make sure they have all their ducks in a row and all their financials in place. So when those markets do open up, they're ready to execute on that strategy immediately. Additionally, they're advising clients to slow their cash burn rates to weather the storm and hold off on raising capital until 2024, if you can manage.

Additionally, if you are a buyer, it's a great time to be in the market and bankers are advising these clients that they can find some great deals for companies. They can secure strong assets set at an attractive price. There are fewer buyers to compete with. And so it's just a great time to look for attractive assets.

Additionally, companies looking to try to secure a successful exit, bankers are telling these companies that there's really four things they need to have lined up in order for that to happen. Those four being they need to be able to address a large unmet market need. They need to be seen as the market leader among their competitors. They need to have their technology or drug derisked as much as possible to entice a buyer. And they need to have strong IP and patents buttoned up and have them be exclusive in order to give those buyers an edge on their competitors.

JULIE-ANNA NEEDHAM: Great. Thank you, Rebecca.

That was Rebecca Wenzel who's a senior reporter for Mergermarket. Thanks for listening to this week's episode of Dealcast presented by Mergermarket and SS&C Intralinks. Please rate, review, and follow the podcast.

You can find us on Apple podcasts, Spotify, or look out for your Mergermarket news alert. For more information, have a look at our show notes. Join us next week for another episode.

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