Despite an environment of rising inflation and interest rates and with the possibility of a recession, 60 percent of healthcare and life sciences investors say they plan to increase their M&A activity in 2023.
The KMPG Healthcare and Life Sciences Investment Outlook sampled more than 300 executives on their perspective going into the new year and how that will affect their investment plans. For 2023, the theme seems to be strategic investments, as companies continue to combat continued supply chain issues, labor costs and inflation.
Some subsector highlights included:
- Hospitals and health systems have been forced to operate on strict margins as the high costs of capital, labor and supplies squeeze budgets. For some systems, the wisest move may end up being a partnership or M&A. That includes a number of large organizations: As research firm Kaufman Hall pointed out recently, the average size of hospital M&A deals grew significantly in 2022.
- In home health and hospice care, hospitals and other care providers are looking to vertically integrate, while private equity firms are focused on smaller operations with growth potential.
- Diagnostics deal volume fell during 2022 and companies have been pursuing acquisitions that would decentralize testing for various conditions and thus lower wait times for customers. Six out of 10 investors expect deals to increase in 2023.
- In biopharma, a focus on early-stage cell and gene therapy in 2022 resulted in a few big deals but mostly consisted of frequent, smaller activity. Sixty-four percent of respondents told KPMG they are more likely to acquire “early-stage, innovative assets” in the sector this year.
That’s not to say that deal volume in 2022 was disappointing. In fact, 56 percent of respondents exceeded goals set in January 2022, KPMG reports. This tracks with the overall trend Silicon Valley Bank identified in its Healthcare Investments and Exits report, where it called 2022 the “second-largest investment year ever,” with $22 billion of investible capital raised.
As for how that capital will be deployed in the new year, operational efficiency and expansion are the key focus areas. That means new offerings, platforms and milestone-based deals as companies try to get ahead.
"Companies are sitting on a lot of cash and assessing their opportunities to make strategic investments now that will set them up to gain a competitive advantage as we come out of a possible downturn,” said Kristin Pothier, a principal at KPMG. “Deals are likely to continue to reflect the new reality of the industry, a reality that balances scientific and clinical advancement with cost."
The surveyed executives’ intent to maintain or increase the pace of M&A jives with what Claudine Cohen, managing principal of CohnReznick LLP’s Value360 group, is seeing in the market, particularly from private-equity investors. Many of those players, she said, have shortened their investment time horizons in recent years and are moving more quickly than before.
“They’re constantly doing add-ons but valuations are so high, they have to move more quickly and integrate to create value,” Cohen said.