Health industry M&A mid-year update

Bursting with vitality thanks to innovation and attractive growth prospects

Marc Schmidli, Partner, Deals and Valuations Leader, PwC Switzerland

Luca Borrelli
Partner, Deals Pharma and Life Sciences, PwC Switzerland

Investors in the health industries are apparently largely undeterred by the various headwinds, and interest in deals remains high – especially transactions to acquire innovative technologies. For a more detailed look at PwC’s most recent insights into global health industry mergers and acquisitions, plus an outline of developments and prospects in Switzerland, read on.

Despite a variety of headwinds, including economic uncertainty, investor interest in the pharmaceuticals and life sciences (PLS) and healthcare services (HCS) segments continues to run high. Capability-driven deals providing access to new technologies such as mRNA, gene therapy and telehealth capabilities are popular among both large corporations and private equity (PE) – just as we predicted in our last outlook. While volatile public markets might in some cases restrict corporates’ capacity for embarking on large deals, lower valuations of public companies are leading to opportunities for public-to-public transactions. PEs have abundant capital, and will be actively pursuing mergers and acquisitions in the health sector in the next six to 12 months.

Acquisitions will continue to be a popular option for health industry players seeking to realise their growth plans. One potential obstacle is close antitrust scrutiny from regulators in places like the US, UK, Europe and Canada. This is making it more difficult to follow through on transformation-driven megadeals, and companies will probably have to consider embarking on a larger number of smaller deals to achieve the same outcomes. Examples would be pharmaceutical companies acquiring multiple medium-sized biotechs or PE funds creating specialist care platforms by way of a series of roll-up acquisitions.

Global M&A trends in the health industries
pharmaceuticals and life sciences

While the war in Ukraine hasn’t had a significant direct effect on the operations of pharmaceutical companies, it has prompted many to reassess the risks and dependencies of their supply chains. With M&A a good way of regaining control, we anticipate deals up and down value chains, from raw materials to the distribution of products. Customers need certainty, and using M&A to on-shore, near-shore or “friend-shore” (trading with countries sharing similar values and strategic interests) supply chains can provide this by reducing lead times.

We’re seeing particular investor interest in fast-growing organisations with innovative technologies such as mRNA vaccines and innovative medical devices. Big pharma conglomerates are maintaining their efforts to optimise portfolios and get rid of non-core assets. They’re also competing with PE funds for innovative operators in the biotech, contract development, manufacturing and contract research segments.

The absence of megadeals can be partly explained by valuation levels for biotech in the past few years. While big pharma craves good assets to fill its pipeline, valuations were at levels that made it difficult to justify what were still early-stage investments. Markets for IPOs were hot, and companies were trading at incredible valuations while still being pre-read-out of their trial data. Despite large amounts of dry powder and the need to fill their pipeline, big pharma companies were in most cases not willing to go all in and bet on horses with little track record. Looking at the two indices "XBI" and "IBB" as a proxy for biotech valuation the picture was clear, and the market recognised the exaggeration and corrected painfully. The increasing uncertainty and rising interest rates kept the valuations tumbling until they found a floor around 2017 levels. However, further increases in interest rates might again put pressure on biotech valuations.

Grafik 1

With the market finding its feet again and valuations at a more compelling level, we expect big pharma to again eye up the rising biotech stars, and expect to see a few more larger deals.

On the other hand, the slightly softer valuations and uncertainty might have larger players consider the timing of shedding non-core assets and wait until the market trends upward again. While holding their breath, companies should look into value creation opportunities to be ready when the tide turns.

Healthcare services

The consumerisation of healthcare is an ongoing trend. Companies offering vitamins, minerals and supplements (VMS) and nutraceuticals boast high multiples and should remain attractive assets. At the same time traditional players in the consumer and retail sectors are looking to get into pharmaceuticals, for example by investing in online pharmacies. Private clinics, specialist care providers and services groups are still fragmented, and we expect to see the trend towards consolidation continue.

One development that could prompt an increase in distressed deals is reductions in support for sectors that enjoyed significant government backing during the pandemic. Hospitals, for example, face major operational challenges because of labour shortages. Especially in countries where government funding is being phased out, this could create liquidity challenges for hospitals and force them to restructure or resort to M&A.

Embracing digitalisation and accelerating the adoption of digitalised practice management and patient-centric digital solutions is key to unlocking value. A shortage of skilled employees mean that healthcare providers have to use digital technologies to become more efficient – and telehealth, health tech and analytics companies remain a good option for filling the gap.

“As far as M&A appetite is concerned, the health industries appear to be largely immune from the economic and sociopolitical uncertainty that currently prevails. Acquisitions of innovative technologies and digital capabilities remain a very healthy and attractive option.”

Luca Borrelli, Partner, Deals Pharma and Life Sciences
What about M&A in the Swiss health industry?

Like most people, when I wrote my recap of 2021 six months ago I didn’t think the world, and especially Europe, would be such a different place half a year later. The changes in the geopolitical environment have had and in some cases are still having serious macroeconomic knock-on effects. Nevertheless, deal-making in Swiss health industry M&A has appeared resilient.

With a total of 47 deals in the first half year of 2022, deal volume was still high compared with the same period in prior years, but we can also observe the global trend of dealmakers being more cautious regarding large and mega deals. Uncertainty has led to capability-focused M&A and smaller roll-ups rather than attempts to make the big bang. Generally, within the Swiss health industries, pharma & life science transactions show greater seasonality in terms of deal count than those in health services. Not only this, but the first two quarters have always turned out to be slower in terms of industry M&A activity compared with the third and fourth quarters.

Grafik 2

Despite slight increases in interest rates in most markets and modest financing restrictions, both financial and strategic investors still have abundant cash seeking deployment. The health industries sector is among the most resilient, and we have seen money being deployed in the health services and healthcare space. We expect this trend to continue, as regulated markets, steady cash flows but also growth opportunities in the sector (telehealth, smart care, etc.) will continue to attract investors.

Private equity showed continued interest in health industries, with special emphasis on healthcare businesses in the labs, physicians and medtech space. One of the larger deals has been the acquisition of Sanoptis by Groupe Bruxelles Lambert. On the other hand, we have also seen PE exiting investments and industry players happy to step in. This includes Sonova’s acquisition of Alpaca Audiology as well as Straumann’s announced takeover of Sunshine Smile.

Generally, the wider health services industry is in the focus of traditional PE, while early-stage biotechs have remained the realm of the venture capitalists.

Grafik 3

All in all, we can say that the market has cooled down somewhat from the frenzy of 2021, but is still healthy and structurally sound. We expect demand to continue and fuel M&A activity, but with buyers more focused and potentially a bit more defensive when it comes to auctions and valuations. But with valuations potentially slightly lower, opportunities await, and the market might get hot again really quickly.

Mid-year outlook: healthy M&A activity despite lack of economic and sociopolitical certainty

Despite an unpredictable operating environment dominated by economic and sociopolitical uncertainty, M&A activity in the health industries will remain lively. PE funds have significant dry powder at their disposal, and large corporates are still endeavouring to achieve growth through deals and softer biotech valuations might fuel M&A from big pharma to fill their pipeline. With PE and corporate capital competing to acquire innovative small and medium-sized businesses with new technologies and digital capabilities, dealmakers are in for a busy time in the remainder of 2022.