Economic headwinds and recessionary fears will not slow down healthcare dealmaking next year coming off a robust M&A market in 2022.
Increasing transaction volumes and players embracing value-based care—coupled with large levels of corporate cash and private equity "dry powder"—are leading to continued expansion for deal volumes in 2023, according to a new analysis from PwC.
The accounting and consulting firm forecasts a strong outlook for health services M&A deals in 2023 with companies actively exploring M&A, divestitures and other transactions, said Nick Donkar, PwC’s U.S. health services deals leader.
"The deal market in 2022 was fairly robust coming off an unprecedented banner year, which was 2021. Obviously, 2021 was the highest deal volume we've experienced from a health services perspective. We're happy to see the health of the overall market, no pun intended, with respect to the level of volume and activity that has been exhibited thus far in 2022," he said in an interview.
He added, "The fact that we've got a lot of assets trading in this marketplace is good for all parties. As people reevaluate their strategies, they want to participate in a healthy ecosystem. The deal volume in this sector was fairly heavy and continues to be so, which speaks to the overall attractiveness of the market for healthcare."
In 2021, there were 1,996 health services M&A deals at a value of $217 billion, which marked a high for the sector.
Despite the economic downturn, the healthcare sector and health services in particular has proven to be nearly "recession-proof," Donkar noted, due to "innovation, technology and investment dollars that continue to funnel in to enhance patient care."
While sufficient headwinds existed in the deal markets to potentially stall health services deal activity in 2022, the sector performed well and is poised to further expand volume in 2023 between reshaping portfolios, divestitures and a flurry of PE "dry powder," according to Donkar.
Megadeals, trading multiples and overall deal values in the sector have not been immune to interest rate hikes and fears of an economic downturn.
But payer-provider convergence and headline-grabbing investments from non-traditional players like CVS, underlie the broader evolutionary theme of the sector—fee-for-service focused models are in the rearview mirror and players are diving in and embracing value-based care throughout the ecosystem, the PwC report said.
In the last 12 months through Nov. 15, the health services sector has seen 2,277 deals valued at $127 billion, PwC reports. Deal volume jumped 14% from 2021.
But deal values have declined from the peak set in 2021, a function of smaller value roll-up and platform add-on transactions representing a greater portion of activity in the current year, according to the report.
Year-over-year deal volumes increased in each quarter through the third quarter of 2022, though some pullback has been seen in Q4 through November 15 with 251 announced deals in the fourth quarter of 2022 versus 307 in the same period in 2021.
Deal valuations in 2022 were largely driven by activity in the home health and hospice markets. This was one of only two sub-sectors that saw growth in announced deal value from 2021 levels, as pandemic-driven interest in alternative and patient-accessible care models continued to be a key theme, the report said.
There were 114 home health and hospice deals in the 12 months ending Nov. 15, contributing to a 74% increase in deal value from 2021. This growth in deal value was driven by two megadeals—CVS’ acquisition of Signify Health for $8 billion and UnitedHealth's Optum division shelling out $6 billion for LHC Group.
"We do expect to see continued interest in home health and value-based care, for example, risk-taking transactions. We anticipate that health services deals within multiple areas of physician practice management groups, healthcare IT and adjacent areas will remain hot in 2023," Donkar said.
The 12 months ending Nov. 15 had seven megadeals, including the $18 billion merger between two healthcare real estate investment trusts and an $8.9 billion acquisition of Summit Health-City MD, a provider of primary, specialty and urgent care services, by VillageMD, a Walgreens subsidiary.
These two deals collectively represent $26.9 billion of the total $44.3 billion of other services deal value in the period, according to PwC.
Other megadeals include Quidel Corporation’s acquisition of Ortho Clinical Diagnostics ($8 billion), Mediclinic International’s acquisition by a consortium of investors ($7.4 billion) and Chubb’s acquisition of Cigna's life, accident and supplemental benefits businesses ($5.4 billion).
Home health and hospice M&A deals in 2022 so far total $19.5 billion while labs, MRI and dialysis deals are valued at $23.5 billion. Long-term care M&A deals raked in $13.6 billion this year.
Industrywide enterprise value to EBITDA multiples have declined from heightened levels seen at the end of 2021. As of Nov. 15, the average multiple across health services sub-sectors was 14.4x, down from 15.9x as of Dec. 31, 2021, and 14.9x as of Dec. 31, 2020.
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While the healthcare industry faces major macro headwinds going into 2023, there are also "enormous tailwinds," Donkar said.
"Health systems are going through their normal one- to three-year cycle of reviewing their strategic imperatives, looking at their portfolio of assets and the markets they have and asking, 'Are they still strategically aligned with our vision and goals of what the health system wants to do?' From that, there comes two things: a potential divestiture play in the marketplace or exploring opportunities in other markets and other sub-sectors that would enhance the delivery model and provide further growth to the overall strategy for 2023," he said.
He added, "The second piece is the impact and implications of private equity 'dry powder' in this play."
Headwinds from the macroeconomic financing environment are causing companies to reevaluate the capital allocation approach. The higher cost of capital is a challenge to larger, platform-sized deals and is driving more club deals, or a private equity buyout where several private equity firms pool their assets to acquire a company, and noncontrolling investments, according to PwC.
"When you have people reevaluating their strategies, when you have an excess amount of dry powder in the private equity space, and when you have a generally robust asset trading environment in health services, this will be the right environment for healthcare investing, for all shapes and sizes," Donkar said.
The increased volume of antitrust regulatory reviews, which have expanded outside of health systems and into the broader sector, could dampen some companies' eagerness for M&A deals in the health services market. Antitrust reviews have yet to focus much on the cross-sector convergence with nontraditional players, but these deals may begin to draw heightened attention given their size and publicity, the PwC report noted.