Healthcare proved to be a resilient market for mergers and acquisitions in 2024, despite deal volume declining 9% from 2023.
While health services deal volumes declined year-over-year, activity stayed robust throughout 2024, with annual deal volume through November 15 remaining nearly 70% higher than the pre-COVID trendline, according to a yearly PwC report published in mid-December.
There were 1,373 health services deals in 2024 compared to 1,506 the year before, 1,708 in 2022 and 1,525 deals in 2021. But that compares to 814 health services deals in 2020 and 828 M&A deals in 2019.
"We had crazy years of volume in '21, '22, leading into a certain extent a little bit into '23, and the resiliency and the step-up function that we experienced and have been experiencing since the post-COVID-related markets has been tremendous. The base tends to be around 1,300 to 1,400 announced transactions a year, which is a huge step function," Nick Donkar, PwC's Health Services Deals Leader, said in an interview with Fierce Healthcare.
Health services M&A deal value ticked up slightly in 2024 compared to the year prior, from $63 billion to $69 billion. That compares to $88 billion and $56 billion in deals value in 2019 and 2020, respectively. M&A deal value hit a high of $197 billion in 2021 and then dipped to $101 billion in 2022.
Donkar notes that deal volume is a more precise indicator of the health and strength of a market.
Megadeals, defined as those greater than $5 billion in value, remain subdued relative to 2021 and 2022 levels, illustrating the impact of regulatory-driven hesitation towards larger-scale transactions, according to PwC analysts. Only one such deal was completed in the 12 months ended November 15, 2024.
Within healthcare and life sciences, the highest-value deal for the year was Novo Holdings' $16.7 billion acquisition of contract manufacturing giant Catalent.
Other megadeals last year include drug distributor Cencora's $4.6 billion deal to buy Retina Consultants of America from Webster Equity Partners, Cigna selling off its Medicare business to Health Care Service Corporation in a deal valued at $3.7 billion, the Carlyle Group's move to buy Baxter's Vantive kidney care group for $3.8 billion, as reported by Fierce Medtech, and Cardinal Health acquiring a majority stake in GI Alliance from Apollo Global Management for approximately $2.8 billion in cash.
"I think some of those megadeals that we didn't see in 2024 we will see in 2025 and specifically around take-private transactions," Donkar said. "I would expect more mega deals in concert with the overall fuel volume to be the case in 2025."
The market faced uncertainty in 2024 with the presidential election and interest rates. Uncertainty surrounding the presidential election has eased, and the generally pro-business stance expected from the incoming administration is providing additional optimism for increased deal activity into 2025, according to PwC analysts.
In mid-December, the Federal Reserve announced a quarter-point cut to its key interest rate, marking the Fed's third rate cut of the year.
"This puts us in a great launching point for 2025 and beyond," Donkar said. "There are tailwinds that are outweighing some of the factors that we experienced in 2024 to launch us into what we think at PwC is going to be a very robust deal market from a volume perspective."
Donkar also pointed to long private equity hold periods as another tailwind this year. The year-to-date 2024 average hold period of health services portfolio companies for global PE investors is 5.5 years.
"Private equity investors are in one of the longest hold periods we've seen of healthcare assets on a global basis. All of those transactions that were occurring and being consummated in 2021 and 2022 are now they need to generate returns for their LPs," he said.
The elevated hold period, outside the traditional three- to five-year investment model, demonstrates a growing pipeline of future deal activity, PwC analysts noted in the report.
"Just by sheer volume, those assets which were at the highest level of volume activity we ever experienced in the back half of 2020 plus 2021 and 2022, those assets now need to monetize," Donkar noted. "You've got dry powder both corporate balance sheets and private equity sitting there. You've got the evolution of private credit for private equity and how they're taking less than majority positions in some of these assets and just plowing capital in to help support capital expenditure or other things."
He added, "You also have historical competitors of assets, so strategics and private equity that are now playing in the sandbox together saying, "OK, we've strategically reviewing our portfolio of assets if we're a corporate player and what are these non-core assets? What are cash-generating, stable cash flow basis assets that we don't need in our portfolio anymore. And, the thought of private equity coming into the mix and forming joint ventures or NewCos with some of these strategic players with very unique structuring capabilities around this, that's another tailwind."
Large levels of undeployed capital and elevated interest rates require "artful approaches by investors to get deals done and justify valuations," PwC analysts said. "Sponsors are deploying capital through private credit-like investments that involve junior debt or preferred equity in lieu of traditional leveraged buyouts (LBOs), enabling flexibility in capital structure and deferment of potential divestitures that would yield underperformance against targeted returns on capital," analysts said in the report.
With the incoming Trump administration, the federal government's stance on antitrust issues will be closely monitored in the first months of the administration and investors are "cautiously optimistic that the administration will relax enforcement actions and have a more deferential view towards markets," analysts wrote.
"We still have this notion of state and FTC regulations as a whole around anything with private equity or just large transactions as a whole, the certainty from an election perspective creates a great glide path for deals to happen," Donkar said.
Private equity investment in healthcare has grown dramatically over the last decade. Estimated annual deal values have gone from $41.5 billion in 2010 to 119.9 billion in 2019, for a total of approximately $750 billion over the last decade, according to a 2021 report from the American Antitrust Institute.
In 2024, regulatory uncertainty resulted in some shift in focus away from physician practice management models toward technology and other ecosystem supports that benefit from the broader sector tailwinds while limiting direct exposure to regulatory changes, analysts noted.
Despite the Trump administration's pro-business stance, it's likely that regulators will continue to scrutinize PE deals in healthcare, particularly around concerns around access to care, quality of care and cost of care.
Larger health systems continue strategic rationalization of their portfolios and favor tuck-in approaches of ancillary services in current markets versus larger-scale geographic expansions as they continue returning to operating margins that are beginning to approach pre-COVID levels.
On the payer side, insurers continue to focus on expanding the “payvider” model, combining payer and provider functions, and evaluating geographic expansion opportunities aligned to their strategic missions, according to the report.
In 2025, provider reimbursement will be an ongoing topic of interest, as certain segments have not clawed back to pre-pandemic operating margin levels and reimbursement disparity across specialties continues to gain the attention of lawmakers.
"The headwinds of reimbursement coupled with the already bleak margin profile, or very thin margin profile with some of these health larger systems, is going to cause some disruption and maybe cause some things to change hands," Donkar predicted.
The industry will be keeping an eye on regulatory issues—including staffing mandates, required services, technology and reporting requirements—to see how the new administration will approach these issues.
From a payer perspective, rate setting, program enrollment incentives and potential funding changes, particularly for Medicaid, will be areas of focus. "Trump’s approach to broader value-based care programs and Center for Medicare and Medicaid Innovation (CMMI) initiatives will have downstream impacts throughout the sector. Investors are likely to adjust their allocations based on the administration’s actions in these areas," PwC analysts wrote.
The growing pipeline of assets to be brought to market, significant levels of available capital for both corporate and private equity players, expectations for further interest rate cuts and optimism around the incoming administration’s pro-business stance are all anticipated to drive increased health services deal activity throughout 2025, PwC analysts said.
A new wave of healthcare IPOs?
The macroeconomic environment effectively put a freeze on the IPO market for health tech companies during the past three years. There were 20 digital health companies that went public in 2021 and only two, including prescription digital medicine company Akili, in 2022. There were no digital health IPOs in 2023.
Last year, there were several healthcare and health tech IPOs including healthcare payment software maker Waystar, precision medicine company Tempus and BrightSpring Health, a home- and community-based healthcare services provider.
Investors are expecting an uptick in healthcare IPOs this year.
Healthcare and digital health companies that are rumored to be eyeing an IPO this year include Omada Health, Hinge Health, Sword Health, Aledade and Quantum Health, according to a report from Nelson Advisors. Women's health company Maven is another name that has been mentioned on the list of potential healthcare IPOs along with drug distributor Medline and US Radiology.
Business Insider reported that Omada Health confidentially filed its S-1 this summer and that Hinge Health has hired banks to prepare to file its S-1 confidentially.