Consolidation and a changing U.S. healthcare market continue to drive investment activity to record levels.
Healthcare transactions in 2020 started off at a fast pace, consistent with the uptick in activity throughout 2019, but could slow down over the summer due to the temporary impact of the coronavirus pandemic on the economy.
Transaction activity in 2021 may depend upon election outcomes and possible changes a new Congress or administration could bring.
This projected growth is largely driven by the increasing confluence of the following three key drivers:
- The ongoing national imperative of reducing the cost of healthcare, via disease prevention and detection, and cost-effective, quality treatment, including more efficient care in ambulatory and retail settings;
- Extraordinary advances in technologies which enhance disease prevention, detection and cost-effective treatment (e.g., artificial intelligence (AI)-driven diagnosis and treatment, virtual care, electronic medical record (EMR) systems, medical devices, gene therapy and precision medicine); and
- The aging baby-boomer population, with tens of millions of Americans entering their 70s, 80s and above. (According to the AARP, 10,000 baby boomers are turning 65 every single day, and this is expected to continue into the 2030s.)
What 2020 activity is telling us
The 336 healthcare industry transactions in January and February 2020 demonstrate a continuation of last year’s upward momentum. While it is not uncommon to see high deal volume in January, due to deferring taxes on gains until the following year, transaction volume this year was nearly double that of January 2019, indicating that industrywide healthcare transactions are likely to continue to exceed 2019 benchmarks. Healthcare IT and life sciences deals were most active, with a combined 70 transactions.
This high-volume activity is likely driven by an increased interest in wellness solutions, enhanced care coordination and high-quality, cost-effective treatments. Physician group deals are also highly active, as practices understand the value of being part of larger organizations possessing substantial infrastructure and capital, which allow the practices to compete and remain relevant in their regions and specialties. Long-term care, as well as home health and hospice, show no signs of slowing down as the number of individuals needing services along the long-term care continuum continues to grow.
How may the COVID-19 pandemic impact transaction activity?
The healthcare industry is largely recession-proof—in fact, the recent coronavirus pandemic has demonstrated the utmost necessity for healthcare services, such as: (i) life sciences companies developing tests, treatments and vaccines; (ii) medical device companies manufacturing high-end and critical medical equipment (e.g., ventilators) and supplies (e.g., masks, gloves and disinfectants); (iii) hospital and long-term care facilities with capacity for the sickest patients; and (iv) physicians and midlevel professionals who are the front lines of diagnosing and treating patients (not so different from the risks taken by marines in war zones).
Based on initial reactions from major investors in the healthcare space, a majority (but not all) transactions that are far longer in their processes likely will not be impacted by the economic slowdown due to the COVID-19 pandemic. However, the current economic conditions may delay investors’ focus on newer transactions in the early stage of their processes as well as their “pipelines,” which in turn, could cause a dip in transaction activity this summer/fall.
On a macroeconomic level, it is possible that interest rates, and the overall cost of corporate debt financing, will rise which in turn may have short-term effects on the valuation of target companies and the volume of transactions.
Nevertheless, the same factors described above could also result in greater perceived opportunity for investment in the healthcare industry, and result in greater activity. For instance, once the pandemic is behind us, it is likely that many stand-alone hospitals and small health systems (whether distressed or not) may finally decide to explore joining larger systems, and some other small to medium sized healthcare businesses (including physician practices) may also be looking to become part of larger organizations. Any such post-summer surge in activity could result in very robust deal activity from the fall through the end of the year.
1. Healthcare IT: Advances in analytics and science are key to aiding healthcare providers in the early detection and treatment of healthcare conditions and to safely deliver quality, lower-cost care. This includes, for example:
- Advanced, interoperable EMR systems;
- AI and data analytic technologies that improve diagnostics and early detection, such as use of AI-aided breast cancer detection;
- Virtual care (telemedicine) platforms that enhance access to care and treatment in the ever-increasing digital, personal device, and consumer-driven healthcare economy;
- Mobile apps and IT “connected” medical devices that enhance prevention and detection of illnesses, and can guide care for individuals managing chronic diseases; and e.g. Marlin Equity Partners’ acquisition of Blue Mesa Health Inc., a mobile-first diabetes prevention program technology platform; and
- Cybersecurity to protect our health information and technology-dependent healthcare delivery system.
2. Medical device and pharmaceutical: New scientific discoveries are being developed at a fast pace, all of which are geared to more effectively treat healthcare conditions with an eye towards lower costs (which are being accelerated by many of the IT advances described above), such as:
- Gene therapies, based on research of the human genome;
- Precision (personalized) medical treatments; and
- New biological drugs based on advanced, AI-driven clinical research and trials. Deal sizes in this sector are also some of the highest. Likely driven by access to capital, rapid innovation, and the need for new sources of revenue.
3. Physician services: Physicians are key “quarterbacks” in controlling healthcare costs, but they require the support of advanced EMR, data analytics, and a vast infrastructure, all of which require substantial capital and the management capabilities of larger organizations. This dynamic is drumming up demand for physicians and competitive offers. Physician practices and services accounted for 219 deals in 2019, substantially up from 2018. In fact, the top consolidators of physician groups include:
- Large national healthcare companies, both public and private (e.g., Optum, Mednax, etc.)
- Large hospital and healthcare systems; and
- Specialty platforms backed by private equity investors.
4. Hospitals and health systems: Hospital systems, both nonprofit and publicly owned, will get even bigger—both regionally and nationally—in order to increase their available capital and generate economies of scale in connection with their investments in new patient-friendly facilities with advanced ICU and acute care services in addition to capabilities to manage care efficiently. These capabilities include advanced EMR, data analytics, virtual care, urgent care locations, physicians, clinical integration, population health, social determinant initiatives, cutting-edge technologies and other strategic, scaled corporate infrastructure.
5. Long-term care services: Long-term care led all sectors during 2019 with nearly 300 transactions announced or closed, a 40% increase from the prior year, and we expect a similar (or slightly higher) growth rate of deals in this sector in 2020. With tens of millions of Americans entering into their 70s and 80s, there is increasing demand for all components along the continuum of long-term care services, with a particular focus on providing care at either the patient’s home (via home health agencies) or at the least costly care setting (e.g., adult day care versus assisted living versus skilled nursing facilities).
6. Behavioral health services: There has been increasing awareness of, and funding for, the treatment of the entire range of behavioral health services, including patients within the autism spectrum, with mental health illnesses (e.g., depression, anxiety, etc.), as well as substance use disorders (opioids, alcohol, etc.) and other addiction disorders.
Gary W. Herschman is a Member of the Firm in the Health Care and Life Sciences practice and Zachary S. Taylor is an Associate in the Health Care and Life Sciences practice in the Newark office of Epstein Becker Green.