PwC: Deals among providers, payers slowed in first half of 2020 due to COVID-19

Mergers and acquisitions deals consolidation
Mergers and acquisitions fell by 21% in the health services sector in the first half of the year due to COVID-19, a new report from PwC found. (Getty/Kritchanut)

The number of deals among payer and provider industries in the first half of the year declined by 21% compared with the same period in 2019 as healthcare continues to grapple with the COVID-19 pandemic.

The report on deal activity, released Friday by PwC  (also known as PricewaterhouseCoopers), found that while deal activity overall slowed, some sectors such as labs and long-term care grew. The pandemic could also change the types of deals that health services companies find more attractive.

“The pandemic has accelerated the shift to virtual health, home health, and remote work, making targets that enable these functions more attractive,” the report said. “Behavioral health is also seeing COVID-related demand, and Medicaid enrollment has increased, so capabilities in these areas could become more valuable.”

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PwC found that not only is deal volume down, but so is the value. The total deal value in the first half of 2020 was $22.4 billion, down 52% compared to the first half of 2019.

The report noted, however, that only about a third of all health service deals tend to get disclosed.

There were some bright spots though across the industry.

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Labs, MRI and dialysis centers had the most valuable deals in the first six months of 2020, generating $12.5 billion in value on the back of 28 transactions. The sector saw the biggest deal as Thermo Fisher Scientific acquiring the testing supplier Qiagen for $11.5 billion.

The long-term care industry also had 158 deals valued at $4.2 billion, the report said.

One of the biggest deals was in the managed care sector where Molina Healthcare acquired the managed care company Magellan Complete Care for $820 million.

There is also robust investments from private equity firms; for example, the firm TPG Capital invested $1.2 billion in the online behavioral health company LifeStance Health. The continued investments could suggest 2020 “will see additional large deals among those with capital to spend,” PwC said.

Of the deals that were made in the first half, 32.7% were in the long-term care sector and only 8.1% were among hospitals, which have been hit hard financially by the COVID-19 pandemic and the cancellation of elective procedures.

PwC identified three clear factors that could affect deals in the short term: a company’s liquidity position, short and long-term needs that the pandemic has created and preexisting market dynamics.

“in each case, deals can be a resilience strategy: a way to add strategic assets or relationships that preserve growth, profitability or operational excellence; and/or a way to free up needed capital by shedding non-core assets,” the report said.

Hospitals or physician medical groups could become attractive acquisition targets as the pandemic has caused the postponement of elective procedures and physician office visits, causing liquidity problems for certain providers.

The pandemic could also create a new focus on social determinants of health but there could also be unexpected changes for businesses.

For instance, “current real estate footprints may be rethought due [to] growth in remote care and work,” the report said.

PwC estimates that deal volumes could be uneven for the remainder of the year.

“In pre-deal diligence, buyers may need to disentangle targets’ short-term challenges from their longer-term strategic potential,” the report said.

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