After three years of strong growth in healthcare technology funding, investor interest in the space has not abated.
Corporate, private equity and investment banking executives are eyeing more investments in health IT in 2020, according to a survey from KPMG.
KPMG, which is an audit, tax, and advisory services firm, surveyed 330 corporate, private equity and investment banking executives who follow the healthcare and life sciences sector about their expectations for growth, deal activity and valuations in the sector.
Targeted sectors
When asked which healthcare and life sciences sectors they are targeting for investment in 2020, 30% of investors said health IT and revenue cycle management. That topped pharmaceutical and biotech products and services at 24%.
Behavioral health and home/hospice care also drew considerable interest (both 23%), according to the investors surveyed. Hospitals and health systems drew interest from only 8% of those surveyed, lagging medical devices (20%) and managed care companies at 15%.
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Deal activity
Healthcare and life sciences deal activity was robust in 2019, up 40% in November 2019 as compared to the same period in 2018, according to KPMG.
Big healthcare M&A deals last year included Beth Israel Deaconess Medical Center and Lahey Health, CVS Health and Aetna's $69 billion deal—which a judge officially OK'd in September—and Centene's $17 billion deal to merge with WellCare Health Plans.
Major M&A transactions in health IT in 2019 included Dassault Systemes’ acquisition of Medidata for $5.8 billion; EQT VIII Fund (EQT) and Canada Pension Plan Investment Board (CPPIB), which acquired a majority stake in Waystar for $2.7 billion; Google’s acquisition of Fitbit for $2.1 billion; and Golden Gate Capital’s acquisition of Ensemble Health Partners (51% stake) for $1.2 billion.
Deal volume
Healthcare and life sciences investment professionals believe deal volume will grow in most sectors in 2020 compared with 2019.
Analysts at Kaufman Hall noted earlier this year that industry players are increasingly eschewing traditional M&A for alternative partnership deals and strategies.
Investors are betting on more big-ticket deals and are optimistic about the health IT sector in particular, with 70% expecting an increase in investment activity in 2020. A quarter of respondents expect health IT investment activity to increase by more than 10% compared to 2019, according to the survey.
Investors also anticipate increased deal activity in 2020 in behavioral health companies, pharma and biotech products and medical devices.
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"We saw a high amount of deal activity in 2019 despite some concerns of a bubble, and that is likely to carry over to 2020," Carole Streicher, deal advisory leader for KPMG's Healthcare and Life Sciences practice, said.
Less than a quarter (23%) of life sciences investors characterize the sector as in a "bubble," a drop from 48% a year ago, according to the 2020 and 2019 KPMG surveys. And half of healthcare investors viewed the sector as in a bubble in 2019, and that fell to 39% for 2020.
Political environment
Investors see better fundamentals for investing in the sector in 2020. And respondents expressed the belief that, if a bubble is on the horizon, it won’t occur for more than 12 months, the survey found.
But the coming elections threaten to disrupt market activity.
Nearly half of investors surveyed anticipate that the 2020 election could have a potentially negative impact on investment activity in healthcare (48%) and life sciences (47%), according to the survey.
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Only 19% of investors surveyed expect the election leading to increased investment in healthcare, and 13% of investors surveyed said the same for life sciences.
"The election-year political climate has given some cause for concern, but other fundamentals are very positive for deals and investment, particularly around the need to cut costs and invest in innovation," Streicher said.
Healthcare is an important campaign issue, noted Larry Kocot, national leader of KPMG's Center for Healthcare Regulatory Insight.
"Increasing access to healthcare and lowering prescription drug costs will be among the highest priorities for voters in districts across the country," Kocot said.
U.S. healthcare spending continues to accelerate, with national health spending projected to grow at an average rate of 5.5% per year to reach nearly $6 trillion by 2027, according to the Centers for Medicare & Medicaid Services. This represents both an opportunity and a risk for healthcare investors, Kocot said.
Despite the election-year political climate, there are several market forces driving merger and acquisition deals in healthcare and life sciences. The majority of investors (58%) believe cost consolidation and economies of scale drive most M&A deals, followed by accretive acquisition strategies (34%) and changing payment models (31%)