United States

2019 Annual Health Care and Life Sciences Industry Spotlight

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"Dealmakers are looking for targets that can provide technology innovations or readily applicable tools to health practices." - Ron Ellis, Senior Director, Transaction Advisory Services, RSM

Spotlight

An issue deeply affecting how the health care industry will evolve is a shortage of labor. Not only is it encouraging increased investment into substitute technologies; it is also helping prompt further consolidation among companies as providers seek to optimize care delivery. In October 2019, the U.S. Department of Health and Human Services announced changes that would allow health care providers, who participated in value-based arrangements, to coordinate patient care with other providers. According to RSM’s summary of a Definitive Healthcare survey, a majority of respondents indicated that an increase in provider compensation and incentives would continue to drive growth in value-based care model adoption.

According to Lohr, “Technology is a huge component of how biotech and pharma companies are going to stay competitive in the future. Life sciences’ talent pools are being drained in two ways: first, backgrounds in life sciences alone are insufficient to obtain roles in the industry as data science has become a prized skill; and two, tech companies are also competing for those same candidates who possess data science knowledge and/or skills, even in combination with life sciences, given potential applicability.”

Thus, the key factor of labor shortages may continue to prompt even further consolidation and investment in technology moving forward, along with broader industrywide adoption of digital health tools, aided by the evolution of regulatory regimes worldwide.

Big picture

While the annual volume of mergers and acquisitions (M&A) in the health care industry slid in 2019, the total value of those deals remained well within the high range seen throughout the decade. Nearly 1,800 transactions closed across Europe and North America totaling $429.5 billion. It appears dealmakers are still willing to pay up for the right prospects.

“The health care market is still fragmented across multiple regions,” says Ron Ellis, senior director in transaction advisory services at RSM US LLP. “There are still plenty of opportunities for consolidation.” One of the other key drivers propelling M&A in this space at a healthy rate is the desire for exposure to or acquisition of relevant technologies. Ellis also notes that as the consumerization (referring to increased digitization of processes for consumers to improve convenience and transparency) of health care continues, hospital chains and other providers are looking to acquire or develop capabilities in realms such as telemedicine or patient facing, which are easy-to-use applications for virtual care. This and the drive for consolidation of physician practice specialties look set to continue, which should help spur significant levels of M&A going forward. Key indicators to consider, however, do remain; chief among them is a diminishing appetite for acquisitions as avid competition keeps transaction multiples high.

“It’s still a very strong environment for dealmaking,” says Adam Lohr, partner and life sciences senior analyst at RSM US LLP. “Our clients’ primary concerns remain on how they are going to access capital while the economy is still hot.”

Looking ahead

“Long term, health care is still viewed as a growth industry,” says Ellis. “However, from year to year, potential shifts in political environments or macroeconomic trends can encourage more buying or more selling. For example, given the uncertainty around 2020 elections, sellers may be incentivized to get deals done sooner rather than later.”

As we consider the future of this industry, it’s important to note the underlying and somewhat interconnected drivers of aging demographics and increasing health care costs. These factors look to be even more potent as the full force of baby boomers’ retirement materializes throughout the 2020s. But there are significant variables to consider beyond broad economic trends. “The biggest threat to pharma and biotech companies is a potential shift to benchmarking drug pricing against a truly global level of competition,” says Lohr. “That would have a huge impact on the entire American life sciences ecosystem. However, much of the uncertainty around drug pricing related to the 2020 elections, in particular, has been priced into the market. Overall, if the global and U.S. economies can continue to be reasonably stable, any market volatility is likely to be overcome.”


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