Q1 2019 Health Care and Life Sciences Industry Spotlight
With one quarter in, it’s easier to assess the evolution of the health care mergers & acquisitions (M&A) cycle. Interestingly, across both Europe and North America, the volume of M&A was down by a considerable portion, more so than any private markets data lag could explain. Mega- deals still boosted aggregate deal value, yet regardless the M&A cycle definitely took a breather at least to kick off 2019.
“The fundamentals for deals remain in place,” says Andy Jenkins, partner with transaction advisory services at RSM. “The biggest complaint we hear is that multiples are still quite high – there are too many buyers for the number of existing assets.”
That could help explain, in part, the reduction in volume, as could the sheer longevity of elevated volume since 2015’s start. Any single quarter’s downturn after a period of exuberant dealmaking could be ascribed to a pause on the part of buyers as they focus on internal integrations post-close. Even if buyers are cash or capital-rich, it’s difficult for financial sponsors to justify elevated multiples consistently, and strategics can take some time to consolidate and integrate. Furthermore, as volume is mostly concentrated within health care services still, it is likely that key niches will see cyclical declines as both financial and strategic buyers look to the next set of prime targets. Consequently, the downturn to kick off 2019 is likely not foreshadowing so much as temporal.
This state of sluggish M&A persisting for an entire quarter is unlikely to persist. The health care ecosystem only continues to grow within the U.S. in particular, as multiple companies across various segments look to streamline operations and cut costs in general, even as the number of job openings continues to outstrip the supply of workers. Demographics provide an even stronger if slow-paced tailwind. All in all, one down quarter in an environment characterized by positive drivers suggests more a temporary state marked by unfavorable dealmaking conditions and timing than anything else.
“The fundamentals for health care M&A are still very strong,” says Jenkins. “The industry is still extremely fragmented, there’s plenty of private equity (PE) dry powder, and the demand for health care services continues to increase.”
Ellis adds: “Specific sub-segments of health care will continue to support consolidation as some will be more popular than others depending on temporary fluctuations in the overall climate.”
What will help drive further consolidation in key arenas going forward are even greater shifts in regulations of either pharmaceuticals or insurance, both of which appear to be significantly popular issues of focus within the political sphere as US elections approach. Beyond the realm of policy, even greater penetration of digitization into not only the customer experience but also diagnostic tools and back-office procedures will prompt investment of all kinds, from the acquisitive to growth funding. Medical and biotechnology plus consumer-facing health care solutions look set to benefit in particular.
Datagraphic available for download.