Q2 2019 Health Care and Life Sciences Industry Spotlight
Midway through 2019, aggregate mergers and acquisitions (M&A) value across North America and Europe has hit nearly $180 billion, comparing favorably to last year’s tally of $366 billion. However, volume has somewhat slowed. Two primary factors are likely having an impact on sluggish volume: first, a typical lag in aggregate private market data; and second, prolongation in the time taken to close deals across the market overall. Thus, volume is likely healthier than data sets currently indicate, aligning with what RSM industry professionals are seeing in their practice.
“This year has been very similar to last year,” says Ron Ellis, senior director with transaction advisory services. “Health care transactions can take longer to close, but still, we’re busier than ever.” Between private equity (PE) groups and strategic M&A acquirers, the factors influencing time taken to close can differ, but two common trends of policy and pricing unite both. Ongoing uncertainty around potential policy shifts that would decrease the size of the insured population, as well as additional regulatory burden endemic to the industry, have further complicated dealmaking and required extra due diligence. Moreover, as Ellis emphasized, valuations are as high as ever, in no small part due to the amount of capital buyers can still access as they come to market. “There are still too many dollars chasing too few deals,” Ellis stated. “That has helped draw many sellers to market, but it doesn’t make things easy for buyers.”
As noted above, the pace of completed M&A is likely to even out in H2. Greater macro shocks will be required to significantly derail dealmaking. With that said, given how high-priced the environment is, deals will likely take longer to close. Proper due diligence, especially given increasing concern around cybersecurity, will remain a necessary challenge for dealmakers on both the strategic and financial sides. The supply of companies and practices coming to market does not look set to slacken anytime soon.
“For health care deals in particular, there are additional regulatory concerns investors have to navigate: IT security, Medicaid and similar reviews, potentially coding, etc.,” says Ellis. “In short, health care may take longer, but we’re still seeing plenty of practice consolidations. The smaller niches that underwent the last five years without any significant consolidations are now finally seeing more activity (for example, orthopedics and pain management).” Given the proliferation of activity in smaller niches, it is also likely that PE firms will remain a significant contributor to overall M&A activity. As PE portfolio acquisitions continue apace and eventually feed into the prospective deal pipeline, strategics will have a steady stream of potential targets. Although the pace of closing deals will be sedate, the M&A cycle looks set to continue at a healthy level for the foreseeable future.
Datagraphic available for download.