United States

Q3 2019 Health Care and Life Sciences Industry Spotlight

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"As companies and consumers push for hyper-personalized medicine and tailored therapies, we expect that larger businesses are going to seek innovation via acquisition."

Adam Lohr, Partner, Life Sciences Senior Analyst, RSM


Spotlight

Specialization is increasing in many areas across health care. Consumerization of services—primarily referring to more convenient and transparent presentation of services to patients (e.g., telemedicine) as well as growing individualization—has been a buzzword and arena of investment for years. In tandem, as immunotherapies have proven promising in actual deployment across cancer-focused clinical trials, more specialized treatments are growing popular for other disease and disorder categories. Given the nature of immunotherapies, their increasing popularity is also intersecting with the burgeoning field of research into developing patient-specific therapies of all kinds, with the plummeting costs of genomic analysis and increased use of data analytics aiding the process. Adam Lohr, partner and life sciences senior analyst at RSM, notes a recent announcement of a personalized treatment that was created in eight months for a patient in Boston suffering from Batten disease, a neurological disorder that has so far proven somewhat efficacious.

While many advances are still ongoing in the clinical stage, the overall theme of hyper-personalization—down to the level of the patient’s specific affliction—continues to characterize developments across health care, from services to biotechnology. The cost of personalized treatments and insurance companies’ ability to adapt policies and pathways toward greater adoption remain key hurdles, especially given that hyper-personalization at the individual patient level does not align with classic clinical treatments. Classic clinical treatments are predicated on the existence of a large group afflicted with a specific ailment, which allows for the largest benefit to the population and an opportunity for the drug developer to achieve a desired return on investment. In short, many questions remain. “We’re moving to a model where a treatment will quickly be developed that may only treat one person; gaining the scale to do that effectively with proper reimbursement would be a fundamental shift in health care finance,” says Wolf. However, it is likely that private investors will continue fueling biotechnology companies pursuing such therapies as well as related areas (e.g., data analytics solutions providers).

Big picture

As 2019 comes to a close, many of the drivers that propelled a robust mergers and acquisitions (M&A) cycle in the health care industry remain intact. Aging populations, the evolving regulatory environment, expiring intellectual property, technical advances across both hardware and software, consumerism, digital health and many other factors are still in play, and the environment has become more complex throughout 2019. “Historically, health care providers have been viewed as insulated from general economic cycles,” says Matt Wolf, director and senior health care analyst at RSM US LLP (RSM). “However, Americans are now paying much more out of pocket for their health care. Even as positive drivers for demand, such as aging demographics, are ongoing, any indirect impacts from the trade war or a recession on consumer incomes could have a negative effect on patients’ ability to pay for care even if demand for services stays relatively constant.”

Another complicating factor—largely positive—is the uptick in investment by both private equity (PE) funds that are relatively new to health care investment, and venture firms targeting nascent enterprises, particularly in the biotechnology space. PE is helping drive significant consolidation across regional markets and various service provider niches (e.g., dermatology clinics in the southwestern United States or dental centers nationwide) at the lower end of middle markets. Venture is helping bring to market an ever-proliferating array of software and hardware that results in more efficient care delivery, therapy discovery and implementation. However, that innovation will likely contribute to potential M&A or consolidation in the future as larger companies look to derive growth and innovation from buying more innovative startups and synergies from absorbing competitors.

Looking ahead

As PE fund managers compete to build out platforms of service providers across regions, the pipeline for M&A will continue to grow as they consolidate holdings over time into larger businesses to sell to hospital and clinic conglomerates. A key factor here is the amount of dry powder that the US PE industry has at hand—close to $700 billion across multiple fund vintages, many of them relatively young—to keep devoting to more novel strategies in an attempt to combat a pricy, competitive marketplace. “It will be interesting to see what happens next year as more limited partners commit to health care-focused funds and what that’ll entail for overall PE activity across the space,” says Wolf.

At the same time, venture firms’ portfolios will be ripe for the picking as pharmaceutical giants seek to replenish their intellectual property assets. Lohr states: “Large pharma and biotech companies are facing economic headwinds due to patent expirations and the growth of generics and biosimilars, which reduce pipelines and increase competition; this near-term to midterm risk will continue to compel them to expand and diversify their portfolios.” All in all, until a recession actualizes, or the trade war worsens, additional positive drivers of health care M&A look set to keep spurring the cycle forward at a healthy level. “Overall, we’re anticipating a bump at the end of the year,” says Ron Ellis, senior director in transaction advisory services at RSM. “Some of the largest deals (for example, AbbVie’s $63 billion merger with Allergan) have yet to close, so there is still potential for aggregate figures to be skewed.”

 

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