United States

2018 Annual Health Care and Life Sciences Industry Spotlight



An ongoing evolution within HC is the adoption of technology across various niche segments. Because software is more of a horizontal, leveling force than a true vertical, its permeation of key HC functions, especially within the electronic medical records (EMR) space, has been uneven and protracted. This isn't so much due to systemic flaws within adoption but rather the intrinsic nature of HC, which has multiple barriers—from regulatory to cost efficacy—when it comes to software’s entry. Consequently, HC technology systems haven't seen as much M&A as one would expect, but steady progress has been made in not only innovating EMR but also in usage of automated programs to improve patient care. Examples include virtual personal assistants to aid care providers in day-to-day tasks or in-person patient interactions for low-intensity screenings and monitoring. As noted in the most recent edition of RSM’s The Real Economy, more opportunities lie within leveraging data analysis via deep learning models to facilitate development of new drugs, among other use cases. Investment within this arena has been largely internal on the part of corporations or has been early-stage as startups seek to become providers of data pools and analytical tool packs for care providers to leverage and for pharmaceutical giants to reduce the cost of drug development. Such efforts are gaining steam as practitioners look to implement these tools within existing frameworks to avoid overreliance on unproven systems (i.e. employ automated screening of key medical research and simpler markers of disease to funnel more actionable data to doctors for final decisionmaking). Currently, that seems to be the optimal form of experimentation and refining going forward—careful development alongside existing practices to avoid overstepping regulatory bounds and continual refining of tools until fully proven. Dealmakers and investors alike are keeping abreast of developments and ensuring corporate development and portfolios are aligned.

Big picture

As 2018 wound to a close, the sheer longevity of the health care (HC) mergers and acquisitions (M&A) cycle was only reinforced by year-end tallies. The final quarter of 2018 saw $118 billion in total deal value across Europe and North America—a figure exceeding the prior six quarters and higher than all but a handful of other quarters this past decade. Such persistence largely owes its existence to the slow reshaping of the HC sector across the world, particularly in developed nations. Systemic factors such as demographic changes, rising costs, increased technology adoption, and regulatory changes all have combined to encourage both vertical and horizontal integration across multiple service and product lines. For example, as noted in the December 2018 edition of RSM’s The Real Economy, Medicaid expansion alone across the US can play a factor in the insured population, which offers a positive lift in demand for HC providers in key niches such as behavioral HC.

“We see no significant change this year as opposed to prior years,” says Ron Ellis, senior director with transaction advisory services at RSM US LLP (RSM). “There’s a similar sense of optimism around consolidation and rollups sponsored by private equity (PE) players. High multiples will still be a factor for all to consider, and consequently some sectors still have more favorable dealmaking considerations than others heading into 2019.”

Looking ahead

No cycle can last at a robust level forever, even if the longevity of the HC M&A cycle would seem to bely that particular assertion. Despite the longstanding and still-potent factors of demographics, technology usage, and more, it is clear that in the short to medium term, more immediately pertinent factors could affect dealmaking. High transaction multiples will dissuade some deals from occurring, for one, while regulators may continue to encourage vertical integration as opposed to horizontal, thereby encouraging cross-sector buys rather than same-sector consolidation. Financial sponsors are still eager to gain exposure to HC investing by all accounts, but their interest is longer term and could be drawn out over a longer cycle than, say, the entirety of 2019. Moreover, the types of strategies employed will feed into the M&A cycle at future points, as Andy Jenkins, partner with transaction advisory services at RSM, points out. “The overall impact our clients will eventually make is in the aggregation and professionalization of specialty services in order to make them more integrable down the line,” says Jenkins. “Large systems are always looking to acquire specialties to integrate vertically, just at varying rates. As a result, PE groups are looking to capitalize on backing the specialty groups that would be attractive to some of these larger entities.” All that said, such integration and building takes time, which aligns with the minute if steady diminishing in M&A volume over the past several quarters.


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