Global M&A Trends in Health Industries

Pharmaceuticals and life sciences (PLS) and healthcare services (HCS) M&A remained resilient in 2023, with innovative companies that can drive value attracting substantial investor interest. We expect dealmaking to accelerate off this baseline in 2024, as has already been observed with a pickup in M&A activity toward the end of 2023 and in the first few weeks of 2024. Although headwinds such as elevated interest rates and regulatory scrutiny remain, investors and lenders are becoming more comfortable navigating this environment. In the more attractive parts of health industries, dealmakers, while remaining selective, appear eager to pursue high-quality assets which may in turn unleash some pent-up M&A demand.

Large-cap pharma companies are expected to continue pursuing midsize biotech companies to fill pipeline gaps in the face of impending patent cliffs. Investor interest in GLP-1 drugs, used to counter diabetes and enhance weight loss, and a continued focus on precision medicine are likely to fuel M&A activity in 2024. The divestiture of non-core assets also remains top of mind. Private equity (PE) firms are armed with significant dry powder which can be used to acquire or partner with healthcare assets. In addition, several funds are holding investments in their portfolios which are approaching the end of their targeted hold periods, which may result in more assets coming to market in 2024.

Although there is cautious optimism that the IPO market will gradually reopen in 2024, likely skewing toward companies with strong clinical data, continued market uncertainty and upcoming elections in several countries may reduce the available window for an exit and force some companies to wait until 2025. As such, M&A and divestitures will likely remain the prevailing exit strategy and capital-raising mechanism for biopharma in 2024. With higher interest rates potentially persisting, corporations are reviewing their portfolios for divestiture candidates that can’t clear their required hurdle rates to be value-add for shareholders. And while many megadeals are on pause, we expect to see more collaborations and joint ventures, including partnerships with nonprofits, to get important deals done.

• GLP-1s are medications that treat type-2 diabetes by lowering blood sugar levels and promoting weight loss. These drugs have displaced COVID-19 mRNA vaccine capabilities as the superstar of the pharmaceutical industry. Investors and analysts believe the market potential of these drugs is significant, with analyst forecasts varying but several estimating potential sales of US$100bn or higher. The anticipated large and sustainable demand for these drugs across the population has resulted in both revenue increases and stock price gains for companies such as Novo Nordisk and Eli Lilly, which already have GLP-1s on the market.
• Companies across the value chain are expected to compete to position themselves in this fast-growing market, with a premium to be paid for innovation. GLP-1s are most often injectable medications; hence, those biotech companies which can demonstrate delivery of these drugs via an oral method of action are likely to be highly sought-after M&A targets in 2024. We have already seen examples of large-cap pharma companies investing in the development of oral GLP-1s, as illustrated by Roche’s proposed acquisition of Carmot Therapeutics and AstraZeneca’s exclusive license agreement with Eccogene.
• The efficacy and projected widespread demand for GLP-1s has also prompted investor concerns around reduced demand for products and services focused on treating diabetes, sleep apnea, cardiovascular disease and other conditions. Medical technology (medtech) companies with exposure to GLP-1s and their tangential impacts have seen their stock prices negatively impacted in recent months. This creates potential for M&A as medtech companies disrupted by these new drugs seek to reposition themselves.

• Role of the regulator: While the regulators will continue to play a role in relation to the appetite to undertake larger transactions in the health services industry, they may not be as great a deterrent to M&A in 2024 as they were previously. In 2023, some dealmakers hesitated to undertake larger deals and instead turned their focus toward smaller deals which typically carried less regulatory scrutiny. Others moved forward with acquisition plans but were faced with regulatory challenges which required litigation and either prevented or delayed closing deals. However, recent high-profile losses for the Federal Trade Commission (FTC) in the US, such as Amgen’s US$27.8bn acquisition of Horizon Therapeutics, which completed in October 2023, may encourage dealmakers to pursue these mid- to larger-size deals with renewed interest. Regulators are also closely monitoring M&A activity within the healthcare services sector and are expected to take action in relation to any deals that may be perceived to disrupt access to—or increase the price of—patient care.

• Divesting non-core assets: With higher interest rates forcing companies to demonstrate higher returns for shareholders, we expect companies to continue to strategically evaluate and identify non-core and margin-dilutive assets for divestment. The proceeds from these divestments will then increase those companies’ dealmaking capacity as they seek to acquire assets that align with their strategic visions.

• Pressure on rates of return in the R&D pipeline: In addition to research and development (R&D) activity, pharma companies will seek to address gaps in their drug pipeline by directing capital toward midsize biotech companies—and with higher interest rates and required returns on investment, the onus will be on sellers to come armed with good data that supports their value. In the United States, the Inflation Reduction Act of 2022 reduces the overall return on R&D, with shortened exclusivity windows for drugs, and disproportionately affects small-molecule drugs. Companies will need to reevaluate and potentially rebalance their R&D pipelines and M&A targets accordingly.
• Continued rollup of fragmented sectors: Private clinics, specialist care providers, dental clinics, veterinary clinics, and services groups such as ophthalmology, IVF, and nursing homes and elderly care remain fragmented. We expect PE will continue to focus on these sectors. However, when evaluating these platform rollups, PE dealmakers will need to carefully evaluate the regulatory risks and political scrutiny over their ownership of healthcare providers. Staffing shortages and the end of governmental pandemic support in these aforementioned sectors, as well as among hospital providers, are creating operational and liquidity challenges that could lead to an increase in restructuring or distressed M&A.
• Digital capabilities to deliver cost-effective value-based care: Established companies are being forced to modernise their business models to stay viable in the face of rising labour and energy costs combined with funding challenges and shifts from payment models based on traditional fee-for-service to value-based-care. Those companies seeking opportunities to digitalise through implementation of analytics technology, digital direct-to-consumer therapeutics offerings, smart health devices and other software innovations will continue to acquire or partner with data and analytics and other technology companies that can deliver these digital solutions.
• Joint ventures and partnerships on the rise: We expect companies to increasingly explore the use of partnerships and joint ventures, as an alternative to outright acquisitions of large companies, to achieve their transformation goals. This has become an increasingly popular deal model in pharma—for example, Merck’s recently announced US$22bn collaboration with Daiichi Sankyo. The healthcare sector, too, has seen an increase in joint ventures, including between PE groups and hospitals and healthcare systems, as well as with nonprofits—for example, the recently announced US$10.5bn joint venture between Henry Ford Health and Ascension Michigan.

Global M&A volumes in health industries declined between 2022 and 2023 by 8% and deal values increased by 9% over the same period. The trends were very different between the pharma and life sciences sector and the healthcare services sector:

• Pharma and life sciences deal volumes grew by 2%, but values increased by 22% due to the number of announced megadeals—transactions with a value in excess of US$5bn—increasing from six to 11 between 2022 and 2023.
• Healthcare services deal volumes and values declined by 19% and 32%, respectively. The year saw just one megadeal, compared to three the previous year.

Health industries dealmakers can take steps now to develop a comprehensive M&A strategy, thinking several transactions ahead to drive growth and business transformation and to create value and sustained outcomes. Successful dealmakers will be those who proactively evaluate their existing portfolios, take decisive action in the pursuit of accretive targets and balance the regulatory and macroeconomic risks that persist in the current environment.

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