July 28, 2021

Biology Reporter

Complete News World

Health returns to investors' radar

Health returns to investors’ radar

W By 2020, the health sector will be at the center of the storm. Mergers and acquisitions started to pick up there already in the second half of the year, but much slower than stock markets might suggest.

(© Envato)

North America is the region most actively involved in mergers and acquisitions in the healthcare sector. Even before the pandemic, the health sector in the United States experienced a historic boom. It is expected to add 4 million jobs by 2026 — nearly a third of all employment growth over this period, according to the US Department of Labor’s projections.

Interestingly, the US health care system is slowly moving away from the traditional model of paying for individual medical services in favor of one that enhances treatment outcomes and value to the patient. The debate has erupted in earnest since health care reform, the so-called Obamacare, was enacted in 2010. Critics of the current system blame it for rising health care costs and accuse it of ineffectiveness. Patients are not taken for medical care until after they are sick, after which the more tests or treatment, the higher the income of the healthcare provider. Thus, there is no incentive to apply preventive care, which can significantly improve patients’ health and reduce health care costs. For example, many patients with diabetes or heart failure can avoid a costly acute hospital stay if their disease is controlled through preventive measures.

full lock Making patients postpone medical consultations and less urgent routine procedures. At the same time, hospital and outpatient maintenance costs not only decreased, but also increased due to the necessity of introducing a strict sanitary regime. As a result, healthcare providers and medical equipment manufacturers faced negative cash flows. As mass vaccination progresses, patients keep coming back, but that doesn’t mean stakeholders can breathe a sigh of relief. The pandemic has highlighted the need for a comprehensive portfolio strategy and review. The priority is recovering lost profits (revenue and profitability are expected to reach pre-pandemic levels by the end of 2022), disposal of unprofitable assets, and of course technology investment.

Digitization will help protect health

The latter is now the leitmotif of every business plan in every field. It is no different in the case of M&A activity in the health field. With the forced reduction in the number of elective patients, healthcare systems have had to start providing counseling through ICTs almost overnight. However, this is only the first step towards further digitization. This is confirmed by the results of a survey conducted by EY Consulting among medical entity management personnel as part of the EY Global Capital Confidence Barometer report.

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There is no shortage of capital in the market: on the one hand, there are companies that seek leadership within their business models, and on the other – funds private equity (PE) and SPAC – clearly focused on investing in growth. Asset consolidation will continue in the healthcare provider sector. Those who are badly damaged will become targets for acquisition; Those who are in a slightly better position will look for assets capable of meeting their short and medium term financial needs; Those lucky enough to come out of the pandemic naturally unscathed will look for shopping opportunities while empowering the digital assets needed for long-term transformation.

Asset consolidation will continue in the healthcare provider sector. Those who are severely damaged will become targets for acquisition.

However, the most interesting changes are in the pharmaceutical and biotech sector, where corporate takeovers remain dominant despite competition from the European Parliament.

First, there will be an overhaul of supply chains: at the start of the pandemic, concerns arose about relying on a single country, such as China or India, to produce low-margin consumables such as disposable gloves and masks, as well as active ingredients for pharmaceuticals. This dependence will lead to a dispersal of production, albeit rather within the borders of Southeast Asia. The downward pressure on drug prices is also expected to lead to consolidation between drug and active ingredient manufacturers.

Second – without surprise – the trend towards enhancing technological resources and efficiencies will continue: from digital analytics, through smart medical devices that monitor specific life parameters of chronically ill patients and send records to connected electronic panels in the doctor’s office, to patient service management software and medical documentation (according to For statistics, doctors spend at least 20% of their time on the so-called paperwork).

Third, companies will seek synergies through transactions across sectors, which often involve technology assets. This trend has been visible for a long time, for example, the Swiss pharmaceutical company Roche bought the oncology software product Flatiron Health in 2018.

Transactions private equity The higher the number, the lower the value

Over the past five years, private equity investment in healthcare has grown faster than the private equity market in general, increasing its advantage every year: from 7% in 2015 to 18% in 2019. This trend reversed in 2020. Although the number of transactions themselves rose by 21 percent. (Total EP decreased by 14%), but its total value decreased by 17%. Up to $66 billion (gross dividend up 7.5 percent, totaling $592 billion) – according to the “Global Healthcare Private Equity and M&A 2021” report by consultancy Bain & Company (the data represented Transactions on a global basis only holders of declared value, as in the private market, disclosure of amounts to the public is not considered a rule).

Over the past five years, private equity investment in healthcare has grown faster than the private equity market in general. This trend reversed in 2020.

The average transaction size also fell by more than half: from $686 million. It reaches $296 million in 2019 in 2020. On the one hand, there were many undervalued deals, particularly in the Asia Pacific region, and on the other hand, there were no staggering buyouts that previously dominated the equity sector health scene. own. By the way, 2019 was unique in this respect: 54 mega deals worth over $1 billion. All. In 2015-2018, similarly, the 10 largest purchases accounted for between 60 percent. and 75 percent of the value of all healthcare mergers and acquisitions.

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Active buyers turned out to be the winners in the 2008 global financial crisis. So despite the uncertainty in the current economic situation, fund managers private equity They are persistently looking for promising investments. However, it is becoming more and more difficult to catch them. On the one hand, competition from corporate investors intensifies, and on the other hand, private equity managers complain about a small group of companies in the price range (especially around $100 million) that have sufficiently mature technologies or products to sustain dynamic growth or are strategically aligned with their activities. . This explains why they attack the shelves of higher prices more boldly, and when they lack capital, they enter into alliances with each other. joint project.

Corporate deals in depth

The value of capital transactions in healthcare by corporate investors more than doubled as in the case of private equity: -37 percent to $338.6 billion (in the polyethylene sector: -17% to $66 billion). However, one should take into account the fact that the previous year was a record-breaker.

The share of mega-mergers, understood as deals in excess of US$20 billion, fell dramatically by three quarters. The two largest companies: AstraZeneca – Alexion Pharmaceuticals ($40.1 billion) and Gilead – Immunomedics ($20.9 billion) were much smaller than 2019: BMS – Celgene ($74 billion) and Abbvie – Allergan ($63 billion).

On the other hand, most transactions – 58 percent – were less than $5 billion, whose traditional target was EP. This confirms the hypothesis that competition between corporate and private equity investors has increased. However, while EP relies on consolidation or expansion to increase competitiveness, investors from companies with high levels of capitalization are more likely to choose a vertical integration strategy. Acquisitions dominated biopharmaceutical assets, with a strong R&D component. Although its value decreased by 43 percent. Compared to 2019, they still account for 67 percent. The total volume of mergers and acquisitions of companies in the healthcare sector.

Catastrophic Health Expenditures: From Antiquity to Today

As you know, the capital markets have been buzzing with capital, including debt capital, as evidenced by the rise in net debt to EBITDA (company operating earnings before interest, tax, and amortization) in both the US and Europe.

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So what has affected the decline in transaction value in healthcare, which is one of the preferred capital investments among private equity funds and corporations alike?

PE chews on companies, and SPACs chew PE

First of all, the aforementioned decrease in the volume of massive mergers, resulting from the precautionary attitude: uncertainty regarding the development of the situation in the markets means that, despite the excess of capital, potential buyers preferred to refrain from large purchases, while sellers, both investment funds Private and companies, they hope that after the pandemic they will get a better assessment. Companies sensed the competition’s breath from the PE throne on their backs, entering the higher price ranges they were previously assigned to. On the other hand, the value of the private equity market (not only in relation to healthcare, but in general) has been negatively affected by the desire to exit investments through IPOs (preferably through famous SPACs), i.e. the publication of companies that have been traded in the years The former after the private market was among EP’s portfolio of assets in the health field.

In developed countries and in many developing countries, the conditions for health market development look like a dream: an aging population and the spread of chronic diseases go hand in hand with an increase in population income, a flood of therapeutic innovations inspired by technological innovations, and- to be – Cost reduction thanks to the automation of repetitive activities. This is reflected in the fact that healthcare represents an increasing share of GDP and generates increased returns for investors. Before the pandemic, widely understood “health” was one of the beleaguered investment trends. The experience of previous recessions shows that wealth smiles at the “bold” who treat the crisis as an opportunity to strengthen their position in the market or change. the current situation. Therefore, the return of M&A investments to pre-pandemic levels is a matter of relatively short time.

(© Envato)