HEALTH CARE DEALS !FULL!
The volume of health-care deals in the second quarter of 2022 was lower than the robust activity of 2021 due to growing economic uncertainty, according to Epstein Becker Green attorneys and health industry financial and investment analysts at KPMG and FocalPoint Partners. They predict the remainder of the year could still outpace the overall trend from the past few years, notwithstanding several macroeconomic challenges.
HEALTH CARE DEALS
Health-care transactions have been relatively active throughout the first half of 2022, though not as active when compared to the banner year of 2021. Specifically, deal volume for the first half of 2022 (1,112) is down approximately 23% from this time last year (1,444).
Despite the headwinds, when compared to 2018 through 2020, total transactions over the first half of 2022 are up over 25% from 2020 (830), 47% from 2019 (586), and 52% from 2018 (530). Life sciences continues to lead the way as the most active subsector, followed by health-care IT, medical device, and physician services.
Although health-care IT and software has the second highest deal volume among subsectors through the first half of the year, volume is down from this time last year, which was extremely active due to accelerated changes in care delivery during the height of the pandemic. However, continued focus on telehealth after the pandemic, and growing patient interest in remote care options, could help to sustain longer-term interest in this sector.
Compared to 2021, medical device and supplies deals have experienced a drop in deal volume due to continued supply chain issues and growing economic pressures on health system purchasing. However, the potential continuation of Covid-19 and the rise of new illnesses such as Monkeypox, could drive activity higher in this sector as these issues increase the demand for diagnostics and medical supplies.
There were 20 physician practices and services deals in June, but this sector was down year-to-date when compared to 2021. This includes four dermatology practices, and several urgent care and primary deals. As described below, however, the second half of this year is expected to be very active with physician group transactions.
Despite the headwinds mentioned above, we remain optimistic about the second half of 2022 due to current deal activity and processes underway, as per health-care investment bankers and mergers and acquisitions attorneys who are active in this space. As a result, total 2022 health-care deal volume may not match the record-setting totals of 2021 but could still outpace the overall trend from the past few years, notwithstanding several macroeconomic challenges.
In addition to physician groups, the home care and hospice and behavioral health subsectors are expected to maintain steady transaction volume through the end of 2022. With respect to home health and hospice, as the elderly population continues to grow each month, patients desire to receive care at home: (i) to avoid nursing homes and other long-term care facilities which have had issues with the spread of Covid-19 and (ii) to receive care in a more desirable and cost-effective setting.
Moreover, we expect stable volume in behavioral health transactions, including deals related to substance abuse, other addiction disorders, and basic mental health care, as the demand for all of the foregoing is expanding due to many factors, including pandemic-induced burnout, isolation and depression.
Gary W. Herschman is a member of Epstein Becker Green in its Newark, N.J., office. Anjana D. Patel is a member of Epstein Becker Green in Newark. Timothy C. McHale is an associate at Epstein Becker Green in Newark. Hector M. Torres is managing director at FocalPoint Partners LLC in Chicago. Larry Kocot is a principal and national leader, Center for Healthcare Regulatory Insight at KPMG LLP in Washington, D.C. Carole Streicher is U.S. lead partner, deal advisory and strategy at KPMG LLP in Chicago
Megadeals, trading multiples, and overall deal values in the sector have not been immune to interest rate hikes and fears of an economic downturn. However, transaction volumes continue to increase due to enhanced attention on private equity (PE) platform add-ons during this challenging macroeconomic rate environment and continued sector resilience.
Health services deal volumes increased further from levels seen in 2021, but have softened thus far in Q4-22. Year-over-year deal volumes increased in each quarter through Q3-22, though some pullback has been seen in Q4 through November 15 (251 announced deals in Q4-22 through November 15 versus 307 in the same period in 2021). While deal volumes have continued to increase, deal values have declined from the peak set in 2021, a function of smaller value roll-up and platform add-on transactions representing a greater portion of activity in the current year.
Industry-wide enterprise value (EV) to EBITDA multiples have also declined from heightened levels seen at the end of 2021. As of November 15, the average multiple across health services sub-sectors was 14.4x, down from 15.9x as of December 31, 2021 and 14.9x as of December 31, 2020. Multiples dropped in four of the seven sub-sectors whose multiples we track, led by outsourcing (down from 19.2x to 15.0x) and managed care (down from 17.3 to 14.2).
For select sectors, M&A volume retreated when compared to the historic levels experienced in 2021; however, the health services sector continued an impressive display of volume level through the last 12 months (LTM) ending November 15.
PwC anticipates increased divestitures activity within health services for 2023 based on a variety of economic, regulatory and overall strategic repositioning. Given the variety of healthcare participants (e.g. for profit, not for profit and PE, etc.), each of the parties have varied processes for decision-making, but growth is the one goal they all share. As management teams assess growth, the power of strategically reviewing and aligning an organization's portfolio is critical to shareholder returns. Other key themes that can help create value through divestitures include: timely decision-making, actively embracing the process of divestitures and navigating inertial factors like entanglements.
Headwinds from the macroeconomic financing environment are causing companies to re-evaluate the capital allocation approach. The higher cost of capital is a challenge to larger, platform-sized deals, and is driving more club deals and non-controlling investments. Private equity sponsors in particular have re-adjusted capital towards their existing platforms via add-ons and an increased focus on organic value-enhancing initiatives. Some evidence of this approach is the 15% increase in transaction volume despite overall deal value declining nearly 40% since the prior year.
Lastly, health services has benefitted from a disproportionate share of capital, particularly from PE, over the last few years. As these portfolio companies run up against their traditional holding periods, there will be increased incentives for effectuating sales or significant recapitalizations that allow original sponsors to cash-out and demonstrate marked returns to limited partners.
The volume of health-care deals in the first quarter of 2022 was slightly lower than the robust activity that ended 2021 due to growing economic uncertainty, according to Epstein Becker Green attorneys and health industry financial and investment analysts at KPMG and FocalPoint Partners. They predict the next quarter may indicate whether inflation and recession fears are overstated.
After a hot start to the year on the heels of a booming end to 2021, the volume of announced and closed deals in the health-care and life science markets has notched a little lower in the first quarter of the 2022 (634), down around 10% from the same period in 2021 (723).
Third, the recent extension of the Covid-19 public health emergency declaration and an uptick in Covid-19 case rates, driven by the rapid spread of the BA.2 and BA.2.12.1 variants, suggest that the pandemic may not be ending as quickly as some investors and the American public may have hoped.
Despite the minor slowdown in the overall health-care deal market this quarter, life science and pharmaceutical deal volume continues to be relatively strong, leading the industry with 39 announced/closed deals in March, the highest deal volume across the health-care industry in the first quarter (120) and roughly on par with deal volume in Q1 2021 (125 deals).
But, shifts in how care is being delivered in various non-inpatient settings could result in continued growth in overall investment interest in this subsector, as conventional wisdom reflects ongoing transition to virtual care for certain illnesses.
More clarity on telehealth policies and reimbursement, along with the continuing drive to health-care interoperability and the regulatory shift in emphasis from protection to sharing of health-care data, should attract sustained investor interest in digital health care solutions and tools, and other IT innovation over the longer term.
Deal volume for physician practices and services in the first quarter of 2022 (86) is down from Q1 2021 (113), but again, this could very likely be a pause after the crush of deal activity toward the end of 2021 as investors integrate the slew of newly acquired practices. Despite the downturn in deal volume, deal activity for this subsector is currently third highest in terms of the number of closed/announced deals year-to-date.
We are also seeing increased transaction activity in the orthopedic sector, and continued investor interest in the urology, eyecare and primary care sectors, and a newer trend of cardiology group deals.
Medical device and supplies had 20 announced/closed deals in March, and 81 deals through the first quarter of the year, down a little from 98 in Q1 of 2021, suggesting that the subsector may be experiencing the impacts of the broader downward trend in investment activity along with economic pressures on hospital purchasing and supply chain issues. 041b061a72