New York – March 16, 2021 – The Covid-19 pandemic rocked global healthcare systems and communities to their core in 2020. Healthcare investors realized a Covid-19 paradox, facing urgent, widespread need for innovation and more equitable access to healthcare services as well as sharp repercussions for demand. Nonetheless, healthcare private equity showed remarkable resilience last year. In contrast to the overall private equity market, healthcare private equity deal volume rose to record levels, increasing by 21% to a total of 380 deals in 2020. Ample dry powder, along with capital markets’ strong appetite for exits, created fertile conditions for investment. These are the findings from Bain & Company’s tenth Global Healthcare Private Equity and M&A Report, released today.

Despite Covid-19’s damage to patient volumes and provider margins, healthcare provider and biopharma sectors were the most active in 2020, with nearly 150 deals each. Pressures on healthcare providers and the shift toward alternative sites of care also drove growth and activity in healthcare IT.

2020’s uptick in deal volume, however, came with reduced total and average deal values, especially in the absence of blockbuster transactions on the order of the 2019 $10.1 billion Nestlé Skin Health deal. The average size of deals with disclosed values dropped 57% in 2020 while total disclosed deal value declined for the first time since 2015, falling 17% to $66 billion.

“The concentrated impacts of the Covid-19 pandemic on the healthcare industry made last year’s economic shock unlike anything the sector has felt in recent years,” said Kara Murphy, who co-leads Bain & Company’s Healthcare Private Equity practice. “While previous recessions saw  healthcare deals become a beacon of quality and stability, the picture in 2020 was more nuanced. We saw a rise in activity around Covid-19 treatment and prevention juxtaposed with a litany of disruptions, including volume losses, treatment deferrals and supply chain constraints.”

The industry’s upheaval in 2020 inserted substantial uncertainty for buyers and sellers of assets, reducing deal appetite, especially for the largest deals that have been a hallmark of prior years. For example, between 2015 and 2018 the top 10 healthcare buyouts represented roughly 60% to 75% of disclosed value for all healthcare deals. In 2020, however, the top 10 deals represented just 43% of total value, the largest being DXC Technology at $5 billion. Among deals with disclosed values, the average size of a check fell to $296 million in 2020 from $686 million the year earlier as large volumes of lower-value deals jumped in 2020, especially in the Asia-Pacific region.

Covid-19 was not the only relevant factor dampening disclosed value. A number of large assets traded without disclosing value. Also, some of the largest assets wound up transacting to special purpose acquisition companies (SPACs).

At the same time, even amid a turbulent macro environment, many investors were able to secure rapid financing, allowing them to shore up tightened balance sheets of their existing investments, as well as move quickly on investing in new assets. In the US and Europe, debt-to-EBITDA multiples remained high, a sign of good access to credit for investors.

“Healthcare private equity saw robust activity in 2020, and we believe competition will continue to intensify for attractive assets that come to market in high-interest segments,” said Nirad Jain, co-head of Bain & Company’s global Healthcare Private Equity and Corporate M&A practices. “Investors will need to diversify their search and forge strong relationships across the industry in order to position themselves to access high-value, accretive opportunities.”

Asia-Pacific’s surge

For the first time, the Asia-Pacific region logged more deals than North America and Europe, due to increases in biopharma and healthcare provider deals in the region. Deal value was heavily concentrated in the second and third quarters of the year, possibly due to the earlier and shorter effects of the pandemic in key Asian countries. Investment trends varied widely by country and sector; for instance, the healthcare provider sector showed substantial in-hospital activity in China, but more alternate site deals in Japan.

Declines in North America and Europe

North American and European deal volume and value fell in 2020. North America continued to concentrate most of its activity in the provider sector, especially provider services, followed by biopharma. Europe’s sector mix appeared similar to North America, and both saw increased activity in alternate care sites and retail health providers.

SPACs in vogue

Low interest rates, easy access to financing, concerns about the effectiveness of a traditional IPO pricing mechanism in the midst of Covid, and strong performance by public equities all raised the appeal of SPACs in 2020.

As a proven investment sector, healthcare attracted its share of newly formed SPACs and a few fast-moving groups were able to complete deals last year. Notable examples include Multiplan, a healthcare services and technology solutions provider, which merged with Churchill Capital III in a deal valued at $9.7 billion; Cano Health, a value-based care provider for seniors, which merged with Jaws Acquisition Corporation in a deal valued at $3 billion; and Cerevel Therapeutics, a biotech firm spun out of Pfizer’s neuroscience division, which merged with Arya Sciences Acquisition Corporation II.

Private equity investors increasingly view the SPAC as an attractive exit channel, and the next year or two will serve as a “make or break” time for SPACs, which typically are allowed two years to deploy their capital.

M&A contractions

M&A contracted more than private equity as many corporates retrenched during the economic downturn. Corporate M&A fell to $339 billion from $541 billion in 2019, with deal count falling to 2,845 from 3,137. Still, M&A finished the year over five times larger in value than buyout activity, with many corporate entities acquiring attractive assets.

Seizing the moment: opportunities to watch in 2021

As with most crises, the turbulence caused by the pandemic creates potential opportunities for companies or investors that prepare for and are capable of seizing the moment.

• Alternative sites of care: Shifting patient reliance away from higher-acuity sites of care has created openings for providers to capture some of the patient flow to alternative sites or services, especially in the realms of post-acute and home healthcare. Bain expects to see better coordination and care management in these alternate sites. Home healthcare had become a more important channel even before the pandemic as patients became less reliant on visiting higher-acuity sites and enjoyed favorable reimbursement changes, especially in the US.
• Telemedicine: As consumers deferred visits to healthcare centers during the pandemic, basic diagnostics became quite difficult, complicating efforts to promote good patient outcomes. Many consumers began taking telemedicine seriously as a suitable replacement. Telehealth has the potential for growth, but the pandemic has also provided lessons on ways to drive adoption. Existing models that offer patients the opportunity to visit any physician were much less popular with patients than those that enable virtual visits with a doctor they already know. Regulatory groups and healthcare payers have further supported this shift, by adding virtual services to reimbursement lists, and by increasing the rate at which these services are reimbursed.
• Modernization of clinical trials: Covid-19 exposed weaknesses in the traditional clinical trial approach that historically relies on in-person visits to collect patient data. This dependence slowed or halted development of many pipeline assets early in the pandemic. Clinical trial efficiency solutions, such as e-consent in clinical operations; decentralization of trials, including remote patient diagnostics and monitoring; and the use of real-world data, such as synthetic control arms, all represent the development of a trial model less reliant on physical interactions. Most notably, researchers collaborated in unprecedented ways to accelerate vaccine development last year. Development success may adopt more consortium-oriented research and trial models for sharing data as part of innovative life-saving medications.
• Increased healthcare provider consolidation: In recent years, larger provider platforms have been busy consolidating small providers, to gain the efficiency benefits of scale. Independent physicians and smaller physician groups were particularly vulnerable to the business effects of the pandemic. More of these individuals and smaller groups may choose to mitigate their risks by joining a broader platform this year. Larger platforms are inherently better positioned to survive, due to their scale, better economics, and reduced exposure to any individual payer or geography. To continue to reap value from their position, large-scale groups will need to harness the power of technology, ancillary services and more outpatient-focused models.

Looking ahead to 2025

Healthcare companies continue to see underlying trends that strengthen the case for a relatively rapid return to past levels of demand. Bain expects that an aging population, rising income levels and healthcare access, innovation in treatment and technology, and likely moderate pricing growth will combine to increase healthcare profit pools by roughly 5% annually in the next five years.

Legislative and regulatory risks could certainly cloud the picture, especially in the wake of the pandemic and the significant changes that will likely result in health systems, infrastructure, and historic pricing tailwinds. Nevertheless, Bain does not anticipate a comprehensive overhaul of most countries’ current healthcare systems. Instead, it expects to see a mix of continued pricing growth, increased demand, and the creation of new market niches to explore.

Editor's Note: For more information or to arrange an interview, please contact Katie Ware at katie.ware@bain.com or +1 646 562 8107.

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