At a Glance

• Healthcare M&A volume was up 16% in 2021, and value rose by 44% after last year’s steep decline. Across the five sectors, deal value totaled $440 billion in 2021, with multiples at an all-time high.
• More companies are underwriting the revenue synergies that are becoming increasingly critical to justify high valuations. They are pursuing more cross-border deals, buying new capabilities, and continuing to acquire both carve-outs and full companies.
• Activity varied by subsector, with pharma companies purchasing to boost top-line growth and add to their portfolios and medtech companies pursuing deals that give them category leadership.
• While deal volume dropped among payers, the deals that did occur added scale and platforms or diversified offerings—and in a growing trend, payers bought providers to better control members’ costs.

This article is part of Bain's 2022 M&A Report.

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Strategic healthcare M&A rebounded in 2021 from a down year in pandemic-ravaged 2020, with volume up 16% and total deal value rising by 44%, to $440 billion.

The year 2021 brought with it a return to pre-pandemic trends across all five sectors: pharmaceuticals, medtech, payers, providers, and healthcare services. What’s different this time, though, is that the cost of acquisitions has become dramatically more expensive in most areas, with deal multiples reaching the highest level in decades. The median healthcare deal fetched 20 times forward-looking enterprise value (EV)/EBITDA in 2021, a full five turns higher than in 2019, the last time that volumes were as high.

Paying for these inflated multiples requires companies to get more creative in their deal theses and focus on better execution to deliver on deal value. Here’s what the best acquirers are doing.

• Healthcare acquirers are increasingly thinking about revenue synergies in their deals. It’s a trend that is happening in other industries, too. Across all industries, the percentage of large deals (that is, deals greater than $1 billion in value) with announced synergies that included revenue synergies rose from 4% in 2016 to 16% in 2021.
• Successful healthcare companies are not shying away from looking outside their borders for growth.
• Many companies are continuing to opt for carve-out acquisitions (vs. full-asset acquisitions), which maintained their decades-long average of 30% to 40% of total transaction volume.
• The number of transactions aimed at adding a new capability have risen dramatically from 11% of healthcare deals among the top 250 largest transactions across industries in 2017 to 18% in 2021.

Overall, 2021 saw a continued push for focus, scale, and specialization across all healthcare sectors. This is most evident in the announcements by General Electric and Johnson & Johnson to split up to form separate entities, each with a standalone healthcare business, or GlaxoSmithKline’s recent decision to split into pharmaceuticals and consumer healthcare businesses. Those companies hope to replicate the successful separations of companies such as Abbott/AbbVie and Baxter/Baxalta, which created bespoke strategies, financials, and organizations tailored to their standalone equity stories.

We’ll show how pursuing deals for focus, scale, and specialization plays out in each of the five healthcare sectors.

Pharma: Midcap companies get in on the action

Pharma continues to be the healthcare sector with the largest M&A transaction value and volume. After experiencing declining volumes and values during the early months of the pandemic, pharmaceutical companies saw big gains for both in 2021.

Companies continued using M&A to boost their top-line growth and add products and therapeutic areas to their portfolios. For example, Roche bought GenMark Diagnostics for $1.8 billion to increase its testing and diagnostics business. We expect this trend to continue for as long as the market rewards pharma companies for top-line growth more than it does for profitability.

In 2021, midcap pharma companies took a page from their large-cap competitors’ playbooks and went after large acquisitions to broaden their access to new products and therapeutic areas. Among the activity, examples include Horizon Therapeutics’ more than $3 billion acquisition of Viela Bio to continue to expand its position in autoimmune diseases, Jazz Pharma’s $7.2 billion acquisition of the leading cannabinoid-based therapeutics company GW Pharmaceuticals to enter the CBD therapeutic game, and Servier’s $2 billion carve-out purchase of Agios Pharmaceuticals’ oncology business to enhance its position in that area.

Midcap pharma companies took a page from their large-cap competitors’ playbooks and went after large acquisitions to broaden their access to new products and therapeutic areas.

Given the rising importance of specialty drugs and biosimilars as well as a general sense that the best way to stay independent is to reach sufficient scale, we expect small-cap and midcap pharma companies to continue to play a significant role in the market going forward. These small caps and midcaps are testing the waters with small acquisitions and developing playbooks to consider potentially larger deals down the line.

Medtech: Category leadership comes roaring back alongside investments in digital

After a down year for medtech in 2020, both values and volumes saw increases in 2021, though no return to 2019 levels.

Acquirers are going after deals intended to give or enhance category leadership positions. Steris’s acquisition of Cantel Medical for $3.6 billion expands its offerings to dental customers. Boston Scientific’s carve-out purchase of Lumenis is another example—the deal strengthens its position in urology. Meanwhile, Thermo Fisher Scientific’s attempted acquisition of Qiagen is an example of a medtech with a diagnostics business that grew significantly during Covid-19, prompting it to try to increase its leadership positions via acquisition.

Medtech acquirers are going after deals intended to give or enhance category leadership positions.

In the same vein, some medtech companies divested or spun off noncore categories to focus on those in which they could become leaders while also freeing up cash flows and driving up aggregate top-line growth percentages. For example, Zimmer Biomet’s spin-off of its spine and dental businesses was done to drive higher growth and focus in the remaining Zimmer Biomet portfolio.

Finally, medtech companies continue to prepare for their uncertain access to operating rooms in the post-pandemic world. As they do, they are investing in the digital and point-of-care technologies that will keep them critically relevant to physicians. Baxter’s $10.5 billion acquisition of Hillrom is intended to drive a more connected care experience for patients. Another example is Stryker’s OrthoSensor purchase for an undisclosed amount; OrthoSensor’s technology enables doctors to receive feedback on how the knee is performing in the patient’s body post-surgery.

Payers: Muted deal volume recovery, with a focus on scale and access to new populations

Payer transaction volume fell about 30% after increasing from 2019 to 2020. Those deals that did occur in 2021 tended to focus on adding scale and platforms, or diversifying offerings to different member populations.

For example, Centene’s $2.2 billion purchase of Magellan Health added new members and enabled the company to enter behavioral health in a meaningful way. The deal also gave Centene a specialty pharma provider for Medicaid. Cigna’s Evernorth division bought MDLive for an undisclosed amount, adding scale to its telehealth offerings. Evernorth is taking advantage of the lasting effect of Covid-19 lockdowns: More members are now comfortable with telehealth options.

In another continuing trend, payers bought providers in an attempt to better control members’ total costs. Humana completed its $5.7 billion purchase of Kindred at Home and also bought One Homecare Solutions for an undisclosed amount. Meanwhile, Walgreens continued its push into the provider space with its $5.2 billion investment in VillageMD, with the goal of opening an additional 600 primary care clinics in its stores. Should these strategies prove successful, we anticipate additional transaction activity that crosses the payer-provider line. And with strong profit pools and cash positions, we expect to see deal activity accelerate across the payer landscape in 2022.

Providers: M&A rebounds, with deal activity focused on continued consolidation

The impact of Covid-19’s associated margin pressures on providers led to declines in M&A volume in 2020. Provider M&A transaction volumes and values both recovered in 2021, exceeding pre-pandemic levels. Likewise, transactions with financial sponsors in the sector increased as well, with a 43% increase vs. 2020.

As it was pre-pandemic, one of the main catalysts for transaction volume in this sector in 2021 was the consolidation of healthcare systems to build scale and cost efficiencies. The announced merger of Brazil’s Hapvida with NotreDame Intermédica for about $9 billion and Intermountain’s merger with SCL Health are two examples of consolidation in 2021. Given the ongoing margin pressures on providers, we anticipate continued deal activity aimed at building scale.

After two years of declines, transaction value from corporate healthcare acquisitions of European targets increased by 224% in 2021.

Healthcare services: Opportunistic deals to capitalize on outsourcing

In healthcare services, companies used creative deal theses with the objective of entering new markets. There were multiple scale transactions among providers of outsourcing services to pharma companies, for example. The goal is to enter the pharma market without becoming a direct marketer and developer of pharmaceuticals. Thermo Fisher Scientific bought PPD for $17.4 billion to expand its clinical research outsourcing offering, and Danaher acquired Aldevron for $9.6 billion to add mRNA manufacturing to its life sciences portfolio. We anticipate M&A activity for healthcare services companies will remain robust in 2022 and beyond as they get more creative in an effort to reap the value of high-multiple transactions.

Spotlight on Europe: A growing share of global healthcare deal value

Unlike other industries, in which cross-border deals are becoming less popular, healthcare is experiencing a steady rise in deals that stretch across geographies. And nowhere is healthcare cross-border deal value as high as it is in Europe.

After two years of declines, transaction value from corporate healthcare acquisitions of European targets increased by 224% in 2021. The European pharma sector used M&A to fill pipelines and boost top-line growth. That was the case with Sanofi’s purchase of Translate Bio and Roche’s acquisition of GenMark Diagnostics, for example.

In medtech, Tecan bought Paramit, and Philips acquired Capsule, with both deals reflecting the multiyear global trend of pursuing category leadership through M&A.

Covid-19’s ongoing impact on elective surgery has led to consolidation among Europe’s providers, a trend that is likely to continue for the near term on a domestic basis in nursing homes, mental health, hospitals, and ophthalmology, with medium- to long-term consolidation across geographies possible in nursing homes.

Healthcare services saw high deal activity in contract development and manufacturing organizations (CDMO), especially CDMOs with a differentiated or specialized offer. Icon’s $12 billion purchase of PRA Health Sciences is an example of an acquirer adding scale and breadth by buying a differentiated outsourcing provider. Pharma and medtech companies will continue to look for outsourcing, both to secure supply continuity and to absorb demand peaks for fill and finish services in vaccines, for example, providing a tailwind for CDMO deal volume.

What does it all mean?

Healthcare companies will continue to look to M&A to spur growth across all sectors. Should deal multiples remain at 2021 levels, companies will be forced to make the deal economics work by relying on more creative deal theses with value drivers that have key implications.

When carefully devised and planned, a creative deal thesis can deliver tremendous value to acquirers. But that upside is not risk free. With a creative deal thesis comes increased integration risk. For example, achieving the value of a transaction may require the acquirer to behave in a way that is counter to its current norms—for instance, if a cost-driven organization needs significant revenue synergies. Acquirers need to anticipate these added challenges.

As revenue synergies become more significant, so does retention. An increased focus on people and cultural integration will be important for realizing deal value.

That means using diligence to pressure test a bespoke deal thesis and outlining what must happen for the deal to add value. It is unlikely that cost synergies alone will suffice to make the deal economics work in the current environment. Yet revenue synergies are inherently riskier because they are more reliant on market conditions and customer behavior. Also, as revenue synergies become more significant, so does retention. An increased focus on people and cultural integration will be important for realizing deal value.

For companies acquiring a carve-out, the first order of business is to stabilize and then prepare to exit transition service agreements (TSAs)—both objectives require significant time and focus for the first 90 to 120 days post-close. Companies need to plan accordingly with cost and revenue synergies, prioritizing their limited bandwidth on the highest value areas.

The best companies take the time to articulate where, how deep, and how quickly to integrate different parts of the organization. They are clear about where integration is crucial for achieving the value of the deal (e.g., combining salesforces to achieve revenue synergies) vs. where a slower integration approach may work (e.g., combining sales and operations planning may be more valuable after systems integration is complete).

Companies that buy a capability or talent pool need to think long and hard before changing any part of that organization; many acquirers learn that the best course of action is to leave that group alone. Another critical step is to overinvest in the handoff between diligence and integration planning so that the focus is on key value drivers during integration.

In a market with record-high deal multiples and with companies leaning in to make the economics work, every item in the M&A capability toolkit is critical. That’s why the best companies work to clearly understand where they excel in M&A capabilities and where they need to improve to boost the odds of successful deals.

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