Healthcare private equity had another banner year, topping off a remarkable decade. Whatever macroeconomic risks simmered in 2019—from slowing economies to ongoing or debated regulatory reforms—they did not temper investor enthusiasm for this resilient sector.
Deal count may have remained flat compared with 2018, but disclosed deal value rose markedly. Similarly, corporate M&A disclosed deal value rose to an all-time high on the back of two megamergers. Exits were steady and holding periods remained low as portfolios returned to healthier positions.
New sources of capital continue to flow in from eager investors worldwide, who embrace the industry’s fundamental strengths. Investors grasp the benefits of robust demand based on demographics and rising incomes; technological innovations that can improve medical outcomes and reduce the complexity of processes such as payments; and new business models in response to cost pressures and calls for greater efficiency and effectiveness in delivering care.
These strengths have powered the steady expansion of healthcare investing over the past decade, so that healthcare’s share of all PE activity now roughly matches healthcare’s share of GDP in many national economies. Think of the sweeping changes in the US, for example. The decade brought the Affordable Care Act (ACA), the expansion of private Medicare, advances in technology beyond the adoption of electronic medical records (EMR), a shift to specialty drugs and consolidation among providers. All of these were considerations that affected the investment landscape.
Our report this year covers a number of intriguing developments:
- Finding new uses for data and analytics. Health-related data has grown exponentially, but putting the data to valuable use and monetizing it has largely eluded companies to date. Our spotlight on data and analytics describes three business models that show the greatest promise.
- Tracking the liftoff of HCIT. A decade ago, much of healthcare information technology focused purely on adoption of EMR solutions. The advances since then now allow IT to help reduce costs and improve outcomes across a range of subsectors, from running pharmaceutical clinical trials more efficiently to managing costs of self-funded employer plans. Five distinct investment themes emerged during the year.
- Going big in Europe. Investors put the region squarely on the map with large deals such as Nestlé Skin Health. Further, European funds pursued assets in both Europe and North America, and their overseas interest is likely to continue.
- Riding a wave of innovation in biopharma. Advances in cell and gene therapy along with life sciences diagnostics sparked excitement and drew capital from both sponsors and corporates. These technologies require different R&D and commercialization models, and we expect to see more funds take the plunge.
- Asset scarcity and intense competition in the payer sector. Payer and related services continues to attract attention, particularly assets that improve financing flows, support Medicare Advantage and other complex populations, or lower the costs of self-funded employer health plans. We also see value chain realignment and build-out of services businesses as new levers of growth.
- Monitoring regulatory and political changes. In the US, the expansion of Medicare Advantage and the Food and Drug Administration’s push to speed up the pathway to new drugs have been key parts of the regulatory scene. Now investors will be monitoring the US presidential and congressional election for possible changes to the payer system and drug pricing. In Europe, changes include new medical device regulations coming into force. Wherever a regulatory shift is underway, diligence and scenario planning around the probable effects become even more important.
What’s next? The possibility of a recession will be palpable throughout 2020. Regardless of when, or whether, a downturn hits, the question of how investments perform during a holding period that includes a recession will figure in investors’ plans.
We see several reasons why healthcare should remain a strong sector for private equity investments in the near future. The industry’s performance has proved resilient through past recessions. Aging populations and the growing incidence of chronic disease will boost demand, and supply has not caught up in some countries, particularly in the Asia-Pacific region. Innovation has not abated, fueling practical solutions that attract private capital. Further, healthcare remains fragmented and inefficient in many service markets, affording opportunities for consolidation.
The ample stores of dry powder, moreover, must be put to work. Strong demand for assets, plus intense competition from a range of financial sponsors and corporate buyers, should keep valuations and multiples high for the near future, particularly for gem assets.
All of this leaves investors focused on creating good returns even if they can no longer confidently rely on multiple expansion. Higher prices raise the bar for planning early—incorporating more factors into diligences so that investors can start creating value right out of the gate. They will want to consider both where to play (what subsectors, geographies and products) and how to win (through levers such as commercial excellence and performance improvement), as well as creative deal approaches (such as bundling of assets).
One final thought. Healthcare has come under more scrutiny regarding what is “right” for the public well-being. All the efforts of the past decade have done little to curb rising healthcare costs in many countries, and now the bar has risen. Can the next wave of investments do anything to bend the cost curve? We are cautiously optimistic about what lies ahead.
We look forward to collaborating with you over the coming year and seeing what the next decade has in store.