Bain
& Company’s tenth annual Global
Healthcare Private Equity and M&A Report
outlines
the impacts of Covid-19 on healthcare dealmaking across regions and
sectors.
New
York – March 22, 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.
About
Bain & Company
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