This in-depth examination of the healthcare and life sciences (HCLS) deal market explores how the major developments of 2023 have prepared the way for the year ahead. In this paper, we analyze how eight subsectors fared during another year of industry challenges and global instability, and how deal activity and market drivers could shape the 2024 investment landscape.
The HCLS marketplace began last year facing widespread uncertainty. The US Federal Reserve was hiking interest rates at a historic pace even as inflation proved difficult to tame. Companies throughout the industry had to cope with a sharply higher cost of capital as they considered strategic changes to reposition themselves in an unpredictable post-COVID-19 environment. And although many economists insisted recession was imminent, employment reports and consumer spending numbers kept surprising on the upside. There were many more questions than answers as industry and PE leaders considered their next moves.
Against that backdrop, deal volumes for life sciences and healthcare dropped from 2022 levels, with life sciences transactions declining from 1,133 to 919, and healthcare deals falling from 1,001 to 857. Much of the retreat came in the fourth quarter. In terms of strategic investments, deals for life sciences companies dipped from 778 in 2022 to 662 a year later. But healthcare transactions by strategic investors went up, rising from 475 in 2022 to 566 in 2023.
Here are the highlights of the eight subsectors:
- Biopharma:the pharmaceutical industry was confronted with a range of headwinds in 2023 and many will continue into the foreseeable future. In addition to macroeconomic headwinds, three federal government policy issues are negatively impacting the industry: the FTC’s new and more extreme anti-competition policies (see Sanofi-Maze); the implementation of the Inflation Reduction Act (IRA); and the Biden administration’s new NIH framework for march-in rights. The amount of policy disruption facing the pharmaceutical industry is unprecedented. That said, for companies with a sound legal preparation to combat FTC objections, there were several large acquisitions near the end of the year that demonstrated a continuing appetite for innovative cell-and-gene therapies and treatments for cancer and rare diseases. Precision medicine helped fuel much of activity in the subsector, which also featured product acquisitions, licensing deals, and strategic R&D partnerships. But, as we head into 2024, a more assertive FTC, the impact of the IRA, and the potential threat of march-in rights could have a profound effect on the industry, and if policymakers are not extremely thoughtful on the degree they implement these policies, the current ecosystem that fuels innovation could be dramatically disrupted, which would domino into the deal market.
- Diagnostics: Amid a sharp drop in M&A, the largest diagnostics industry transactions moved offshore in 2023, with an ex-US buyer, seller, or both. Innovations in testing, including companion diagnostics for precision medicine and advanced at-home testing for a growing number of conditions, is helping to reshape company priorities.
- Medical devices: After three years of challenging elective surgery volume, it now appears to be climbing past pre-pandemic levels. That means optimism among medical device companies may begin to rise, and M&A could recover from low levels in 2023. Innovations in cardiology, robotic surgery, internet-connected wearable devices, and other areas may also spur dealmaking in 2024. Innovation across robotics, AI, machine learning, and IOT are driving advancement in this field, and 2024 should include a range of deals focused in these areas.
- Biopharma services: Still adjusting to a post-COVID-19 world, many CDMOs and other pharma services companies face uneven demand and heightened competition; overall, however, this area has significant potential. Major pharma firms and emerging biotechs continue to outsource functions at all stages of drug development and manufacturing, and private equity investors, in particular, appear poised to reengage in what has historically been their most active life sciences subsector.
- Hospitals and health systems: While hospital and health system operating margins began moving into positive territory overall in 2023, institutions continue to look for ways to raise efficiencies and revenues, from automating processes to training nurses. Many are pursuing M&A and partnerships to gain scale and share resources. More than 60 percent of our survey respondents expect deal volume to rise in 2024. Health systems will pursue partnerships, especially with digital health companies and physicians, to grow share, build new revenue streams, and gain economies of scale.
- Physician practices: Investors’ interest in physician practices peaked in 2021 and returned to pre-pandemic levels in 2022 and 2023. Challenges in the subsector include reimbursem*nt pressures, the increasing shift toward value-based payments, and potential regulatory changes. In 2023, strategic buyers took up the slack from financial investors, making more deals in the third and fourth quarters of 2023 than even in the peak year of 2021. These acquirers tell us they are now looking for higher-quality assets with stronger management teams.
- Payers: While financial investors stayed on the sidelines and shied away from this subsector in 2023, major players within the payer space are making strategic acquisitions while also divesting select assets to focus their portfolios and improve margins. The value of scale, including the promise of better operating efficiencies, will continue to drive many deals in this space. The most successful payers will have expertise in patient engagement, care coordination, risk adjustment, compliance, and other areas to turn a profit in Medicare Advantage (MA), where more than half of Medicare recipients are now enrolled.
- Healthcare IT: This industry is fragmented, with many small and mid-sized businesses aiming to maintain their independence while they grow. Many are subject to strict regulations, and some have so much customer churn that they are less desirable as acquisition targets. More healthcare players are moving to the cloud and pursuing other digital advances, however, which will likely spark more HCIT dealmaking.
Our annual healthcare and life sciences investment outlook provides insights at the beginning of the calendar year. Our hope is that the survey responses and analysis provided in this report will help leaders in these industries navigate a complex ecosystem of traditional and non-traditional participants, innovative products and services, and evolving ways of interacting with healthcare consumers.
