In­no­va­tion and growth: key in­gre­di­ents for health­care M&A

De­spite a chal­leng­ing macro­eco­nom­ic con­text af­fect­ing trans­ac­tions dur­ing the start of 2023, the US health­care sec­tor is prepar­ing for an up­com­ing wave of M&A ac­tiv­i­ty. RBC’s ex­pert bankers dis­cuss what’s next for the health­care sec­tor on Strate­gic Al­ter­na­tives, the RBC M&A pod­cast. Lis­ten to the episode here, or ex­plore the take­aways be­low.

KEY POINTS

• De­spite a sig­nif­i­cant­ly sub­dued start to 2023, M&A vol­umes in the US health­care sec­tor are be­gin­ning to sta­bi­lize and com­pa­nies are prepar­ing for a wave of M&A in Q3 and Q4.
• Tough fi­nanc­ing mar­kets and ac­cess to cap­i­tal are im­pact­ing the de­ci­sions of small­er-mid cap com­pa­nies – who are ex­am­in­ing strate­gic al­ter­na­tives in­clud­ing ac­qui­si­tion deals to boost val­ue.
• Com­pressed val­u­a­tions and height­ened board­room CEO con­fi­dence across var­i­ous health­care sub­sec­tors are en­cour­ag­ing in­creased trans­ac­tion lev­els.
• The need to ac­cel­er­ate top-line growth and dri­ve scale re­main key dri­vers of M&A across var­i­ous health­care sec­tors.

M&A vol­umes ex­pect­ed to rise in H2 2023

While an­a­lysts an­tic­i­pat­ed a slow first half of 2023, H2 is set to ex­pe­ri­ence a fresh wave of M&A, ex­plains Vi­to Sper­du­to, Co-Head, Glob­al M&A in con­ver­sa­tion with RBC’s ex­pert bank­ing pan­el fea­tur­ing An­drew ‘Cal’ Call­away, Glob­al Head of Health­care In­vest­ment Bank­ing, Ahmed At­tia, Man­ag­ing Di­rec­tor of Health­care M&A, and David Levin, Co-Head of US M&A.

“We’re about to have M&A vol­ume not seen since Q2 of 2020, which was ob­vi­ous­ly dur­ing the pan­dem­ic shut­down. And we’ve just come off of 2021, which was the best year in his­to­ry by all mea­sures,” says Sper­du­to.

Large cap com­pa­nies have all the cap­i­tal they need to pur­sue se­lect ac­qui­si­tions and are be­gin­ning to con­sid­er which tar­gets to chase over the next six to 12 months. This comes at a time when pre­vi­ous rounds of con­sol­i­da­tion have re­duced the num­ber of avail­able and ac­tion­able qual­i­ty busi­ness­es to choose from, so com­pe­ti­tion in the US health­care sec­tor is set to in­ten­si­fy.

“The re­al­i­ty is that the deal chess­board is ac­tive,” says At­tia. “The larg­er play­ers rec­og­nize that their com­peti­tors are go­ing to zone in on the same as­sets. In the phar­ma ser­vices sec­tor, we prob­a­bly had dou­ble the num­ber of pub­lic com­pa­nies in the sec­tor four or five years ago,” he adds.

“The re­al­i­ty is that the deal chess­board is ac­tive. The larg­er play­ers rec­og­nize that their com­peti­tors are go­ing to zone in on the same as­sets. In the phar­ma ser­vices sec­tor, we prob­a­bly had dou­ble the num­ber of pub­lic com­pa­nies in the sec­tor four or five years ago.” Ahmed At­tia, Man­ag­ing Di­rec­tor, Health­care M&A, RBC Cap­i­tal Mar­kets

Tough fi­nanc­ing mar­kets force strate­gic al­ter­na­tives

While large cap com­pa­nies have a wide ar­ray of choice, it’s a dif­fer­ent sto­ry for small­er cap com­pa­nies, with many lack­ing suf­fi­cient cap­i­tal to pur­sue con­ven­tial fund­ing routes. These firms are set­ting their sights on strate­gic al­ter­na­tives, ex­plains our pan­el.

“We’re see­ing small cap com­pa­nies think­ing long and hard about strate­gic al­ter­na­tives; the per­fect storm for what looks like a very ac­tive sec­ond half of the year from an M&A stand­point,” says Call­away.

“We’re see­ing small cap com­pa­nies think­ing long and hard about strate­gic al­ter­na­tives; the per­fect storm for what looks like a very ac­tive sec­ond half of the year from an M&A stand­point.” An­drew ‘Cal’ Call­away, Glob­al Head of Health­care In­vest­ment Bank­ing, RBC Cap­i­tal Mar­kets.

The fi­nanc­ing mar­kets can be tough for small­er cap com­pa­nies. This in­creas­es the ap­peal of un­lock­ing ex­tra val­ue through M&A. “ It was easy be­fore to do every­thing on your own –  as fi­nanc­ing was more avail­able,” ex­plains Levin. “Now, be­cause fi­nanc­ing is so much hard­er to get, there’s a shift in the board­room where peo­ple are per­haps more re­al­is­tic about tak­ing an op­por­tu­ni­ty to cap­ture some re­al val­ue through an M&A deal,” he adds.

Health­care: dis­rup­tion, in­no­va­tion, and val­u­a­tions

The life sci­ences space has seen ro­bust val­u­a­tions over the last few years. This has made it hard­er for large cap buy­ers to pay the re­quired pre­mi­ums, equat­ing to around 60-100% on every trade. This meant that pre­vi­ous deals re­lied on in­di­vid­ual buy­ers tak­ing a dif­fer­en­ti­at­ed view. But with val­u­a­tions falling, pro­cess­ing is be­com­ing more com­pet­i­tive.

With­in large cap firms, CEO con­fi­dence is high and there is a strong ap­petite for deals. Com­pressed val­u­a­tions fol­low­ing the pre­ceed­ing pe­ri­od of record prices are adding to a buoy­ant M&A out­look in H2. “Large caps are go­ing to be los­ing about $200 bil­lion worth of rev­enue on their prod­ucts in the back half of the decade and that’s giv­ing them re­al ur­gency to try and do trans­ac­tions right now,” says Levin.

“Large caps are go­ing to be los­ing about $200 bil­lion worth of rev­enue on their prod­ucts in the back half of the decade and that’s giv­ing them re­al ur­gency to try and do trans­ac­tions right now.” David Levin, Co-Head, US M&A, RBC Cap­i­tal Mar­kets

Growth and scale re­main the pri­or­i­ty

This grow­ing ap­petite for for M&A is be­ing fu­eled by a need for busi­ness­es to ac­cel­er­ate top-line growth, while al­so scal­ing their op­er­a­tions.  “Growth is still a key dri­ver for large-cap play­ers. And fun­da­men­tal­ly, the mar­ket has been re­ward­ing busi­ness­es that are ex­celling in that re­gard,” says At­tia.

“There has al­so been a height­ened fo­cus by larg­er play­ers in the space to re­al­ly build scale. M&As be­tween strong busi­ness­es that give very dif­fer­en­ti­at­ed ca­pa­bil­i­ties are a dy­nam­ic that con­tin­ues to dri­ve a lot of fo­cus in phar­ma ser­vices,” he con­cludes.

Re­cent years have seen sig­nif­i­cant in­vest­ment from fi­nan­cial spon­sors. And, with small caps seek­ing strate­gic al­ter­na­tives and large caps tar­get­ing con­tin­ued growth and scale, our ex­pert bankers re­main bull­ish that M&A ac­tiv­i­ty will con­tin­ue be­ing high­ly ac­tive in the phar­ma ser­vices space.

Get the lat­est in­sights on is­sues im­pact­ing merg­ers and ac­qui­si­tions from RBC Cap­i­tal Mar­kets’ in­vest­ment bank­ing team on Strate­gic Al­ter­na­tives, the RBC M&A pod­cast.