M&A: a crit­i­cal dri­ver for sus­tain­able top-line growth in health­care

2021 saw a record $600B in health­care M&A ac­tiv­i­ty. In 2022, there is an an­tic­i­pat­ed slow­down in ac­tiv­i­ty, how­ev­er, M&A prospects re­main strong in the medi­um to long-term. What are fu­ture growth dri­vers for the health­care sec­tor? Where might we see in­no­va­tions that dri­ve M&A? RBC’s An­drew Call­away, Glob­al Head, Health­care In­vest­ment Bank­ing dis­cuss­es with Vi­to Sper­du­to, Glob­al Co-Head, M&A.

Vi­to Sper­du­to: As we look back at 2021, it was a record year no mat­ter how you mea­sured it, and all sec­tors par­tic­i­pat­ed. Health­care is one of the top two or three sec­tors year in, year out. What did you see in health­care?

An­drew Call­away: There was $600 bil­lion worth of M&A ac­tiv­i­ty in health­care last year. We saw a strong deal en­vi­ron­ment across all the sub-ver­ti­cals. About 50% of the vol­ume came from bio­phar­ma, but medtech and ser­vices al­so played im­por­tant roles.

Vi­to Sper­du­to: In many sec­tors, we see a high cor­re­la­tion be­tween the sus­tain­able growth record of com­pa­nies and the im­plied mul­ti­ple at which they trade. That’s true in the pub­lic mar­kets and from the per­spec­tive of M&A trans­ac­tions. Do you see this in health­care?

An­drew Call­away: Growth is a crit­i­cal dri­ver. Every­body is in­tense­ly fo­cused on durable top-line growth. Just take, for ex­am­ple, a trans­ac­tion that we com­plet­ed re­cent­ly with a com­pa­ny called LSNE, which was a port­fo­lio com­pa­ny of Per­mi­ra. We helped sell LSNE to PCI Phar­ma Ser­vices for $1.5 bil­lion. There is no doubt that LSNE will have a very pos­i­tive im­pact on PCI’s top line. A cou­ple of oth­er im­por­tant dri­vers in health­care M&A are in­creased scale and ge­o­graph­ic ex­pan­sion.

Vi­to Sper­du­to: A num­ber of our clients, be­yond health­care, have slowed down the rate at which they com­plete cross-bor­der deals. This slow­down is a con­se­quence of the re­cent lim­i­ta­tions on ex­ten­sive due dili­gence. Have you seen a sim­i­lar pat­tern in the health­care sec­tor?

An­drew Call­away: In 2021, de­spite the is­sues as­so­ci­at­ed with the pan­dem­ic and the in­abil­i­ty to do com­plete due dili­gence in the nor­mal man­ner, we saw ro­bust cross-bor­der ac­tiv­i­ty. Do I see a slow­down as we head in­to 2022? Yes, I would say that there will be a con­sid­er­able re­duc­tion in ac­tiv­i­ty, es­pe­cial­ly giv­en the cur­rent geopo­lit­i­cal sit­u­a­tion. We do con­tin­ue to see sig­nif­i­cant con­sol­i­da­tion once the un­cer­tain­ty abates. Look­ing at bio­phar­ma, we ex­pect buy­ers to fo­cus on on­col­o­gy, im­munol­o­gy, neu­rol­o­gy and rare dis­eases. In medtech and di­ag­nos­tics, our team thinks that car­dio­vas­cu­lar, di­a­betes and neur­mod­u­la­tion are ripe for con­sol­i­da­tion; we al­so ex­pect or­tho­pe­dic com­pa­nies to con­tin­ue to di­ver­si­ty.

“If you think about what is hap­pen­ing in AI and ma­chine-learn­ing drug dis­cov­ery: those are ex­cit­ing places to be.”

An­drew Call­away, Glob­al Head, Health­care In­vest­ment Bank­ing

Vi­to Sper­du­to: The last cou­ple of years have pro­duced some ex­tra­or­di­nary in­no­va­tions in the health­care field, es­pe­cial­ly with the de­vel­op­ment of the COVID vac­cine and the as­so­ci­at­ed use of mR­NA tech­nol­o­gy. What types of in­no­va­tion do you cur­rent­ly an­tic­i­pate?

An­drew Call­away:Every­body is al­ways seek­ing dis­rup­tive tech­nolo­gies. If you think about what is hap­pen­ing in AI and ma­chine-learn­ing drug dis­cov­ery: those are ex­cit­ing places to be. Wear­ables and dig­i­tal ther­a­peu­tics are emerg­ing as im­por­tant ar­eas from a li­cens­ing per­spec­tive to­day, but they could be fo­cal points from an M&A per­spec­tive to­mor­row.

Vi­to Sper­du­to: In broad terms, we are very bull­ish on the prospects for M&A and deal vol­ume. Is there any­thing spe­cif­ic to health­care that you think should cause us to have a dif­fer­ent view?

An­drew Call­away: As we look back over the last five years, val­u­a­tions have been creep­ing high­er and high­er and peaked about six months ago. Should val­u­a­tions get back to those peaks, I be­lieve it will be dif­fi­cult to com­plete trans­ac­tions. In ad­di­tion to that, ex­tend­ed volatil­i­ty can play a ma­jor role in mak­ing it chal­leng­ing to find a meet­ing point be­tween buy­ers and sell­ers.

“I think we will see a big wave of M&A as we move to the back half of 2022.”

An­drew Call­away, Glob­al Head, Health­care In­vest­ment Bank­ing

Vi­to Sper­du­to: There is a large wave of health­care patents that are com­ing due in two to five years’ time. As you talk to clients in that wave, what are they look­ing to do to re­place the rev­enue they will lose?

An­drew Call­away: Clients will re­spond by en­ter­ing the M&A mar­ket. We will see sig­nif­i­cant ac­tiv­i­ty as peo­ple look to bol­ster not on­ly pipelines but com­mer­cial port­fo­lios.

Vi­to Sper­du­to: Can you sum­ma­rize how you are think­ing about 2022?

An­drew Call­away: With rel­a­tive­ly qui­et cap­i­tal mar­kets, we are spend­ing sig­nif­i­cant time with man­age­ment teams and boards look­ing at strate­gic trans­ac­tions. So I think we will see a big wave of M&A as we move to the sec­ond half of 2022.

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Andrew Callaway

Global Head, Healthcare Investment Banking, RBC Capital Markets