North American Healthcare Trendspotter: Wave of sidelined assets could hit the market in 2H23

Report 6 July

North American Healthcare Trendspotter: Wave of sidelined assets could hit the market in 2H23

by Rebecca Wenzel and Marie-Laure Keyrouz

While the North American healthcare sector continues to face macroeconomic headwinds such as inflation, labor shortages and reimbursement challenges, dealmakers predict that as soon as the market shows signs of stabilization, there may be a wave of deals, many of which have been waiting on the sidelines.   

In the sector – comprising pharma and biotech, healthcare services, information technology and medtech – North America saw more deal volume than any other global market in 1H23, according to Dealogic data. The 2Q saw a surge, largely due to the USD 7.4bn Syneos Health acquisition, while biomed and genetics make up the lion’s share of deal volume year to date.

Source: Mergermarket

“It’s been a tale of two cities regarding healthcare and life sciences from a deal perspective,” said Kristin Pothier, KPMG’s head of deal advisory and strategy for its Healthcare & Life Sciences division. Life sciences, on one hand, “saw incredible deal flow throughout the pandemic as a result of innovation in Covid-19 diagnostics and therapeutics,” Pothier said. “We expect to see a return in this space in late 2023 and early 2024.”  

“In the healthcare sector, the pace of recovery has been slower but despite mounting headwinds we saw volume hold steady from Q1,” said Pothier.

Deal volume is less than the high-flier years of 2021 and 2022, but the assets that are transacting are still trading at high multiples, according to healthcare dealmakers. In contrast, the second- and the third-tier assets have seen a slowdown and will not likely rebound until markets activate, the sources noted. 

For example, in HCIT, high-quality assets continue to trade, but second-tier assets are struggling to cross the finish line. In some cases, dealmakers have pulled these processes until the market is more conducive, according to sources.  

Bankers are seeing a strong backlog of assets that are waiting on the sidelines to transact once the market looks stable, according to the dealmakers, who are predicting a strong last one-third of the year, once these assets are unleashed on the market. 

At this point, the market will have an accurate idea of how valuations have reset as assets test the market, said the sources.  

Dealmakers are shifting from casting a wide net of potential buyers towards selecting a handful of buyers for assets, said Ahmad Sheikh, partner at SFW Capital Partners. There are fewer broad processes with 30 management presentations in favor of a “know your audience” strategy, selecting only ones who are specialized in lieu of buyers who may be a “tourist on a sector,” he added.  

North American sponsor exits continue to stay active, on par with the same period last year, according to Dealogic data. 

Source: Mergermarket

Hot Sectors 

Dental service organizations are continuing to see heightened deal activity as private equity is rapidly consolidating the market. Mergermarket has reported on numerous DSOs on the block this year including Select Dental Management, Independence Dental, Guardian Dentistry and Five Point Dental Specialists, with a few recently transacting including HighFive Healthcare, Lightwave Dental and Advanced Dental

Healthcare services deals continue to see activity from financial sponsors, who are acquiring specialty doctor practices and building into a platform via M&A. Cardiology, oncology, urology and orthopedic specialty practices are hotbeds for M&A, according to Eric Tower, corporate transactions partner at Blank Rome

UNIO Health Partners, a California-based multi-specialty physician practice management company, doubled its size when it acquired InSite Digestive Health Care earlier this year, and remains acquisitive throughout California, according to a report by this news service. Cardiovascular Associates of America (CVAUSA) merged with Novocardia in April. Acquisitions remain a focus for the cardiology platform, this news service reported.  

Physician practice management groups are facing many challenges, spurring these doctor groups to seek financial sponsors, said Gary Herschman, healthcare transactions attorney at Epstein Becker & Green. Reductions in reimbursement from government and commercial payors, increased costs of practice operations, the increased prevalence of value-based care and at-risk contracting and growing competition from large organizations, such as multispecialty, primary-care driven multi-specialty groups like UnitedHealth’s Optum unit or VillageMD, are among headwinds, said Herschman. 

While there is some tempering as the capital and debt markets remain uncertain, valuations remain strong for these healthcare service platform groups, trading in the 11x-14x EBITDA range, noted one banker. 

Cell and gene therapy developers and personalized medicine markets within the pharmaceutical space continue to attract M&A and funding interest as reimbursement is expected to remain healthy for these treatments, noted one source. Additionally, artificial intelligence technology for the biopharmaceutical industry is also an active sector for M&A. 

Telehealth, while a hot sector a couple of years ago, has seen a cooling off as many players in this market have struggled to generate meaningful EBITDA, according to several sources. 

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