Deals by private equity in healthcare jumps to record $63 billion

06 May 2019 Consultancy.eu

Private equity-based deals in the healthcare industry rose to a record level last year, with total disclosed jumping to $63 billion. North America remains the most active region, but Asia Pacific saw the strongest growth on the back of a rapidly growing healthcare consumer class.

Continuing a multiyear run of growth, the global private equity dealmaking market ran hot last year, amid a booming global mergers & acquisitions market, which according to Bain & Company was worth $3.4 trillion in 2018. While the total number of private equity deals stayed flat at 1,705 deals (excluding add-ons), disclosed deal values rose 11%, to $447 billion. 

Healthcare confirmed its position as one of the most in-demand segments for financial buyers and sponsors. Disclosed deal values surged almost 50% to $63.1 billion in 2018, topping the previous year’s level of $42.6 billion, and deal count rose to 316 from 265. Across the private equity landscape, healthcare now nearly represents 30% of all transactions by deal count.

2018 was a banner year for deal activity in healthcare private equity as disclosed value reached the highest level since 2006

“Last year was an incredible year for healthcare deals. Despite an especially volatile fourth quarter for both global markets and certain political landscapes that contributed to a strong sense of unease among most investment professionals, healthcare’s sturdy fundamentals and track record of strong performance were a beacon for investors seeking a safe haven,” said Nirad Jain, co-head of Bain & Company’s global Healthcare Private Equity practice.” 

Robust deal activity and values set post-recession highs across regions. North America once again accounted for the most deals, 149, and the highest number of announced deal value, at $29.6 billion – both higher than 2017 levels. In Europe, deal count rose by just 3 (to 73), however, as average European deal size surged in 2018, disclosed value reached a record $17.8 billion. “This bump in value came mostly from two large biopharma deals, Recordati and Zentiva, cumulatively worth $9.8 billion, which was $3.8 billion more than the top two European deals from 2017,” explained Jain. 

The Asia-Pacific region experienced a spike in activity – up 44% in deal volume (from 61 to 88 transactions) – as investors looked to tap into demand from a healthcare consumer class that has continued to grow in recent years. As a result, disclosed value more than doubled from $7.2 billion to $15.8 billion. About half of all activity – 45% of volume and 55% of disclosed value – involved healthcare providers, mainly spurred by the growing healthcare consumption across the region’s two most populous countries; China and India.

North America and Asia-Pacific saw increased deal activity, while Europe was relatively flat

Megadeals

One major factor lifting deal value was the growth in the number of megadeals. 18 deals greater than $1 billion were closed last year, pushing larger assets to levels that are out of reach for most buyers. 2018 further saw 8 deals valued at greater than $2 billion each, and four assets trading for more than $4.0 billion, including the largest buyout in at least the past decade: KKR closed a $9.9 billion acquisition of Envision Healthcare in October. The investments by CVC Capital Partners, PSP Investments and StepStone in Recordati and Veritas Capital, Evergreen and Coast Capital in athenahealth were the second and third largest deals respectively. 

Targets completing the list of top ten private equity deals in healthcare were Healthscope (Asia-Pacific), Zentiva (Europe), Sound Inpatient Physicians (North America), Mehiläinen Oy (Europe), LifeScan (North America), Sebia International (Europe; 60% deal) and Sirtex Medical (Asia-Pacific). Overall, these 10 buyouts accounted for approximately 60%, or $38 billion, of total disclosed deal value. 

By segment, pharma yet again served one of the most attractive focus area for financial buyers, with the Recordati and Zentiva deals, and the athenahealth and GE Healthcare buyouts the most notable. Moreover, funds pushed beyond traditional retail health assets into niches such as behavioural health, where autism and other specialty segments hold the promise of sufficient returns, as evidenced by Blackstone’s acquisition of the Center for Autism and Related Disorders (CARD). Further, investors continued to make bets on the consumerisation of health, including the rise of concierge care, telemedicine and home health models.

Megamergers continue to be a feature of corporate M&A in healthcare, but there was also a significant increase in value from smaller deals in 2018

Corporate venturing

Mirroring overall M&A activity globally, corporate venturing value has more than quadrupled since 2013 as corporates turn to bolt-ons to beef up their innovation power and capabilities, corporate buyers also jumped in healthcare with enthusiasm. Corporate M&A in healthcare spiked to a record $435 billion in 2018, surpassing the previous high of $432 billion in 2015. Jain; “Corporate healthcare companies are increasingly turning to mergers & acquisitions for revenue and shareholder growth.” 

Looking ahead, the Bain & Company expert said even in today’s more volatile economy, “there are no signs of abating. When combined with a glut of dry powder, increased fundraising and higher fund allocations, competition for healthcare assets will remain strong.”

However, with multiples at a high, and as uncertainty permeates public stock and debt markets, “more deals may become increasingly difficult to justify.” Jain concluded, “Investors will no longer be able to rely on market-wide multiple expansion to generate returns. There could be a wider fan of outcomes in future deal returns. Disciplined, data-driven funds will find their way to top-quartile deals by backing winning companies, deploying a systematic value-creation playbook and doing their part to transform the global healthcare industry.”