Expect more mergers and acquisitions in healthcare and life sciences, KPMG says

Investors project more deals to be done due to the transformation of healthcare and a host of other factors.

Investors are confident there will be more mergers and acquisitions in healthcare and life sciences in 2022, according to a new report from KPMG.

The 2022 KPMG Healthcare and Life Sciences Investment Outlook surveyed more than 300 industry executives and gauged their opinions on the market.

The survey found 70% of healthcare and life sciences respondents said they plan to increase their merger and acquisition activity in 2022. Four in 10 life sciences investors and 30% of healthcare investors said they plan to increase deal activity by 10% or more in 2022, compared to 2021.

It’s already been a robust market for investors in healthcare and life sciences, said Brett Glover, KPMG advisory partner.

“As we look forward, the majority of our respondents think in 2022 it’s going to continue,” Glover said.

An uptick in 2022 would follow a heavy amount of deal making last year. There were 1,839 deals in the healthcare and life sciences field in 2021, up from 1,618 in 2020 and 1,543 in 2019, according to KPMG.

Ross Nelson, KPMG principal and national healthcare strategy leader, cited a host of factors for the expected uptick in activity in the year ahead. He pointed to the combination of continued innovation, the transformation in healthcare, low interest rates and a lot of money on the sidelines.

It is worth noting that there have been fewer mergers of hospital systems, such as one system buying a smaller hospital or system. In fact, a Kaufman Hall report found mergers of hospital systems dropped to a 10-year low in 2021.

Still, even on the hospital side, analysts expect more mergers and activity. They projected more healthcare systems may look to acquire or merge with specialty providers, including those in outpatient services and surgeries, telehealth or home healthcare.

Hospitals have been struggling to cope with the financial toll of the pandemic. Systems have been flooded with COVID-19 patients due to the Omicron variant, leading to record hospitalizations during the pandemic. Many systems have delayed elective surgeries, depressing another source of revenue. Hospital systems are dealing with labor shortages, higher labor costs to recruit and keep staff, and higher supply costs.

KPMG expects larger hospital systems to fare well in 2022 but projected smaller systems could have a rougher road.

“As smaller hospitals and health systems continue to struggle, many that have remained independent may finally be forced to partner with, or be acquired by, larger institutions,” the KPMG report stated. “We expect the most capable health systems to keep pursuing scale and market-share growth with new business models and revenue streams, as well as a wider range of services.”

However, Nelson noted the Federal Trade Commission is expressing “a much more critical tone” when it comes to hospital mergers. In the hospital area, the FTC is showing more scrutiny of mergers involving hospitals, even when geographies don’t overlap, he said.

Many investors are particularly bullish on behavioral health, Glover said. The report noted investors are particularly interested in three areas in 2022: medication management, outpatient psychiatric care, and psychotherapy.

KPMG acknowledges some headwinds with the potential to slow down some deals, including inflation, labor shortages, and continued supply chain challenges.

The KPMG survey found 50% of investors said inflation would have a modest impact, while another 28% said rising costs could create significant headwinds.

Still, most investors bring plenty of optimism for opportunities and deals in healthcare and the life sciences.

“While economic headwinds could always change the course of investor sentiment, it still looks like the strong momentum for deal activity we saw in 2021 will continue throughout all or most of 2022,” said Ash Shehata, KPMG national sector leader for healthcare and life sciences. “With the emergence of breakthrough innovations in COVID-19 anti-viral therapies, vaccines, and diagnostic tests, interest in life sciences and pharmaceuticals continue to remain high.”

Investors continue to be interested in information technology in healthcare, particularly in telehealth.

“Investors clearly believe telehealth is here to stay and will be widely used in certain treatment areas, such as behavioral health,” the KPMG report stated.

The biggest information technology merger in healthcare came in December, with Oracle buying Cerner, a key player in electronic health records. Some analysts have said the $28 billion deal could spur other tech giants to make new moves in the healthcare field.

Investors surveyed also expressed enthusiasm for electronic health records and clinical workflow solutions, which are attractive as healthcare organizations continue to deal with staffing shortages.

The KPMG report found investors are expecting more deals in the diagnostics industry, with technology and lab tests more accessible to both consumers and clinicians.

Investors also showed a strong appetite for biopharma activity and expect to see more deals in 2022. However, expected rises in interest rates and increased FTC scrutiny could cool off activity, the KPMG report stated.