Investors expect more mergers in healthcare, life sciences in 2023

Most investors said they see more dealmaking taking place in the coming year, according to a new KPMG report. Inflation and rising interest rates pose challenges, but the difficult environment could spur more M&A activity.

Even with challenging economic conditions, investors expect to see more dealmaking in healthcare and the life sciences in 2023.

Despite concerns about the recession, 60% of healthcare and life sciences investors say they plan to increase merger and acquisition activity in 2023, KPMG said in a new report released Monday morning. Investors said higher inflation and borrowing costs would likely have a modest effect on their pursuit of deals.

It may take some time, as investors weigh potential interest rate hikes and evaluate markets, but the volume of mergers and acquisitions should pick up as the year progresses, said Ash Shehata, KPMG’s national sector leader in healthcare and life sciences.

“We saw continued movement, obviously, in ’22, when everybody expected a bigger drop off,” Shehata told Chief Healthcare Executive. “And I think kind of the tale of ’23 is going to be that the industry is still a resilient industry. And it's an industry with quite a bit of great factors behind it. A lot of cash on the sidelines, both corporates and private equity, are still looking for great opportunities.”

“As we kind of prepare or head into recession, or maybe are in recession, the reality is healthcare and life sciences tends to be one of those resilient industries that the markets tend to go to,” Shehata added. “And I think that's where the data is bearing out.”

(Ash Shehata of KPMG shares his outlook for the year ahead in this video. The story continues below.)

Obstacles ahead

Investors cited three top obstacles to merger and acquisitions: inflation and the potential for higher interest rates, fierce competition for appealing targets, and the anticipated impact on the economy.

The number of deals in healthcare and life sciences dropped from 3,189 in 2021 to 2,381 in 2022, according to KPMG’s analysis.

Even with the decline, the amount of dealmaking actually exceeded the expectations of investors. A majority of investors (56%) said the number of mergers and acquisitions surpassed their projections, according to KPMG’s report.

The report notes that the number of mergers and acquisitions in 2022 remained higher than 2019, the last year before the pandemic (2,244), and 2020 (2,316).

In some respects, Shehata said that he expects 2023 to be a “reset” year, as organizations regroup, develop strategies and look for opportunities in the coming year, or perhaps in 2024.

“I definitely think this kind of resetting stage is really kind of an overarching theme of ’23,” Shehata said.

“I think the idea to kind of refocus on your operating model, and your strategic position in the market is really, really something that's critical.”

Attractive areas

Shehata said he anticipates investors are eyeing a number of attractive areas.

“I think just on the provider side, we definitely see specialty providers continue to be high value assets,” Shehata said. “Ask any specialty provider across the country: are they busy? Are they overbooked? So, I think you're going to see that there's obviously a high appetite for those assets to be aligned with insurance. So the insurance buyers are still out there. And I think the large health systems, if you look at the large, mega mergers that have happened, and have been announced in the last year, there's going to be more appetite to put that capital work. So I think that's one.

“I think, on the life sciences side, we've seen some really interesting developments as well, you know, post COVID,” Shehata said. “We've seen now using some of the drug therapies that are used for vaccine, moving forward, and advancing cancer treatments, for example.”

More retailers could be looking for merger and acquisition opportunities in the coming year. VillageMD, backed by Walgreens Boots Alliance, purchased Summit Health-CityMD in a $8.9 billion deal in October is yet another indicator of the changing healthcare landscape. VillageMD said it finalized the deal on Jan. 5.

In September, CVS Health announced the $8 billion acquisition of Signify Health, a network of doctors providing care to patients at home. Primary care continues to see more competition from corporate heavyweights. Amazon announced a $3.9 billion deal to buy primary care provider One Medical in July.

“I think one thing we've learned, preparing and responding and being resilient post COVID, is that we've really activated the consumer,” Shehata said.

“Getting access to that consumer through retail, is something that … nobody's cracked the code on that yet,” he continued. “So I definitely feel like there's going to be a lot of energy, a lot of excitement on it.”

More hospital deals

Several noteworthy hospital mergers took place in 2022. In the year’s most widely anticipated deal in the hospital sector, Atrium Health and Advocate Aurora Health completed their merger. The merged organization, Advocate Health, is now one of America’s largest nonprofit hospital systems.

Shehata said he expects to see more hospitals and health systems using that merger as a model for similar deals. With Atrium based in North Carolina and Advocate Aurora operating in Illinois and Wisconsin, the deal avoided concerns of reducing competition in the same market, an area where regulators are showing increased opposition.

Shehata said larger systems could gain greater ability to negotiate with payers, and more leverage in investing in technology and other capabilities, including specialty practices.

“I think you'll see many more mergers move into that direction,” Shehata said.

Hospitals and health systems struggled economically over the past year, with more than half expected to finish the year in the red. Hospitals battled higher expenses and saw the end of federal aid to cover additional expenses from the COVID-19 pandemic. From an economic perspective, 2022 was one of the worst financial years on record, some analysts have said.

‘The reset year’

Health systems could face another difficult year with inflation, uncertainty around federal aid from Washington, and notably, higher labor costs, Shehata said.

“I think the first thing we always kind of remind everybody is that we have to kind of realize that these pressures are not transient, that these things are going to be in place for a while now,” Shehata said.

“In the past, we could take a one-time adjustment, reduce labor costs, reduce expenses, and try to get over that cliff,” Shehata said. “That's not what we're seeing. Now, we're seeing these are potentially sustainable, longer-term cost trends that are going to affect operations.”

With hospitals likely to face a difficult financial environment for the foreseeable future, health systems may be looking to pursue mergers and acquisitions, or some other partnerships, out of financial necessity, KPMG projects.

“To me, the underlying tone of the data we're getting is executives saying, we need to reset ourselves in '23,” Shehata said. “And we need to really figure out what are the things we want to keep? What are the things we want to change? And while we're going through a lot of this firefighting every year, I think this is the reset year.”