Jeff Bartel is chairman and managing director of Hamptons Group, a private investment and strategic advisory firm headquartered in Miami.
Investments in the healthcare sector can be popular options for investors looking to build a diverse portfolio. This holds water as healthcare goods and services are always in demand. The trick is knowing which healthcare investments may provide the greatest returns. For example, the increased use of private equity funds in healthcare mergers and acquisitions (M&A) could make this an investment opportunity worth exploring.
Before putting money into healthcare investments, it is essential to understand current and emerging healthcare M&A trends.
Mixed Signals In Trends For 2023
Due to mixed signals through 2022, investors are struggling to predict future outcomes for the healthcare M&A sector. On the one hand, the industry saw a significant drop in M&A deals in 2022, as the number of these dropped from an average of 600 per quarter in 2021 to just 400 per quarter in 2022. On the other hand, several major, multibillion-dollar M&A deals took place in 2022.
Additionally, global issues, such as the ongoing labor shortage, supply chain disruptions, geopolitical turmoil and fluctuating inflation concerns, may spur an increase in the number of healthcare industry M&A transactions. For example, some healthcare companies may invest in acqui-hiring to help fight the labor shortage or acquire companies to overcome supply chain challenges.
2022 Had Less Volume, Larger Deals
As mentioned above, there was a significant drop in the number of healthcare M&A deals from 2021 to 2022. Instead, the healthcare M&A news in 2022 was dominated by several recent healthcare mergers and acquisitions, including:
UnitedHealth Acquired Change Healthcare
After winning a case brought on by the U.S. Department of Justice, UnitedHealth successfully acquired the healthcare tech company Change Healthcare for $13 billion. This successful acquisition may encourage other companies to take on the Department of Justice to secure deals on this same scale or bigger.
CVS Acquired Signify Health
Near the end of Q3 2022, CVS announced that it would acquire the well-known home healthcare service provider Signify Health for $8 billion. The completion of this deal signifies that CVS is ready to expand into the home healthcare services sector.
Amazon Acquired One Medical
In July 2022, Amazon announced its intention to purchase One Medical in an effort to expand its primary care service options. Adding One Medical to the company’s Amazon Care program would provide virtual and in-home primary care solutions.
Clayton, Dubilier And Rice Acquired Kindred At Home
In a deal finalized in 2022, the private investment firm Clayton, Dubilier & Rice agreed to divest a majority interest in Humana’s subsidiary company, Kindred at Home. With the agreement, Clayton, Dubilier & Rice agree to divest 60% of Humana’s Kindred at Home company, which focuses on personal care and hospice services, for a cash payout of nearly $2.8 billion.
Apollo Global Management Acquired Shares Of Waud Capital Partners For GI Alliance
Apollo agreed to a partnership with the physician owners of GI Alliance to repurchase the minority stake in the company from Waud Capital Partners for $2.2 billion. This agreement highlights these physicians’ confidence in the continued success of GI Alliance, the country’s largest gastroenterology practice.
Challenges To Healthcare M&A Deals
While mergers and acquisitions have the potential to help healthcare companies overcome many of today’s issues, these deals also come with several challenges. If these companies are not careful, a merger or acquisition could do more damage than good. For example:
• Lack of clear rationale for growth: The success of healthcare mergers and acquisitions depends on the purchasing company’s clear vision for continued growth. Without a comprehensive plan to maximize the company’s ability to grow, the M&A deals may not provide desired results.
• Antitrust concerns: An increased push by the U.S. Department of Justice to prevent monopolies in the healthcare sector is preventing some mergers and acquisitions from taking place. Companies without the legal strength to take on the government may struggle to obtain final approval for M&A deals.
• Limited funds: Inflation concerns and limited funds can prevent some companies from investing in any type of healthcare merger or acquisition. Some companies are turning to private equity funds to overcome this challenge.
• Ineffective IT integration: IT integration can be highly complex, especially when merging two companies with completely different platforms. Without a comprehensive road-mapped plan for effective IT integration, the company could experience production declines and service delays.
Learning From Activity In Q3 And Q4 2022
When predicting future outcomes for healthcare M&A deals, it is a good idea to see how the 2022 year ended for the industry. We can learn a few noticeable trends from healthcare M&A activity during Q3 and Q4 2022. For example, we noticed several primary factors prompting healthcare industry M&A activity, such as:
• Consolidating for inorganic growth: Many companies invest in M&A deals to advance inorganic growth by expanding their customer base, increasing their employee talent pool and building investor confidence.
• Enhancing core operations: M&A deals, especially healthcare technology mergers and acquisitions, can help companies improve core operations and increase production while lowering operating costs.
• Buy and build strategies: Companies may also invest in M&A deals in an effort to expand their current operations. This buy-and-build strategy enables companies to expand into new geographical markets, enter an adjacent market or minimize supply chain disruptions.
• Disruptive innovation: Several recent major M&A deals allowed companies to enhance their business model by moving into new markets. For example, CVS’s recent purchase of Signify Health permits them to expand into the home healthcare sector.
Signs show that M&A deals will continue to take place throughout 2023. While the number of deals may not be as high as in 2021, major deals may be on the horizon. Since UnitedHealth successfully completed its deal to acquire Change Healthcare despite the government’s attempts to stop it, other larger healthcare companies may be encouraged to battle it out in court. This factor, in combination with other M&A activity we saw in Q3 and Q4 2022, could lead to more finalized healthcare mergers and acquisitions for 2023.
The information provided here is not investment, tax or financial advice. You should consult with a licensed professional for advice concerning your specific situation.