Healthcare M&A and Financing Trends and Predictions for 2024

This article was originally published in HealthInvestor UK.

The healthcare sector was one of the biggest beneficiaries of the pandemic influenced boom in asset values, but has faced significant headwinds since the middle of 2022. Despite optimistic predictions for 2024 on the M&A front the first quarter has brought no relief with a persistent gap in valuation expectations between buyers and sellers, paired with higher interest rates and geo-political uncertainty continuing to dampen deal appetite. A different picture has emerged in the healthcare financing market, where 2024 has kicked off with a noticeable uptick in deals – although those look very different from the financings achieved by healthcare companies during the boom years.

In this article we explore the drivers behind market activity in the healthcare sector so far this year as well as the trends that are expected to impact the healthcare market for the remainder of 2024.

Down-round financings and sluggish M&A market during Q1 of 2024

After having raised significant amounts of cash at record-high valuations during the pandemic, many healthcare companies had a healthy cash buffer to fall back on after the market down turn in 2022. This allowed many companies, with the help of some cost reduction measures, to sit out 2023 without the need to return to the financing market. Attention during 2023 was instead focused on such cost reduction measures to extend cash runway in the hope that valuations would recover and public markets re-open in the meantime. But for many healthcare companies, that hope – and, more importantly, their cash buffer – is now running out. This is forcing healthcare companies back into the financing market, where dynamics have shifted significantly in favour of the investors. With companies and founders forced to accept lower valuations, and investors looking to shift at least some of the dry powder they have accumulated over the past 18 months, the first quarter of 2024 has seen an uptick in activity for healthcare financings, which we expect to see continue over the remainder of this year.

The healthcare M&A market, on the other hand, is generally lagging behind its financing equivalent with a sluggish first quarter of 2024 continuing the downwards trend from 2023. There has, however, been some bifurcation in the broader healthcare M&A market with pharma and life sciences M&A seeing an uptick in activity in contrast to healthcare services where activity continues to lag.  Similar to the situation on the financing side of the market, we are starting to see a re-alignment in valuation expectations between sellers and buyers. Sellers who had been holding out in the hope that valuations would recover in the short term are coming to the grudging realization that this is unlikely to be the case and are recalibrating their pricing expectations lower. In addition to this, another factor that may drive an increase in healthcare M&A over the remainder of 2024 is that private equity is sitting on historic high levels of dry powder – an estimated $100 billion is ear-marked for investment in the healthcare sector by US-headquartered private equity managers alone. Strategic players have also accumulated significant amounts of cash, and as conditions for organic growth within the healthcare sector remain limited, M&A may be just the ticket to secure growth in these turbulent times. We expect M&A activity in this sector to pick up significantly as the year progresses.

Political and regulatory trends

Healthcare is a sector that is heavily impacted by changes in government policies, political agendas and regulation. Post-pandemic, many countries took on record high levels of debt. The need for belt-tightening combines with a general trend to seek more efficiencies in the delivery of healthcare services, which in some countries has led to a push towards privatization of previously government delivered services.

Outside of government spending, increased regulatory scrutiny on the antitrust and foreign direct investment front continues to remain a key consideration in the M&A market. Traditionally more of a concern for strategic buyers, it is increasingly also at the forefront of considerations for private equity investors. However, antitrust authorities especially in the US have recently suffered some high-profile defeats in their attempts to prevent large-scale healthcare acquisitions (e.g. the FTC’s unsuccessful attempt to block Amgens acquisition of Horizon Therapeutics). This may encourage the pursuit of larger deals.

In the UK and Europe, foreign direct investment regimes, many of which have been recently implemented or enhanced, are also relevant in evaluating financing and M&A activity in the healthcare space with many healthcare businesses viewed as nationally sensitive for the purpose of these regimes and requiring potential notification to or approval by regulators.  Given many of these regimes are new, there has been a trend towards notifying the relevant regulator when in doubt about their application.

AI to the rescue?

The promise of AI transforming healthcare and drug development is expected to continue to attract significant funding into the healthcare and life sciences sectors, which is, in turn, expected to create a tail wind for the 2024 healthcare financing (and M&A) market. However, the healthcare market is traditionally a market which is slow moving, conservative and heavily regulated. There will therefore be a natural limit on the speed with which AI technologies will be incorporated, but the potential benefits of AI will drive some M&A and financing activity during 2024 as players – institutional and strategic alike – seek to establish their own access to the space and secure their place at the head of the AI race.

AI allows for much more efficient data-sifting and extraction, potentially accelerating the development and delivery of healthcare including personalized medicine and accelerating the pace of new drug development. This makes it an appealing technology to use in the healthcare and life sciences sector. However there remains continued resistance to using AI in areas where patient data may be involved given the high regulatory compliance costs associated with doing so. Such costs may be prohibitive for smaller players leaving the application of AI solutions in this sector to deep-pocketed incumbents.

This informational piece, which may be considered advertising under the ethical rules of certain jurisdictions, is provided on the understanding that it does not constitute the rendering of legal advice or other professional advice by Goodwin or its lawyers. Prior results do not guarantee a similar outcome.