Health Care and Life Sciences Are Facing Headwinds, but Investors Remain Interested in Deals

Health care and life sciences (HCLS) organizations took a tremendous hit from COVID-19 and its secondary effects, including labor shortages, rising wages, supply chain problems and inflation. In addressing the challenge posed by the pandemic, these companies were able to produce impressive progress, not the least of which were the development and delivery of vaccines, therapeutics and tests for COVID. In addition, telehealth evolved quickly, producing new delivery models across multiple parts of the health care system.

But even when faced with multiple headwinds and more uncertainty, investors continue to compete for HCLS acquisitions. According to a recent KPMG LLP report, merger-and-acquisition (M&A) activity across both sectors “bounced back with a vengeance” in 2021: 1,839 deals, not counting joint ventures, minority investments and venture funding. That’s up from 1,618 deals in 2020 and 1,543 deals in 2019.

In fourth-quarter 2021, KPMG surveyed more than 300 corporate and private-equity (PE) deal makers across nine subsectors:

(1) Biopharma,

(2) Diagnostics manufacturers,

(3) Medical devices,

(4) Biopharma and diagnostic lab services,

(5) Health care IT,

(6) Hospitals and health systems,

(7) Behavioral health,

(8) Specialty physician practices, and

(9) Home health and hospice care.

Seventy percent of the respondents said they anticipate increasing their M&A activity in 2022. And more than half of the PE/venture capital respondents said they plan to increase M&A activity by at least 10% compared with 2021. A few months after the survey, KPMG held a session as part of its Twitter Spaces series on PE and health care and whether the deal pace is likely to continue, as well as what spaces are particularly attractive to investors.

“When you look back at 2021, it was a landmark year for investment,” said moderator Matt Weiss, director at KPMG, where he leads the industry communications team. He maintained that the report’s finding of PE investors expecting to accelerate their deal pace more in 2022 was “fascinating.”

“We obviously came off of a very strong ’21,” noted Ash Shehata, KPMG’s national sector leader for health care and life sciences. “You know, M&A and deal activity both across health care and life sciences did bounce back after 2020, and we actually saw, for example, 460 transactions per quarter [in 2021] vs. 405 in 2020 and even 386 in 2019.…As we look forward to this year — and certainly we’ve had a lot of twists and turns — but in ’22, we are expecting a potential 10% growth factor on top of that very, very strong year.

“And specifically in life sciences, we obviously expect to see sustained innovation,” he continued. “Certainly people will be looking to replace that lost revenue from some of the maturing products.” In 2022, “we’re very bullish across health care and life sciences. Survey responses are saying, ‘Look, cost of capital is still low even though we have some inflationary headwinds.’ Clearly there’s going to be some pressure to deploy that capital, and I think we’re going to see that movement go across the board.”

As to why PE is interested, Glenn Mincey, KPMG’s global and U.S. private equity leader, explained that “the U.S. health care market is a massive industry. At $4 trillion, it easily represents maybe 20% of the economy, and it continues at a rapid pace of growth. But it’s plagued by legacy fragmentation, it’s plagued by local and federal bureaucracy and inefficiency, and, frankly, there are pockets of areas for improvement, including quality of care, accessibility, cost, innovation, responsiveness, and if you think about it, those gaps create large opportunities for private equity, particularly in the context of health tech companies backed by PE.”

“Health care seems like the last frontier for adopting digital tools, big data analysis and optimized processes,” he observed, adding that many people still visit providers who use paper charts. “Health care writ large is such a wide-ranging sector that includes telemedicine, telehealth, remote patient monitoring,…DNA, AI for the use of drug discovery and development. And think about the possibilities not only for patient care but for record management and payments and drug testing, so not just core technologies but technologies that enable patient access and enrollment and registration.”

Mincey pointed out that survey respondents stated that “when it comes to deploying capital in ’22,” their “key priorities would be improving operational efficiency and investing in innovative products and services.” In 2021, he added, “health care and life sciences had the highest growth rate in deal value — 132% — followed by consumer and retail at 90%, “and we certainly expect that trend to continue.”

Impact investing, said Weiss, “is another growth area for many PE firms.” He wondered how that approach might affect a company’s current investing focus in health care.

Impact investing is an investment approach that “seeks to deliver both financial returns, as well as in social and environmental outcomes, in a way that’s being measured, monitored and managed actively,” explained Tania Carnegie, private equity and asset management global leader at KPMG IMPACT. “So these are not competing interests, these are very complementary interests, and health care is a key focus area for impact investors across the board.

“What we’ve noticed is an increasing number of the large private equity firms have launched impact funds that explicitly are focusing on investing and improved health and wellness outcomes,” she said. “So if we think about impact funds, what they invest in vs. the broader health care investment opportunity, very complimentary. Impact funds are typically structured to deploy capital in that complimentary way to existing investment areas. Investments may differ through an impact fund. They may focus on different geographies, companies in different stages of maturity of growth or check size, but the one thing that’s consistent is the focus on generating commercial rates of return.”

She asserted that COVID “really highlighted and exacerbated the gaps in access to health care and health equity,” which in turn has added to “the imperative of finding dignified solutions,…a tremendous opportunity that is just ripe for disruption and innovation.…Health tech is just such a critical enabler of health equity and an area that we see a focus [on] across the board.”

“There’s also a tremendous amount of capital being deployed in investing in key determinants of health, often with our clients using the Sustainable Development Goals as a guide,” observed Carnegie. “So, for example, they’re investing in companies that are focusing on improving employment outcomes and the quality of jobs to create a more safe and stable work environment, which then increases earnings potential; or they’re investing in companies that are improving sanitation and waste management; or investing in responsible packaging or circular economy alternatives, which help avoid the need for landfills; or they’re investing in providing more sustainable housing options. So what really encourages me and fuels me as we are now in 2022 is the breadth of investment dollars that are being focused on improving health and wellness outcomes from a number of different perspectives.”

The U.S. has an “increasingly aging population,” noted Mincey, and “people over 65 on average spend three times more on health care per person than working age individuals, and that span is projected to more than double by 2050 as the U.S. population ages. In addition, a significant segment of the population still can’t afford health care services, which provides a need to really bridge that equity gap. And as the industry finds ways to reach and care for that underserved population, the demand for health services is really going to grow.…The cost of services is really unsustainable for the public at large, and so driving accessibility is really an absolute necessity for underserved communities and populations. Driving efficiency, which is the job of PE, that’s going to help with the cost of services and help make the availability of care more equitable.”

He added that workforce impact also is an issue. “The great resignation is particularly acute in the health care industry.…It’s a field that is disproportionately feeling burnout, and it also has an aging physician population. So big factors of the future are not only going to be how the industry recruits health care professionals but how they lead and motivate those professionals in a way that balances the important contributions those people bring to the front line.”

Asked by Weiss “how inflation and how even supply chain issues are starting to present themselves in the health care space,” Shehata replied that there are three risks: The first one is “kind of that geopolitical unrest and how that impacts obviously a variety of the capabilities that we need in the industry. The second one is workforce, and the third one is inflation, and I think right now obviously as we look at the lens of the news today, all three of those are certainly at play,…and they’re all working clearly to create some headwinds,” as well as some opportunities.

With all the geopolitical unrest, the industry has been looking at solutions to supply chain issues across various stakeholders, including drugmakers, distributors and medical equipment manufacturers, he continued. “Obviously we look at cost of capital, we look at cost of transportation, but also it’s availability of resources and looking at resources and manufacturing regions around the world and looking at trying to create a little bit more risk reduction across those pockets. So I think it’s going to be an opportunity.…There have to be different ways to manufacture, different models, different partnerships, different technologies. I think the industry is looking for those solutions now, and I do believe — I’m very optimistic — that I think a combination of private equity and corporates will stand up to it. And I think it’s going to look a lot more like the tech-enabled world that we’re going to be talking about more and more, and it’s going to be a world where we’re using AI and analytics, and different partners are coming together to form these alliances to create new products and services. I know it’s hard to look at that optimistically, but I definitely have confidence in the industry and the innovators that that’s going to come forward.”

Workforce risk, however, “has a lot of solutions,” contended Shehata. “There are a lot of short-term solutions now that people are looking at, certainly on the health care delivery side, and also just on the general workforce side to be able to staff the opportunities. But I do think we’re going to see amazing opportunities around robotic process automation, physical robotics, different transportation capabilities. We’ve seen some really innovative areas around distribution robots, and I think the third area we’re going to start to see some real insight on is looking at ways to begin to improve workflows and really have clinicians working at the top of their licensure. Those are the areas that are starting to see really, really good movement.”

When it comes to inflation risk, “that’s obviously a big concern for everybody in the industry,” he said, adding that “continued headwinds on inflation throughout the year” should be expected. “However, costs of capital today is still attractive. That might actually accelerate deal volume in the first half of the year, and I think as we’ve talked about that optionality, on the back half of the year, maybe when costs of capital becomes a little more restrained, there will be opportunities to sell to sponsors and strategics who are looking for ways to improve their bottom lines. And I think a lot of that is going to be based on the resumption of the inpatient volumes, and I think you’re going to see it across the innovation cycle on the life sciences side.”

Weiss wondered whether the HCLS space is potentially poised for a sort of modern version of the roaring ’20s. “Historically speaking,” he elaborated, “it was really interesting to note that if you go back about 50, 60, 70 years ago, a period not very much unlike this in kind of the run up to the second world war, some of the big advancements that we saw in the health care space, the Hill-Burton Act law as an example. [That law, passed in 1946, gave grants and loans to hospitals, nursing homes and other health care facilities for construction and modernization in exchange for free and reduced-cost health services for people unable to pay.]…and also it was under the Franklin Roosevelt administration, we had the National Defense Research Committee that was developed. [Formed in 1940, the NDRC ‘organize[d] research of interest to the military and…inform[ed] the armed services about new technologies.’]” In the modern era, “the COVID vaccines are the most obvious example of how there’s still innovation taking place at a rapid pace in health care. Are there any other areas that have stood out to you recently despite all the headwinds?”

“In the last 100 years we have seen economic prosperity in the ’20s and certainly throughout the 20th century,” agreed Shehata, “but all of that has also been unpinned by a variety of geopolitical conflicts — world wars and local and regional conflicts. Throughout that whole period, health care and life sciences have both been able to incubate massive investment and massive innovation. And I do think you look at examples like Hill-Burton — and that was the biggest expansion of the physical infrastructure of U.S. health care that’s ever happened — and that all happened in the 20th century. We saw massive expansion and investment in life sciences and distribution capabilities, the spawn of new capabilities and deliveries like PBMs and the integration of distributors into the supply chain. But if you look at today, we are poised to see the same kind of complexity, inflationary pressure, geopolitical conflict, all of those things, but I do believe that this is a very resilient industry. It’s one that today is underpinned by innovation and technology, it’s underpinned by new partnerships across the ecosystem between health care and life sciences, and it’s also underpinned by, more importantly, this daunting kind of opportunity for growth.”

Noting he had recently heard “some amazing things about wellness and the focus on longevity,” Shehata stated that “all of those forces are going to drive more and more demand, and they’re really, really going to force us to innovate in ways that maybe this industry has been a bit behind [in], and I think you’re going to see it unleash a wave of growth like we saw in the early 1920s. It’s going to be the continuation of the roaring ’20s if we can kind of look back at 100 years and build the confidence we need to keep moving forward.”

Added Mincey, “innovation to me is the clear mitigating factor against those headwinds, and…it is clear that the industry has shown that it can move more quickly and that it can innovate, and I’m very excited about it. But you know, the PE playbook often boils down to providing scale, adding customers, driving revenue higher and improving balance sheets, and in addition to that, PE has a reputation for innovation and technology and being nimble, and that will really help spur the roaring ’20s.”

Environmental, Social, and Governance (ESG) is an incredibly hot topic today, and investors are applying these factors to how they analyze risks and opportunities. With much of the ESG focus on the environmental aspect, this is impacting how PE investors invest in health care in two ways, said Carnegie. “The first perspective is that the climate crisis is a public health crisis and contributing to the health care crisis directly. Think about natural disasters just over the past year. They are increasing both in number and intensity, and that’s resulting in both acute and chronic illness, as well as an unprecedented number of deaths, people being forced from their homes, being put into unstable situations. It has such a wide-ranging impact on health and on the health care industry, so appropriately addressing climate change in our communities, finding more sustainable climate-positive ways of doing business the way that food production is occurring, the way we’re consuming goods and travel, these all have direct implications for health care.

“The second way to think about it is, I guess, more direct to health care organizations themselves, so while they generally have a low carbon footprint, climate does have a number of critical considerations and implications,” she continued. “One of such is the physical risks of climate change on facilities or thinking about sustainable sourcing of energy or the safe disposal of hazardous waste or responsible sourcing to minimize waste. These are all things that are directly relevant and really critical for health care organizations to be actively thinking about managing.”

However, a lack of one main “standard to rule them all” is hampering some efforts in the ESG space, asserted Mincey, who said this is the No. 1 issue the company hears about from clients. “‘Impact’ means so many different things to many different people, and the folks who are within the large houses who are managing impact and managing ESG, it’s almost death by 1,000 cuts. It’s questions from so many different constituencies,…and it’s just questions all over the place. So the industry really, really fervently desires one single set of standards that not only prevents greenwashing and allows you to navigate the criteria, but also it acknowledges that you’re actually doing something significant to do good. Coming back to the question of ESG and impact writ large, I mentioned before the ability of PE to increase accessibility and equitable access for health care. Increasingly, and we’ve all seen this, people want to be involved in something that has a real impact in changing the world for the better. And that really makes health care very, very attractive for the investment community.”

All of the events unfolding in 2022 so far would likely have “put a bit more of a cloud over people’s prognosis” compared with the end-of-2021 survey responses, observed Shehata. “A lot of times when we see this kind of dislocation and complexities with the interest rates and inflationary pressures, health care has been a safe haven traditionally, and I think when you see the emergence of health care and life sciences post-COVID, it will retain its status as a safe haven amid a lot of the uncertainties that we may see in other industries.…Once we can alleviate some of the concerns of the industry, successfully exiting some of the impacts it’s seen on the inpatient side and the acute side, and you retain that difficulty in the world we’re starting to see, I think investors will remain confident within the health care and life sciences sector. I do think the one thing that we’re going to have to figure out in the industry, as many are, is what is the pricing strategy going forward? What is the impact? And I think many industries are asking that question. But even more importantly, I think health care and life sciences, the answer to that question is tied to a lot of things,” including “our commitment to things like ESG, certainly our impact at the federal government level around funding initiatives. I think thirdly, pricing strategy is really going to be also focused on how we look at payment sources both public and private.…But we always know that health care and life sciences does get funded, and I think that is going to be the overwhelming reason why it will stay on that positive side of people’s sentiment.”

Ultimately, said Shehata, “the PE mindset, the PE mindset lens, is what this industry needs the most today. To overcome those forces that we talked about on global uncertainty and workforce and inflation and to focus on the opportunities we’re seeing in a biotech and partnerships and creative financing.” Opportunities exist in conditions including “oncology, immunology, neurology, orphan diseases, infectious diseases — these are the things of our generation, of our time, and we need the PE mindset, we need that ability to deploy capital, and we need everyone’s best thinking for the sake of humanity, so this is the time, and we are so fortunate to be a part of that community and so fortunate to have those resources targeted toward the opportunities in health care and life sciences.”

Contact Carnegie, Mincey and Shehata via Matthew Weiss at

Angela Maas

Angela Maas

Angela has an extensive background of editing, reporting and writing for trade and consumer publications. She has written Radar on Specialty Pharmacy (formerly called Specialty Pharmacy News) since she joined AIS Health in 2005 and has broad knowledge of the various issues at play within the space. Before joining AIS Health, she was managing editor at Employee Benefit News and Employee Benefit News Canada and managing editor at HemAware (a hemophilia publication), Lupus Living and Momentum (a multiple sclerosis publication). She has a B.A. in English and an M.A. in British literature from Arizona State University.

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