Global Healthcare Industry: M&A and Capital Market Landscape H1 2022 Review

Global Healthcare M&A 2022: Recalibration of Expectations

Deal making in the global healthcare industry has been relatively slow in 2022, compared with a blockbuster 2021. Investors were primarily forced to hold off on deal making because of the uncertainty regarding the global growth outlook.

The industry witnessed limited deal closures and is yet to see the conclusion of some ‘big ticket’ deals. The volume of deals withdrawn till date is comparable to that at the onset of the pandemic. As a result, dealmakers are having to amend their strategies to bridge the valuation gaps. They are conducting deeper analyses of the targets, thereby extending duration of negotiations and due diligence. The ability to recognise, negotiate, and realise value from increasingly complex partnerships and alternative collaboration models has become a key competitive differentiator. Considering these developments, we expect the following themes to impact M&A sentiments in 2022:

  • Uncertain geopolitical environment and higher interest cycle puts pressure on justifying synergies and ROIs.
  • Sponsors are turning cautious and revising their expectations to factor in the changing deal making landscape.
  • There is a focus on ramping up digital capabilities.
  • Portfolio realignment is happening among the strategics to divest non-core or under-performing assets.
  • There is a rapid paradigm shift towards utilising data and actionable insights to implement person-centric network strategies across sub-sectors.

Global Healthcare Regional M&A YTD 2022 (US$ bn)

Source: Refinitiv; deals as of August 11, 2022

Healthcare Funding: Geopolitics and Volatility Curbing Demand

The financial equity and debt capital markets (ECM and DCM) witnessed contrasting demand this year. In Q1’22, the DCM witnessed borrowers rushing to refinance and extend debt maturities before the potential rate hikes later in the year. However, the momentum was short lived, with volumes reverting to pre-pandemic levels as seen by the 78% fall in high-yield instrument issuances in H1’22 (indicating a ‘flight to quality’). The syndicated loans market almost came to a halt due to the geopolitical crisis, with investors pausing to review their portfolios and the related primary and secondary risks. The recent scrutiny of SPAC IPOs and its redemption pressure plus the lack of investor demand for traditional IPOs have essentially stalled global ECM activities. The revival of market sentiments, inflationary pressure, fear of recession, geo-political scenario and impact of rising interest rates are expected to be the key factors determining the capital market activity for the rest of the year.

Global Healthcare Capital Markets Activity YTD 2022 (US$ bn)

Source: Refinitiv; deals as of August 11, 2022

Healthcare SPACs: Deal Innovation to Counter Regulatory Headwinds

The heightened regulatory scrutiny has put the brakes on SPAC IPOs. In March 2022, the Securities and Exchange Commission (SEC) of the U.S. proposed new rules and amendments to enhance disclosure and investor protections in SPAC IPOs and business combination transactions between shell companies, such as SPACs and private operating companies. Along with concerns around mixed post-deal performance, rising redemptions during De-SPAC, a weak PIPE market, and overcrowding, this has resulted in growing investors’ doubts about SPACs’ ability to deliver high-quality companies. Though funding has dried up this year, innovative deal structures can still revive investor faith and stability.

Healthcare SPAC M&A Activity: Merger Clock Has Continued to Tick Louder in 2022

ESG in Healthcare: Crisis-resilient Long-term Value Creation

In the healthcare industry, an environmental, social, and governance (ESG) framework aims to create sustainable energy and waste management systems, encourage investments in community health, and address unmet medical needs; it also requires leaders to embrace diversity and inclusion as their foremost duties. The COVID-19 pandemic has demonstrated that adhering to ESG factors is key to crisis-resilient long-term value creation. Companies with dynamic business cultures were relatively more resilient during the shutdowns, given their ability to absorb the shock. Globally, investors have started to recognise the potential benefits of announcing an acquisition that is ESG accretive. By directly linking ESG factors to long-term value creation, companies can substantially alleviate investor concerns by de-risking their investments.

The Advent of an ‘ESG premium’ is Expected to Directly Impact Due Diligence

Outlook 2022: Spotlight on Resilience and Transformation

As we start to navigate the second half of the year, deal activity is expected to pick up, especially in the pharma / biotech sub-sectors, given the availability of large dry powder among the major consolidators. Dealmakers, who have been sidelined due to geo-political uncertainty and market volatility, will be eager to structure deals that enable both buyer and seller to transform their business models for the future.

More normalised valuations levels across the healthcare industry, aided by healthy demand from sponsors, the need for replenishing drug pipelines, the buy and build approach of major companies, and the revival of the credit market should drive volumes higher compared to what we have witnessed during the first half of 2022.

Evalueserve has extensive experience working with large, mid-market investment, and boutique advisory firms that deal with franchising companies across sectors such as sports, education, home improvement, entertainment, health and wellness, and food and beverages. Our resources are experienced and qualified to support clients with in-depth analysis and detailed presentations. The Evalueserve team works as an extended team for clients and helps them in matters such as identifying and profiling potential targets / buyers with relevant metrics, financial and operational benchmarking, financial modelling and valuation, benchmarking of franchise financials, confidential information memorandums, detailed management presentations, indications of interests, live deal support, and deal marketing.

Read more about our end-to-end deal support at Corporate Finance Research Consulting | Evalueserve.

To know more about our investment banking offerings, visit our webpage: Investment Banking Advisory – Evalueserve.

Arjun Paul
Manager, Corporate and Investment Banking LoB Posts

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