German M&A Industry Trends in Health Industries: 2022 Outlook
Mergers and acquisitions (M&A) activity and valuations in health industries remain high with no signs of a slowdown in 2022.
Pharmaceuticals and life sciences (PLS) and healthcare services (HCS) continued to attract high levels of investor interest throughout 2021, led by innovations in biotechnology and patient services. Capability-driven deals have increased in relevance for many companies, including deals that provide access to new technologies such as mRNA and gene therapy. Looking ahead, we expect that an abundant availability of capital will continue to fuel M&A activity and valuations over the next year.
Competition between large pharma companies and institutional investors — venture capital (VC), initial public offerings (IPOs), etc. — remains high, particularly for medium-sized biotech platforms. As we anticipated in our mid-year update, traditional pharma companies are optimising their portfolios by divesting non-core assets in order to free up capital to invest in innovation and address portfolio gaps.
As multiples continue to increase, buyers need to define their post-deal value capture-and-creation plans. Companies with well-crafted long-term plans will be able to unlock value in the current market, while those that take a hands-off approach may struggle to earn the desired return on investment.
M&A-Hotspots
We expect the following areas to be M&A activity hotspots during the next six to 12 months:
Pharmaceuticals and life sciences
- Traditional big pharma players seek to optimise their portfolios by divesting over-the-counter and other less innovative platforms, and continuing to target biotech companies at the frontier of science, such as cell and gene therapy or next generation therapeutics.
- Innovative companies that can deliver efficiencies in the mRNA manufacturing process and address bottlenecks in equipment availability experienced by vaccine manufacturers will draw significant interest from investors. Further, pharma players will increasingly invest in R&D for applications of mRNA technology outside of the vaccine space (e.g. cancer treatment) or seek to acquire companies operating in the space.
Healthcare services
- Specialty care platform roll-ups are coming to market, as investors reach the end of their desired holding period and seek to sell to the next tier of investors, which have significant dry powder to deploy.
- Telehealth, health tech, and data and analytics companies that enable quicker, more efficient and/or virtual delivery of patient care via automation and digital solutions such as clinical decision support present value creation opportunities and are attracting investor interest.
- Cross-border transactions will remain at elevated levels as investors continue to build regional growth platforms and/or enter new markets.
Global M&A trends in 2021
Deal volumes and values in health industries increased between 2020 and 2021 by 32% and 65%, respectively. The growth in deal values was partly attributable to an increase in the number of announced megadeals — those with a deal value of US$5bn or more — from six in 2020 to 18 in 2021. Health industries saw increased M&A from PE funds, which accounted for approximately 49% of deal volume and 54% of deal value in 2021, a marked increase compared with the average over the previous five years of 33% and 28%, respectively.
Key themes driving global M&A activity: Portfolio optimization
Industry players seek to direct capital to innovations in patient treatment and to reinforcement of their pharmaceutical pipeline, with particular interest in acquiring companies specialising in cell and gene therapies, mRNA, and digital analytics capabilities.
Large strategic players will continue shedding non-core business units, to focus on building specialty platforms. We expect increased divestment of consumer-focused businesses (such as over-the-counter products) and the acquisition of specialty pharma developers, contract development and manufacturing organisations and contract research organisations.
Digitalisation of the patient experience
The ongoing digitisation and digitalisation of pharmaceuticals and life sciences (PLS) and healthcare services (HCS) business models through the intersection of digital analytics technology, smart health devices, healthcare practice management software and consumer-centric delivery models (including developing direct-to-customer digital therapeutics offerings) is driving cross-sector deals, as established players modernise their business models.
As a result, PLS and HCS firms are increasingly acquiring or partnering with tech companies to leverage digital solutions — including mining and monetising large datasets of patient information — to enhance interactions and offer a more personalised approach to payers, providers and consumers.
Environmental, social and governance (ESG) considerations
Health industries offer increasingly attractive investment opportunities, as they meet the evolving criteria of investors, stakeholders and governmental institutions to provide a clear contribution to global societal challenges. We are seeing a number of ESG topics being incorporated by dealmakers into their due diligence processes and business models:
We see large similarities between the global trends and themes driving M&A and the German M&A landscape. 2021 was another very strong year for M&A activities in the health industries with an increase of 24% and 25%, respectively, compared to 2020 for health services and pharma & life sciences in terms of deal volume. However, a distinct difference between the global and German M&A trend is a lack of megadeals in 2021.
As observed for the global M&A market, the German health industry M&A market is crowded with all kinds of investors competing for assets. Further, cross-border deals continue to be a major factor with 55% of buyers being located outside of Germany and roughly 30% being located outside of the EU.
We continue to observe strong M&A activity in the area of biotech with 48 deals conducted in 2021 after an already strong year 2020 with 37 deals. Assets operating in the mRNA and cell and gene therapies remain an attractive space for investors and continue to gather high valuations. A notable deal in 2021 was the acquisition of Biotest by Grifols.
After a relatively slow year for medical devices in 2020, we saw a strong increase in deal activity in 2021 which even surpassed 2019 in terms of deal volume. The sector was mostly driven by acquisitions in the area of surgical and medical instruments, appliances and supplies (20 deals), most notably the sale of Vision Ophthalmology Group from Stirling Square Capital Partners to Addlife in April. We also observed strong interest in assets in the analytical laboratory instruments space, notably an investor group being granted an option to acquire a 28% minority stake in Sartorius AG.
Pharma deal activity remained stable in 2021 with 25 deals, compared to 24 deals in 2020. We saw a wide range of deals being conducted with areas including distribution (e.g. sale of GEHE Pharma Handel from McKesson to Walgreens Boots) as well as the planned spin-off of Sandoz by Novartis, which is in line with the observed global trend of large players shedding non-core (consumer-focused) assets. Interestingly, we also observed multiple deals in the cannabinoid space (e.g. sale of C3 Cannabinoid Compound from Canopy Growth Corp. to Dermapharm or acquisition of THCinol/CBDinol CanPharma GmbH by Health House International) which might indicate an emerging trend that, however, will depend on the speculated legislative actions floated by the new government.
The health services sector deal activity (92 deals) was mostly driven by deals in the areas of hospitals (21 deals) and physician medical groups (20 deals). Combined with multiple deals in the area of home healthcare (9) and nursing care facilities (8) we continue to see further consolidation in these spaces which we already could observe in the previous years.
In all other areas of health services (labs, dialysis, veterinarians and other health services) we also saw an increase in deal activity when compared to 2020, further highlighting the appetite for the industry.
Outlook
Consumerisation of healthcare
We expect to see a rise in consumer healthcare groups in 2022, following plans announced by Novartis, GlaxoSmithKline, Johnson & Johnson, and Sanofi to spin off their consumer healthcare businesses into separately listed companies. Armed with direct-to-consumer expertise, these spin-offs have the potential to unleash growth in consumer healthcare brands by rewriting the sector’s marketing playbook. Operating as standalone businesses, they also have the potential to become significant M&A players in their own right.
Business model disruption and digitalisation
To unlock value, operators need to embrace digitisation and accelerate the adoption of digitalised practice management and digital solutions that put patients at the centre of the patient care journey. Staffing challenges, exacerbated by the pandemic, put further pressure on healthcare providers to find digital efficiencies to help bridge the gap left by a shortage of skilled employees.
Healthcare services consolidation and resale
Across the healthcare deals landscape, we see continued consolidation of private clinics and specialist care providers, such as skilled nursing or elderly care/assisted living facilities, which remain fragmented across different markets, as well as more focus on productivity improvements across health systems. Cross-border expansion through M&A will continue, creating healthcare platforms rather than country-by-country plays. Further, roll-ups that occurred over the last several years are coming to market, as investors reach the end of their holding period.
Capital allocation and portfolio optimization
We expect large pharma companies will continue to seek to divest over-the-counter platforms and other non-core assets, while seeking to fill their midterm pipelines with medium-sized biotech deals. We also anticipate further M&A activity to address vulnerabilities around active pharmaceutical ingredients (API) sourcing, with some investors setting up API platforms, enabling pharmaceutical companies to divest manufacturing sites in an effort to adopt a more asset-light strategy.
After COVID-19, new applications for mRNA
The success of mRNA COVID vaccines accelerated the widespread adoption of this technology. Vaccine providers — e.g. German companies such as BioNTech — will now look to expand into other areas. Development of mRNA vaccines for other diseases (e.g., influenza, shingles, HIV) is already underway, and researchers are working on mRNA vaccines for cancer. The potential for a massive increase in demand will turn companies that can innovate to ease manufacturing bottlenecks into attractive M&A targets.
“We expect deal activity to remain high in 2022, as companies look to optimise their portfolios for growth. Innovative biotech and med device companies will continue to be attractive M&A targets.”
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