Robust Healthcare M&A Activity to Continue Through 2018

Healthcare mergers and acquisitions saw a banner year in 2017, despite economic and political uncertainty. Analysts believe that lower corporate taxes will continue to lure foreign investors into the $3.3 trillion U.S. healthcare sector.

Healthcare merger and acquisition values surged globally in 2017, rising 27% to $332 billion while the deal count increased 16%. That robust activity should continue in 2018, according to a report from Bain & Company.

"The industry is at a major inflection point, and as a result, we're seeing category leaders consolidate and the silos between sectors starting to blur," said Dale Stafford, partner and leader of Bain’s Americas M&A practice.

"While total corporate deal value in healthcare hasn't quite equaled its 2015 peak, average annual activity over the past four years has been strong, nearly twice the level of the previous four years. This activity is profoundly reshaping the industry," Stafford said.

The investment in the healthcare sector in the United States and globally continued in 2017 despite unease about the state of the global economy, and political turbulence in the U.S. around efforts to roll back the Affordable Care Act.

Still, Bain said investors are lured into the $3.3 trillion U.S. healthcare sector by fundamental drivers that include an aging population, a rising prevalence of chronic disease, the robust development of new drugs and medical devices, and the fragmented and inefficient care delivery system that is ripe for disruption.

Looking Ahead in 2018

Bain says it expects the continued high level of healthcare M&As to continue in 2018, despite valuations at or near record high levels.

"Already, we've seen aggressive moves by corporates across healthcare, retail and technology this year, fusing sectors and leading others to make offensive and defensive moves," Bain says.

Forces that will affect the M&A market this year include:

• Evolving laws and regulations. U.S. tax reform will mean lower corporate rates, potentially making healthcare assets attractive to foreign investors eager to expand in the world's largest economy.   
   
• Innovation. In the pharma sector, the development of next-generation platforms such as biosimilars and gene therapy will accelerate. They have the potential to disrupt the industry, creating buying opportunities while putting stress on traditional companies.
   
• Changing nature of total shareholder return. Rising stock markets have been very generous to the shareholders of public healthcare companies, but that’s not something they can count on going forward. Forty-five percent of TSR growth at publicly traded global healthcare companies over the past five years came from an expansion of price-to-earnings multiples—that is more than growth from either revenue or earnings.

Bain says companies will face renewed pressure to build total shareholder return through revenue growth, margin expansion or financial leverage.

"If they cannot drive revenue growth internally, they’ll likely look for it in acquisitions, adding further fuel to healthcare M&A," Bain says.