Mergers and acquisitions (M&A) in the healthcare sector have experienced a decline in the second quarter of 2023. However, experts predict an upturn in the coming months, driven by shrinking valuations and divestitures of non-core assets from healthcare companies. This blog post explores the recent trends and future prospects of M&A activity in the healthcare industry, keeping a keen eye on the factors that influence this landscape.
A report by KPMG reveals that Q2 of this year saw a decrease in overall healthcare M&A deals, with only 245 compared to the previous year’s second quarter. This represents a decline of 7% from last year and a more staggering 41% drop compared to the same period in 2021.
Despite the decline in deals during Q2, the report identifies a potential increase in M&A activity for the second half of this year. The continuously shrinking valuations of healthcare companies, along with divestitures of non-core assets, are expected to attract buyers who were previously deterred by high valuations in certain healthcare sectors.
Additionally, the report suggests that M&A deals may witness a boost in the first half of 2024 if the Federal Reserve decides to cut interest rates. This anticipated decrease in interest rates could incentivize buyers further and contribute to increased M&A transactions.
Despite the reduced overall deal volume, Q2 did witness a few significant megadeals. CVS Health’s acquisition of Oak Street Health, valued at $10.6 billion, stands out as the largest deal. This strategic move enhances CVS’s primary care offerings by granting them access to 600 primary care providers, 169 clinics, and Oak Street’s technology platform for value-based care. Other notable megadeals include Optum’s $3.3 billion acquisition of Amedisys and TPG and AmerisourceBergen’s $2.1 billion purchase of OneOncology.
KPMG’s analysts predict that the trend of clinical services moving away from traditional hospital settings will continue influencing healthcare M&A. The report highlights regions like Austin and Las Vegas, where a substantial number of medical procedures now take place in ambulatory surgery centers (ASCs) and offices. In such areas, physician groups become attractive targets for buyers who seek to expand services and enter value-based care arrangements.
Specialties such as primary care, cardiology, women’s health, and nephrology hold significant value-based care potential, making physician groups in these areas particularly appealing to buyers. Companies with ambulatory assets and high patient volumes are positioned well to grow their service offerings and embrace value-based care models.
For regions where hospital-based procedures still dominate, such as Cleveland and New Orleans, investors have a considerable opportunity to shift services to alternative care sites. Independent physician groups that own ambulatory assets in these markets can receive higher fees and revenue, as services move out of hospitals.
Investing in immature markets and shifting services outside hospitals present challenges, including provider concentration and disruption of referral connections. To address these obstacles, buyers are advised to focus on fee-for-service specialties with high procedural volumes, such as ophthalmology, orthopedics, and urology. Collaborating with payers can also prove beneficial, as they can provide the necessary technology and equipment for performing procedures and diagnostics in office settings.
While M&A activity in the healthcare sector experienced a decline in Q2 of 2023, there is optimism for the future. Shrinking valuations and divestitures, along with potential interest rate cuts, create favorable conditions for increased deal activity. The shift of clinical services beyond hospital walls and the growing significance of value-based care models further shape the M&A landscape. Investors need to pay attention to regional dynamics and strategic specialties as they navigate this evolving terrain to capitalize on emerging opportunities.
Market Capital Research 