Global Healthcare Private Equity and Corporate M&A Report 2018


In 2017, underlying trends once again triumphed over uncertainty. In the US, investors contended with the possibility that Congress would repeal the Affordable Care Act. That didn’t happen. Nor, despite the unusual longevity of the global recovery, did major economies slip back into recession. As the year progressed, PE funds latched onto the fundamental forces that have long made healthcare such a compelling investment: an aging population, the rising prevalence of chronic disease, the continuous development of innovative drugs and devices, and a still fragmented and largely inefficient delivery system that is ripe for innovation, disruption and consolidation.

With these currents propelling the industry, healthcare private equity had another banner year. Total disclosed deal value reached $42.6 billion, the highest level since 2007, and deal count rose to 265 from 206 in 2016. Funds continued to make large investments in areas that have historically produced rich returns, including retail health, healthcare IT (HCIT), and contract services for pharma and medtech.


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Mergers & Acquisitions

The biggest challenge PE investors encountered was competition. Funds vying for desirable targets often faced a slew of rivals—both corporate buyers and other funds—chasing the same prize. Overall, corporate M&A in healthcare rose to $332 billion in 2017, following a dip in 2016. Many funds ended the year frustrated that they couldn’t get more deals done.

Valuations continued to climb as funds looked to deploy dry powder against a limited set of opportunities. Funds that completed deals at high purchase price multiples were increasingly aware that they needed to focus on operational improvements, rather than multiple expansion, to fuel returns.

The funds that completed the biggest deals often did so by getting creative. They pursued carve-outs and add-ons, they joined forces with other funds and sometimes with corporate buyers, and they turned to the public markets to take companies private. With a dearth of targets available on the healthcare-light end of the spectrum, funds were willing to take on reimbursement risks to win category-leading assets in less saturated healthcare-heavy segments, such as post-acute care, medical groups, medtech and branded pharmaceuticals. Funds also began to think about how to cope with—and profit from—the tectonic trends disrupting healthcare, including digitalization, consumerism and the entry into the industry of Amazon and other nontraditional players.

In this ever-evolving environment, healthcare PE investors are mindful of a few key principles:

  • Disruption creates opportunity and risk. Rather than shy away from the uncertainty that healthcare disrupters foment, investors should look for ways to capitalize on companies that can benefit from new and increasingly digital approaches to healthcare. Investors should also tailor their investment strategies to mitigate the risks that disrupters can bring.
  • Category leadership remains a winning strategy. Across healthcare sectors and geographies, category leaders consistently deliver higher profitability and are better able to withstand economic turmoil. As funds look to expand their deal strategies, they should focus on acquiring or building category-leading assets as the path toward generating sizable returns.
  • Commercial excellence and operational improvement drive returns. In a world of limited targets and high valuations, even the best deal strategy cannot drive returns without improvements to an asset’s top and bottom lines. Funds must develop and execute a clear go-to-market approach and a strong plan to expand margins in order to capture the full potential of each asset they acquire.

Uncertainty ebbs and flows, and economies move in cycles. But the long-term trends favoring healthcare PE investments remain vibrant. The funds best positioned to capitalize on these trends are those that embrace disruption, recognize the importance of developing a plan for operational excellence, and buy or build category leaders.

We hope you enjoy Bain’s latest Global Healthcare Private Equity and Corporate M&A Report, and we look forward to continuing our dialogue with you in the year ahead.

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