• Healthcare second-best performing sector after technology
• Investments will be driven by necessity, as well as sector attractiveness
• Hot areas include outsourced pharma services, weight loss drugs, AI-enabled assets

European healthcare M&A will stay in good shape in 2024 as the valuation gap narrows and lower multiples trigger opportunistic moves, dealmakers told Mergermarket.

The European healthcare sector was the second best-performing sector in 2023 in terms of deal volumes, according to Mergermarket data. Aggregate deal volumes amounted to EUR 67bn, compared to EUR 80bn for the technology sector.

Though 2022 had a higher deal count – 989 compared to 805 for 2023 – the total deal value in 2023 surpassed that of 2022 by 35%, showing that large-cap deals in healthcare can still be done. The top deal of 2023 was Novartis’ [SWX:NOVN] EUR 14bn spinoff of Sandoz [SWX:SDZ] in October, followed by EQT’s [STO:EQT] ongoing EUR 5.5bn take-private of Dechra Pharmaceuticals [LON:DPH] and Danaher’s [NYSE:DHR] EUR 5.2bn acquisition of Abcam.

The biggest challenge for healthcare M&A in 2023 was the valuation gap between buyers and sellers, said Arvin Abraham, partner at Goodwin. However, more private equity (PE)-related transactions will reach the finish line from 1H24, as vendors wake up from dreams of previously unachievable multiples, he said.

“There is appetite and real interest in the sector, it’s just a question of what the market is willing to pay”, agreed Tarifa Simpson, Partner at Mazars.

One company to watch in 2024 is Echosens, a French provider of diagnostic equipment to detect liver disease, owned by Inner Mongolia Furui Medical Science [SHE:300049] and PE firm Astorg. It has a score of 57 out of 100, according to Mergermarket‘s Likely to Exit (LTE) predictive algorithm.* The company told Mergermarket last month that it receives a lot of interest from buyers.

Despite buoyant deal volumes, there is still something of a hangover from 2021, which saw exuberant valuations and deals happening at a phenomenal pace after the COVID-19 pandemic put the spotlight on the importance of healthcare and life sciences, Abraham and Simpson agreed. Vendors have yet to fully realise the new reality for deals, which has led to more protracted processes and some deals not reaching their conclusion, Simpson added.

This was the case with BC Partners-backed VetPartners, for which initial bids fell short of the vendor’s up to GBP 3bn (EUR 3.5bn) price expectation, as reported in May; and for the sale process of Triton-owned specialty pharma company Pharmanovia, which in August was reported to face obstacles due to valuation disagreements. Triton had wanted to sell the asset for more than EUR 2bn, the report said.

EQT’s IPO of Swiss skincare company Galderma has been ready to go all year, but the sponsor has yet to push the button as market conditions would lead to a serious haircut on its original USD 22bn valuation hopes, as reported.

Increased pressure on businesses that need funding or need to exit will boost M&A levels in 2024, especially considering the amount of capital available to PE funds, which are keen to invest into healthcare, Abraham predicted.

In the life sciences space, many companies raised enough money in 2021 to get through 2023, Goodwin Partner Sophie McGrath said. These companies, both private and public ones, are running low on funds and will have to come back to market and raise further capital in 2024, she said. As valuations are now lower, this will drive two trends: potential down rounds and opportunistic M&A, she said. “2024 will be a very interesting year”, she concluded.

Sectors to watch

Outsourced pharma services will continue to be a M&A gold mine, especially for sponsors, Amar Shah, Partner and Life Sciences & Healthcare Lead at Deloitte, said. PE has an ongoing romance with pharma services, as reported.

Medical communications agencies, supporting pharma companies with drug commercialisation services, are the flavour of the season. UK companies such as Avalere Health (previously Fishawack Health), Lucid Group, Prime Global, Helios Medical Communications, and Inizio (previously Huntsworth) are reaching the end of their sponsors’ holding periods.

By far the most-watched area by media this year has been the type 2 diabetes drugs repurposed for weight loss. Novo Nordisk [CPH:NOVO-B] [NYSE:NVO] in September became Europe’s highest valued company, achieving a USD 428bn market capitalisation, after it launched its weight loss drug Wegovy in the UK.

The attention this space has received will trigger further deals in consumer-related health tech and wellness assets, Shah said. For example, Danish Embla, a digital weight management clinic, raised EUR 10.1m in a Series A in August, and is planning its Series B, as reported by Mergermarket.

There has also been increasing interest in artificial intelligence (AI)-enabled businesses, Simpson said. As an example, in February, Envision Pharma acquired UK-based OKRA.ai, which offers AI solutions across commercialization, real-world evidence and data analytics, medical, and pricing for the pharma and life sciences industry.

The excitement around these assets will continue in 2024 onwards, and M&A as well as venture investments are on the agenda, Simpson said. The discussion around AI regulation will intensify next year, she predicted.

Earlier this month, the EU reached a provisional deal on the world’s first comprehensive laws to regulate the use of AI. The European Parliament will vote on the AI Act proposals early next year.

At the large end of the spectrum, pharma companies continue to spin off their consumer health assets, and Sanofi Consumer Healthcare could be the next item on this list – the deal could happen from 4Q24, Sanofi [EPA:SAN] announced in October. The unit could be worth EUR 23bn, according to calculations by this news service, and has also attracted the attention of large buyout firms, which are assessing a potential acquisition, according to a report.

Meanwhile, Bayer [ETR:BAYN] in November announced that it is considering the separation of either its consumer health or crop science businesses. A spin-off of the consumer health division is an obvious choice, and would copy a move successfully made by companies such as GSK [LON:GSK] and Johnson & Johnson [NYSE:JNJ] in the last couple of years, as reported. Bayer’s consumer health division’s enterprise value could come in between EUR 16bn and EUR 19bn, according to analytics by this news service.

Big-picture macro drivers like the undersupply of care and a growing elderly population are fuelling the underlying growth and general attractiveness of the healthcare sector. Outsourced non-critical care services such as ophthalmology and dentistry will stay on the M&A agenda in 2024, as well as medical products and point-of-care diagnostics, Shah said.

HBS UK, which helps healthcare providers reduce waiting times by providing online outpatient services and on-site clinical capacity, appointed Grant Thornton to advise after receiving buyer approaches, as reported by Mergermarket in June.

The cost of living crisis will have a spillover effect on many healthcare assets, including dental clinics, IVF clinics, and consumer pharma businesses that provide elective products or services as opposed to essential ones, Abraham said. As consumers have less money to spend, valuations of such assets in both private and public markets will go down, making them more attractive targets to private equity, he said.

*Mergermarket’s LTE predictive analytics assign a score to sponsor-backed companies to help track and predict when an exit could occur through M&A, an IPO, a direct listing or a deSPAC transaction.