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Healthcare pipeline grows as dealmakers prepare for pickup in assets coming to market

Although market conditions have affected the workings around auctions and come-to-market timings, the healthcare sector remains at the forefront of sponsors’ focus, according to delegates at the McDermott HPE 2023 conference.

Certain subsectors are continuing to draw interest from investors. A wide array of mRNA treatments, coupled with small molecule therapies, have gained momentum, thanks in part to their relevance to research prompted by the COVID-19 pandemic, which caused a shift in healthcare practices.

Medical imaging has also garnered substantial interest among sponsors and buyers, the partner of a healthcare-focused advisory firm said. The category was highlighted as a catalyst for future deals by other panelists during the conference. The carve-out of Life Healthcare’s [JSE:LHC] UK imaging assets, Alliance Medical, is one of the biggest deals under way in the space, with Icon Infrastructure reported to be in pole position.

Buyers are increasingly drawn to asset-light businesses that are less headcount-intensive, reducing inflationary pressures, a sector advisor said. “Medtech, diagnostics, and pharma services have witnessed increased activity, with a promising pipeline for the latter half of the year,” he added.

One particular bright spot in the medtech pipeline is dentistry- and ophthalmology-adjacent businesses, according to Mergermarket’s LTE score and auctions database. Ardian’s Imes-icore is expected to be one of the sector’s most competitive auctions, alongside Careventures and Quadrum Capital-owned Corus Dental and Miura PartnersProclinic. This asset has an LTE* score of 61, with Mergermarket’s recent predictive intelligence on a potential sale the strongest contributing factor.

Also exciting dealmakers are Eurazeo’s ophthalmology instruments group DORC and UK-based prosthetics manufacturer Blatchford, owned by CBPE.

Diagnostics has also seen vast swathes of consolidation. However, Synlab’s [ETR:SYAB] divestment of its Swiss, Polish and veterinary labs to separate parties – as it remains in takeover discussions with main shareholder Cinven – shows that there is still some manoeuvring in the market.

Pharma services assets that could hit the markets include GHO-owned Ardena, which has an LTE score of 39*, after the same sponsor brought in Partners Group as a minority shareholder in similar asset Sterling Pharma earlier this year.

The post-COVID landscape has reshaped value chains, creating M&A opportunities, one healthcare sector adviser noted.

“There is an element of fundamental growth to healthcare that will always be appealing,” one panelist explained, highlighting the breadth of options spanning early-stage biotechs and life sciences to staffing and care provision. “There is plenty to play with,” he added.

Overcoming challenges 

While the healthcare industry has seen significant investment from private equity, some subsectors have faced challenges, often due to the impact of the pandemic. Hospitals and patient services are still struggling as a category, often necessitating longer educational efforts to attract investors, the partner of the healthcare-focused advisory firm said.

The broader macroeconomic picture, including high interest rates, has also affected private equity (PE) activity in the healthcare space, making sale processes more demanding and transactions take longer. “Deals are getting tougher and are often cut shorter even before valuations are tested,” a deal advisor said. “While there is still a clear bid-ask spread, often the processes stop even earlier than those discussions.”

Such hurdles have damaged processes for large-cap roll-up healthcare services in particular, including BC Partners’ UK veterinary chain VetPartners, Nordic Capital’s pan-European dental chain European Dental Group, and Triton’s British speciality pharma group Pharmanovia.

One positive sign for the large-cap space is the small reopening of the IPO market, which has kickstarted a revival of dual-track processes. Cinven- and Bain-owned pharmaceuticals group Stada, which has an LTE score of 57, is one such case.

Advisers are being engaged earlier to prepare and address potential weaknesses before entering the market, the head of the healthcare practice at an M&A firm noted. Buyer interest persists, driven by strong historical returns in healthcare, despite a shift in focus towards growth margins over more nascent technological innovations.

Exits on the cards 

Other dynamics are leading to planned exits by sponsors. With many CEOs reaching retirement age, some are kicking off succession plans. And Middle Eastern money is targeting healthcare assets in EMEA, panelists noted. In April, M42, an Abu Dhabi-based tech-enabled healthcare company backed by Mubadala, acquired Diaverum, a renal care service provider, from Bridgepoint.

The market features diverse acquirers, including well-capitalised sponsors with significant dry powder, and impact funds and family offices actively participating in competitive processes.

Buyer interest in general is still alive, with many LPs keen to put money in healthcare, and US firms doubling down on European investment. “This is because returns in healthcare are very strong in any cycle. It is down to the lack of volatility and the strong returns over a long period. It can be among the most exciting sectors to be in,” one advisor said.

The pipeline includes a good mix of carve-outs, succession and sponsor-led exits and take-privates, as well as conglomerates restructuring their internal units to adjust the strategy. In addition, some assets have grown so big, falling in the range of USD 10bn-USD 15bn revenues, that the only option is either breaking them up or attempting an IPO, and preferably in the US due to better valuation projections based on listed peers, according to an adviser on one of the panels.

Despite these complexities, one financial adviser recommended sponsors who have already prepared and feel good about their assets to come to market now before the anticipated rush of deals of 1Q24.

“My advice is that, if you feel ready, now is the time to go,” he said.

by Cristiano Dalla Bona and Rachel Lewis

*Mergermarket’s Likely to Exit (LTE) predictive algorithm is based on a number of key industry, holding behaviour, and dealflow criteria. Mergermarket’s platform assigns a score to each exit opportunity, with a higher score corresponding to a higher likelihood for an imminent transaction.