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Second Quarter Sees Slight Slowdown in Health-Care Deals

Aug. 4, 2022, 8:00 AM

Health-care transactions have been relatively active throughout the first half of 2022, though not as active when compared to the banner year of 2021. Specifically, deal volume for the first half of 2022 (1,112) is down approximately 23% from this time last year (1,444).

The slowdown in deal activity is a likely response to growing economic uncertainty and continuing headwinds with rising inflation and worldwide supply chain issues compounded by the war in Ukraine.

Despite the headwinds, when compared to 2018 through 2020, total transactions over the first half of 2022 are up over 25% from 2020 (830), 47% from 2019 (586), and 52% from 2018 (530). Life sciences continues to lead the way as the most active subsector, followed by health-care IT, medical device, and physician services.

Life Sciences

The life science and pharmaceutical subsector had its second strongest month of deal activity year-to-date, in line with the thesis that the subsector may be somewhat more immune to the economic headwinds, while also continuing to be a key player in Covid-19 response as the industry recovers from the pandemic and repositions for the future.

Health-Care IT

Although health-care IT and software has the second highest deal volume among subsectors through the first half of the year, volume is down from this time last year, which was extremely active due to accelerated changes in care delivery during the height of the pandemic. However, continued focus on telehealth after the pandemic, and growing patient interest in remote care options, could help to sustain longer-term interest in this sector.

Medical Device and Supplies

Compared to 2021, medical device and supplies deals have experienced a drop in deal volume due to continued supply chain issues and growing economic pressures on health system purchasing. However, the potential continuation of Covid-19 and the rise of new illnesses such as Monkeypox, could drive activity higher in this sector as these issues increase the demand for diagnostics and medical supplies.

Physician Practices and Services

There were 20 physician practices and services deals in June, but this sector was down year-to-date when compared to 2021. This includes four dermatology practices, and several urgent care and primary deals. As described below, however, the second half of this year is expected to be very active with physician group transactions.

Outlook for Second Half of 2022

Despite the headwinds mentioned above, we remain optimistic about the second half of 2022 due to current deal activity and processes underway, as per health-care investment bankers and mergers and acquisitions attorneys who are active in this space. As a result, total 2022 health-care deal volume may not match the record-setting totals of 2021 but could still outpace the overall trend from the past few years, notwithstanding several macroeconomic challenges.

Though volume is down from 2021, the heightened transaction activity compared to 2018, 2019, and 2020 is the result of several forces, including:

  • Continuation of 2021’s record year of health-care industry consolidation, including frothy valuations and related fear of missing out;
  • Concerns about inflation and other macroeconomic factors that could potentially be much more threatening next year; and
  • Ongoing transformation in the health-care delivery system which seems to be driving companies to become part of larger, well-capitalized organizations with sophisticated management teams, and that can more effectively adjust to industry and regulatory changes, and better compete.

The above three factors are especially true for physician groups, as they have heightened challenges due to competition from many large and growing national health-care companies—including, for example, Optum, Aetna/CVS, and Amazon, as well as large local health systems and growing private equity-backed physician specialty platforms. The following physician subsectors experienced the most transactions in the first half of 2022: primary care, ophthalmology (including retina), dermatology, and orthopedics/pain.

Additionally, we expect an uptick in orthopedic, pain, and neurosurgery practice deals during the remainder of this year and beyond, as there are now more than 15 private equity backed platforms in these specialties, all of which are very active in pursuing multiple add-ons. Moreover, eye care and dermatology activity has remained steadily active, consistent with the last few years. Further, there are many cardiology group deals that are expected to close in the second half of 2022. Cardiology practices are anticipated to be the next “big” specialty that private equity investors will pursue (largely due to Medicare now allowing many interventional procedures to be performed at ambulatory surgery centers).

In addition to physician groups, the home care and hospice and behavioral health subsectors are expected to maintain steady transaction volume through the end of 2022. With respect to home health and hospice, as the elderly population continues to grow each month, patients desire to receive care at home: (i) to avoid nursing homes and other long-term care facilities which have had issues with the spread of Covid-19 and (ii) to receive care in a more desirable and cost-effective setting.

Moreover, we expect stable volume in behavioral health transactions, including deals related to substance abuse, other addiction disorders, and basic mental health care, as the demand for all of the foregoing is expanding due to many factors, including pandemic-induced burnout, isolation and depression.

Overall, economic conditions will weigh heavily on the industry during the second half of the year; but nonetheless, we expect deal volume to remain strong, trending higher than historical benchmarks set prior to 2021.

This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.

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Author Information

Gary W. Herschman is a member of Epstein Becker Green in its Newark, N.J., office. Anjana D. Patel is a member of Epstein Becker Green in Newark. Timothy C. McHale is an associate at Epstein Becker Green in Newark. Hector M. Torres is managing director at FocalPoint Partners LLC in Chicago. Larry Kocot is a principal and national leader, Center for Healthcare Regulatory Insight at KPMG LLP in Washington, D.C. Carole Streicher is U.S. lead partner, deal advisory and strategy at KPMG LLP in Chicago

Michael Stotz and Jordan Coley of FocalPoint Partners; and KPMG’s Ross White contributed to this article.