The healthcare and life sciences (HCLS) sector remained particularly active throughout 2020. Despite the COVID-19 pandemic, deal activity was very strong in the first half of the year — with notable transactions including Asklepios’ US$1.3 billion takeover of listed Rhön Klinikum AG. The second half of the year saw continued deal activity in HCLS, including Siemens Healthineers US$16.4 billion acquisition of Varian and the sale of German-Spanish pharmaceutical producer Neuraxpharm.
International players have shown increasing interest in HCLS — including, in particular, major private equity investors. This trend, which was evident before the outbreak of COVID-19, has only accelerated during the pandemic, due to the disproportionately large impact the virus has had on certain other sectors of the economy (e.g. Logistics, Real Estate, Automotive, Hotels/Traveling). Major hospital and nursing home operators, telehealth, online pharmacies, lab diagnostics, and similar services are likely to see continued increased investor focus also in 2021. Acquirers will also place increasing importance on scalable internet-driven business models.
*Note: data as of 25th January, 2021 | Source: Bloomberg, Latham & Watkins Tactical Opportunities Analysis
Top Healthcare Life Science Trends to Watch in 2021
As the healthcare industry continues to evolve at a lightning pace, the following trends will likely facilitate key developments in 2021.
- Digitization: Increasing competition from new market players has been challenging traditional business models for some time. Now, the COVID-19 pandemic is accelerating technology-driven change by helping companies realize the potential of digitization and open up to new opportunities. Hospital groups, telemedicine providers, online pharmacies, lab diagnostics companies, and similar healthcare services will likely become an increased strategic and investor focus for collaborations, strategic alliances, mergers, and targeted acquisitions seeking to remain competitive or develop new technologies. Acquirers may also place increasing importance on scalable internet-driven business models.
- Acceleration of corporate divestments: Corporate divestitures, including spin-offs and carve-out sales to strategic or financial buyers, will likely continue to grow in the HCLS sector for a number of reasons. Most companies will want to evaluate their assets on a regular basis to maintain a competitive portfolio, with a focus on specialization and internationalization. By doing so, they can help ensure continued divestitures of noncore assets — thereby freeing them up to investment in more innovative and profitable products. Many companies will also remain subject to increased investor pressure to divest or spin-off non-core businesses. In addition, geopolitical and regulatory resistance to conglomerates is likely to increase. Some foreign investors will be rejected to invest in system-relevant HCLS targets. Faced with higher market barriers, companies may turn to spin-offs and divestitures to more easily create shareholder value.
- Increased focus on emerging healthcare markets: HCLS companies are poised to establish or expand their presence in emerging markets, where demand for healthcare systems is increasing due to aging populations, growing cities, and rising incomes.
- Increased private equity investment: Private equity funds will likely prioritize investments in the HCLS industry in 2021. In addition to having abundant “dry powder,” PE funders can invest with confidence due to their sophisticated platforms, know-how, and management.
- Regulatory uncertainty: Several factors are creating greater regulatory uncertainty for HCLS companies. In particular, the HCLS sector has moved away from using fee-for-service payment models exclusively to increasingly implementing value-based reimbursement models, with a particular focus on improving patients’ overall health. In addition, new policies such as the European Medical Device Regulation and In Vitro Diagnostics Regulation have increased regulatory complexity and expense, while also straining internal legal resources.
- Consolidation: The HCLS sector is likely to continue seeing increased consolidation as market players focus on more specialized product portfolios. Post-pandemic, larger healthcare groups, medical device producer and other investors will likely accelerate their acquisitions in the provider/outpatient market (e.g., radiology, dentistry, and ophthalmology).
- Attention to cybersecurity: Healthcare cybersecurity is a critical area of focus, given the quantity of personal and sensitive information contained in patient health records. As the healthcare system embraces technology in clinical medicine, market participants and regulators (e.g., healthcare providers, government bodies, and regulatory bodies) must ensure that all aspects of patient safety, data protection, and privacy are a top priority.
- Proactive compliance: Because they handle major payment volumes and sensitive patient data, healthcare organizations are vulnerable targets that will need to establish and/or maintain smart and forward-looking compliance measures in 2021. Although regulatory compliance can be an expensive undertaking, cases of non-compliance are like to be significantly more costly for companies in comparison. Smart and integrated compliance capabilities also build confidence among stakeholders and regulators, while empowering companies to grow their organizations and operations.
- Cost pressure?: Although COVID-19 showed the imminent importance of strong HCLS structures supported by public reimbursement and subsidies, due to relevant public disbursements required with regard to the COVID-19 pandemic, probably in Q3/Q4 2021 a discussion could start (again), how to somewhat limit public spending and to reduce public debt.
- Internationalization and cross-border activities: Certain HCLS sectors that have traditionally had a national structure due to regulatory requirements (e.g., service providers, including laboratories, hospitals, and nursing homes) are likely to increasingly move toward an international model. This development follows acquisitions by major German hospital operators in other European countries, as well as acquisitions of German targets by leading foreign strategic players and private equity investors.