M&A activity in healthcare and life sciences collapse in 1H’22

M&A activity in healthcare and life sciences collapse in 1H'22

What you should know:

– The Stout-tracked index of healthcare and life science stocks fell 16.8% in the second quarter of 2022, in line with the 16.4% decline in the S&P 500.

– Healthcare & Life Science M&A activity collapsed to 338 deals in Q2 2022, down from 535 in Q2 2021 and a record 565 deals in Q4 2021. The report shows that credit markets are likely to will tighten but expect a healthy level of M&A to continue growing and defensive healthcare sector.

M&A activity in healthcare and life sciences collapse in 1H'22

Key trends and market summary

For more than 30 years, Stout has focused exclusively on serving the unique M&A transaction advisory needs of mid-market clients. It is a trusted advisor to leading organizations for its in-depth industry knowledge, top-level attention, process expertise and relentless focus on delivering unprecedented results.

The key trends highlighted in Stout’s Q2 2022 Quarterly Report are as follows:

1. Health Care Stocks and Big Pharma: Healthcare stocks underperformed the S&P 500, but the outperformance of the big pharma and biotech subsectors allowed healthcare overall to keep pace with the market. Hospital stocks fell 32.6% in the second quarter and were the worst-performing sub-sector that Stout tracked for the quarter. Soaring costs for nurses and hospital staff combined with growing labor shortages have caused several of the largest hospital companies such as HCA Healthcare to lower their earnings estimates, driving prices down across the sub-sector in the second quarter of 2022. To address labor shortages, hospitals have often hired traveling nurses or dealt with organized construction staff, which ultimately increases their labor costs.

2. Sub-area doctor’s practice management: Stout has not observed the same labor cost issues impacting the Physician Practice Management (“PPM”) subsector, as these companies typically avoid resorting to contract labor and some PPM companies have already paid at higher rates. Delivery costs are often less significant in the cost structure of PPM companies, and campaigns by large pharmaceutical companies trying to increase market share of post-patent drugs can create additional opportunities for PPM companies, higher margins for J-code drugs to achieve billing.

3. CMS Proposed 2023 Physician Fee Schedule Changes: On July 7, 2022, CMS announced that it is seeking public comment on proposed policy changes for Medicare payments under the Physician Fee Schedule (“PFS”) effective on or after January 1, 2023. Physician payments are based on multiplying the relative value units (“RVUs”) associated with each service type by a conversion factor. RVUs are applied to each service for labor, medical office expenses, and malpractice expenses. The proposed changes would reduce the conversion factor by 4.4% from $34.61 in CY 2022 to $33.08 in CY 2023.

4. Behavioral Health and Telemedicine: The behavioral health sub-sector declined 18.4% in the second quarter of 2022, with only Acadia Healthcare posting gains. Policymakers recognize the need for payers to increase coverage and reimbursement for integrated behavioral health services, which involves collaboration between primary care and behavioral health to achieve better clinical and cost outcomes, and a healthier workforce. Access to behavioral health telemedicine is expected to increase over time, but there are prevailing questions that continue to be debated as to whether opioids can be prescribed in telemedicine consultations rather than in-person visits once the emergency in the behavioral health space is resolved public health is over.

5. Healthcare IT Stocks: Health information technology stocks fell 21.2% in the quarter. Telemedicine leader Teladoc plunged 54% for the quarter as the pandemic continues to ease and patients are no longer seeking shelter at the point of sale, opting for in-person visits instead. Telemedicine is also experiencing increased competition and rising advertising costs.

6. Home Care and Medicaid Outlook Predictions: In general, Stout believes many states will increase reimbursement rates and funding for Medicaid beneficiaries, who have often had difficulty accessing quality home care, as providers refuse to participate in state-funded programs. In California, Medicaid has become an attractive and lucrative business for providers who know how to operate effectively in this segment. Stout anticipates that payers will increasingly refer patients earlier in the care continuum to the lower-cost home environment, and we are actively working on mandates in the home healthcare and medical device distribution sub-sectors, where the market is also expanding and moving towards the per-capital basis from traditional fee-for-service models.

7. Medical Devices and Life Sciences: The defensive pharmaceutical stocks outperformed the market in the second quarter of 2022. Medical technology stocks fell 18.5% for the quarter, while the molecular diagnostics/clinical labs/tools sub-sector fell 15.7%, on the back of weaker performance from high-multiple names like Illumina.

The most important thing about the M&A market

– M&A transaction volume in the healthcare and life sciences industry collapsed to 338 announced and/or completed transactions in Q2 2022, down 37% from 535 transactions in Q2 2021 and a record 565 transactions in Q4 2021. The weak first half of 2022 was to be expected given the abundance of deals completed in late 2021, but the decline in Q2 was far larger than expected

– The volume of new transactions announced in the second quarter of 2022 also decreased to 74 transactions compared to 87 transactions a year ago, which is the lowest level since the first quarter of 2018. This likely indicates that the second half of 2022 will not rebound strongly, and we also expect lenders to become more sophisticated and conservative in the second half amid recession fears and recent rate hikes

– Stout sees high-quality mandates in its own healthcare pipeline, private equity groups and strategic companies continue to hold large cash reserves, and lenders are likely to favor recession-resistant sectors like healthcare and life sciences when it comes to lending for the foreseeable future, we say believe healthcare M&A activity will remain healthy

– Overall, the number of deals completed in the quarter fell 41% to 264

– Total transaction value of deals announced and/or completed in Q2 2022 was $26 billion compared to $31 billion in Q2 2021 and $65 billion in Q4 2021

– The larger transactions in the quarter were again transactions in the pharmaceutical and biotechnology subsectors. Pharmaceutical and biotechnology transactions accounted for five of the ten largest transactions in the quarter; However, companies in these subsectors are more likely to be publicly traded than companies in other subsectors and are therefore more likely to disclose transaction value

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