Interest Rates, Recession Fears Aren’t Stopping Healthcare Deals

June 26, 2023 - So far this year, healthcare deal volumes have remained resilient despite several headwinds, including higher interest rates, greater antitrust scrutiny, elevated valuations, and general recessionary fears, according to PricewaterhouseCoopers (PwC).

The firm’s midyear outlook report for healthcare deals showed a modest decline in the number of deals over the last 12 months ending May 14, 2023. Volumes fell by just 4 percent from levels observed in 2022, which was a banner year for healthcare mergers and acquisitions.

However, the number of healthcare deals is still nearly twice the levels seen from 2018 through 2020, according to the report.

Deal values, on the other hand, experienced a more meaningful decline, with values falling by 15 percent. PwC said this is a continuation of a trend last year when there were more smaller value roll-up and add-on transactions than transformational platform deals and megadeals.

There were six megadeals over the last year, including CVS’ $10.6 billion acquisition of Oak Street Health and Village MD’s (a Walgreens subsidiary) $8.9 billion acquisition of Summit Health-City MD. Last year, CVS also acquired Signify Health for $8.0 billion.

Other megadeals in the report included the $7.1 billion acquisition of Syneos Health, the $7.4 billion acquisition of Mediclinic, and the $5.4 billion acquisition of Chubb by Cigna. All megadeals have values of $5 billion or greater, PwC reported.

Deal valuation was strong in the hospital subsector, which included Mediclinic’s acquisition. Although, leading valuation was other services, which includes contract research organizations, ambulatory surgery centers, home infusion services companies, and medical office buildings.

Deal value was also high for home health agencies and hospices, as well as labs, MRI, and dialysis services companies.

Additionally, industry-wide enterprise value (EV) to EBITDA multiples have remained steady since the end of 2022. The report stated that the multiple has decreased from elevated levels at the end of 2021, but as of May 15, 2023, the average multiple across health services subsectors was 13.6x compared to 13.7x as of Dec. 31, 2022, and 15.9x as of Dec. 31, 2021.

EBITDA multiples in five of the seven subsectors in the report also dropped since Dec. 31, 2021. Most notably, PwC saw declines in outsourcing (down from 19.2x to 12.6x) and managed care (down from 17.3 to 14.6).

Healthcare deals will persist despite strong headwinds because of the potential opportunities, PwC reported. For example, payers and benefits managers can capitalize on expected member growth in exchange and employer-covered plans as more people leave Medicaid after the expiration of continuous enrollment.

Health services companies also need to adapt and reinvent themselves in order to grow, the report stated. Disruptors, including retailers and hospitals, as well as private equity firms are already doing it, so companies will need to catch up.

PwC has started to see private equity firms, in particular,  “more frequently seek newer asset categories that serve provider groups; specifically, those that facilitate opportunities for value-based care or offer other ancillary opportunities for physicians to supplement their traditional fee-for-service income streams.”

“As legacy investment theses become more repeatable, we expect PE buyers in particular to continue innovating and shifting their deals approaches away from direct buyouts to more partnership-based models and shift away from the traditional platform and add-on approach toward more niche solutions that directly enable provider groups,” the report said.