Pharmaceuticals and life sciences (PLS) and healthcare services (HCS) M&A remained resilient in 2023, with innovative companies that can drive value attracting substantial investor interest. We expect dealmaking to accelerate off this baseline in 2024, as has already been observed with a pickup in M&A activity toward the end of 2023 and in the first few weeks of 2024.
Although headwinds such as elevated interest rates and regulatory scrutiny remain, investors and lenders are becoming more comfortable navigating this environment. In the more attractive parts of health industries, dealmakers, while remaining selective, appear eager to pursue high-quality assets which may in turn unleash some pent-up M&A demand.
Large-cap pharma companies are expected to continue pursuing midsize biotech companies to fill pipeline gaps in the face of impending patent cliffs. Investor interest in GLP-1 drugs, used to counter diabetes and enhance weight loss, and a continued focus on precision medicine are likely to fuel M&A activity in 2024.
The divestiture of non-core assets also remains top of mind. Private equity (PE) firms are armed with significant dry powder which can be used to acquire or partner with healthcare assets.
In addition, several funds are holding investments in their portfolios which are approaching the end of their targeted hold periods, which may result in more assets coming to market in 2024.
Although there is cautious optimism that the IPO market will gradually reopen in 2024, likely skewing toward companies with strong clinical data, continued market uncertainty and upcoming elections in several countries may reduce the available window for an exit and force some companies to wait until 2025.
As such, M&A and divestitures will likely remain the prevailing exit strategy and capital-raising mechanism for biopharma in 2024. With higher interest rates potentially persisting, corporations are reviewing their portfolios for divestiture candidates that can’t clear their required hurdle rates to be value-add for shareholders.
And while many megadeals are on pause, we expect to see more collaborations and joint ventures, including partnerships with nonprofits, to get important deals done.
In line with global trends we believe that innovation, technology and digitalisation will be key for several reasons for the Austrian market as well. For example, the ongoing demographic change requires more efficiency.
Furthermore, innovation, technology and digitalisation will boost a further increase of the quality of products and services in the health care sector.
Moreover, and again in line with global trends, there are massive expectations as regards AI technology and its fields of application. However, it remains to be seen how long it will take until these expectations are met.
We also believe that the trend of the past years pursuant to which private equity houses, family offices and high net-worth individuals are interested to invest in Austrian health care start-ups, scale-ups and more established companies will continue. Nevertheless, the investment volumes are (with some exceptions) still relatively small.
In the traditional hospital sector, in the outpatient sector and for general practitioners, Austrian legislation provides for deal-prohibitive restrictions regarding ownership.
Many hospitals are state-owned and therefore not up for sale. Consequently, this sub-sector does not really exist for deals in Austria.
In contrast, we see regular deal activity in the area of geriatric care (retirement homes). Ownership regulation in this market is less restricted. However, a sound understanding of the regulations applicable to this sub-sector in general is key for profitable investments giving investors with ample local experience and know-how significant advantages.
“In line with the expected general rise in M&A activity in Austria, we are confident that this in particular will be true for health tech and digital health. There is a very good ecosystem for these sectors in Austria, as we have highly qualified people for both the tech sector and the medical field.”
Michael LindPwC Legal AustriaIn addition to GLP-1s, we expect that the following areas will be M&A activity hot spots in 2024:
Divesting non-core assets: With higher interest rates forcing companies to demonstrate higher returns for shareholders, we expect companies to continue to strategically evaluate and identify non-core and margin-dilutive assets for divestment. The proceeds from these divestments will then increase those companies’ dealmaking capacity as they seek to acquire assets that align with their strategic visions.
Global M&A volumes in health industries declined between 2022 and 2023 by 8% and deal values increased by 9% over the same period. The trends were very different between the pharma and life sciences sector and the healthcare services sector:
Health industries dealmakers can take steps now to develop a comprehensive M&A strategy, thinking several transactions ahead to drive growth and business transformation and to create value and sustained outcomes. Successful dealmakers will be those who proactively evaluate their existing portfolios, take decisive action in the pursuit of accretive targets and balance the regulatory and macroeconomic risks that persist in the current environment.