The year 2021 went out with a bang for health care M&A action, with major tech companies getting in on the action -- but this year should see lots more buys ahead with hundreds of billions of dollars waiting to be spent, according to several experts.
"'Healthtech' is a natural target for more consolidation today on the basis that the space exhibits the classic advantages of scale, yet most companies are still-underscaled, such that larger players can bring the broader solution to fruition and achieve the natural scale advantages," Cody Powers, a partner and principal at management consulting firm ZS, told Real Money.
Over 2021, health records giant Cerner (CERN) got snapped up by tech giant Oracle (ORCL) for the hefty price of $28.3 billion. Microsoft (MSFT) made a $19.7 billion purchase of Nuance Communications, and Alphabet (GOOGL) partnered with HCA Healthcare Partners HCA to help its digital transition in health care. Apple (AAPL) , meanwhile, is believed to be on the hunt for a health care takeover target of its own.
Yet, big tech players are not the only companies seeking takeovers and tie-ups in health care. Stryker (SYK) has already kicked off the year with a $2.97 billion deal to acquire Vocera Communications (VCRA) and Given the appetite already evident in these types of deals, 2022 could be another landmark year for health care industry mergers.
"Overall, the activity in 2021 represented a more normal year of M&A investing and some level of deferred M&A from 2020," PwC's Deals Sector Leader John Potter explained in a recent report anticipating the year ahead. "We believe there remains a significant amount of capital allocation available for M&A, which will drive an exciting 2022."
Covid Catalyst, SPAC Action
The Covid-19 pandemic has, without a doubt, served as a significant motivator of interest in investing in the health care space.
"Covid-19 came along and slammed the brakes on M&A in early 2020, but in the recovery that action has really roared back," Morris DeFeo, Chair of the Corporate Department at Herrick Feinstein told Real Money. "Now you have the confluence of a very dynamic, technology-focused market with a new and nearly religious fervor around healthcare. Many would argue the focus on health care is overdue as Covid has really spotlighted a number of deficiencies in U.S. health care."
DeFeo, who advises clients on M&A transactions in his practice, said he sees an almost inevitable increase in tech crossovers to the health care space as the latter space demands more technological advancement. He added that the flow of dollars to special purpose acquisition companies, or SPACs, and health care-focused private equity funds are only going to accelerate this spending.
"There is an enormous amount of money out there, some of which has a finite window in the case of SPACs and private equity funds. The fuse has been lit and they need to make investments, so they are very anxious to get into the market," DeFeo concluded. "That is inevitably driving an increase in demand for these deals and a sort of arms race for the best deals."
As Omicron adds another chapter to the Covid saga, this sort of arms race shows no signs of abating as of yet. Nor does the valuation issue show signs of slowing appetite.
This overall appetite for M&A moves beyond just medical technology and the high-profile pandemic-driven names like Teladoc Health (TDOC) -- which bought Livongo earlier in the year for over $18 billion -- and privately held medical records giants like Epic and Meditech.
"In some ways Livongo/Teladoc is somewhat of a 'North Star' for what the space could become, so I think it is very natural for roll-ups to keep happening in that space to get to more entities that reach large scale status," said Cody Powers of ZS.
At the time of the Cerner and Oracle deal, Oracle CTO Larry Ellison said the two companies together would have the capacity to "transform" health care delivery by providing medical professionals with better information -- enabling them to make better treatment decisions resulting in better patient outcomes at a lower overall health care costs.
More deals are now expected to continue in the sector, with hundreds of billions dollars in the pot for new buys, of all types and sizes.
"In 2022, we expect M&A investments to reach $350 billion to $400 billion, driven by all subsectors," PwC's Potter wrote in a recent report highlighting the broad appeal of M&A action in health care. "The continuation of the $5 billion to $15 billion biotech deals, combined with medium-sized pharma ($50 billion) and medical device ($25 billion) deals is expected to drive significant investment dollars in M&A."
This demand could pick up quickly as well, given the amount of money that experts acknowledge is abundant at present.
"The amount of dry powder in PE to do large deals, the SPAC market, and the increasingly large size of VC rounds portends no reduction in valuations as most firms are seeking a national rollout strategy to be a first-tier player for payers, consumers," Christopher Donovan, transaction lawyer and partner, at Foley & Lardner LLP explained to Real Money. "The pandemic certainly accelerated strategic plans and M&A in health care. No doubt, this will continue in 2022."
He targeted hospice care, home health, and care coordination as patient-facing sectors likely to attract more attention and consolidation moving forward, while primary care and physician practice "supergroups" could be attractive opportunities for private equity.
ZS' Powers seconded the idea that interest is broader than simply health tech, noting that Biotech could actually be a good bet for a pickup in M&A action.
"I would be on the lookout for large cap-to-medium and large cap deals that we really haven't seen since the start of the pandemic," he told Real Money. "I think it's reasonable to assume we would keep going at the $1 billion to $5 billion or $1 billion to $10 billion sweet spot predominating mostly development-stage biotech."
Finally, medical devices and diagnostics are likely to be a hot place for takeovers as testing costs mount amid Covid surges and expose shortcomings.
Already in 2022, medical device firm ShockWave Medical (SWAV) is reportedly attracting interest from Penumbra Inc. (PEN) , while Abbott (ABT) , Boston Scientific (BSX) , and Medtronic (MDT) all apparently eye the firm as well. Given the number of firms interested in a potential multi-billion-dollar deal, the expectation of more deals targeting the space is hardly a stretch.
So long as government intervention into these spaces of dire need, such as diagnostic testing, remains slow, consolidation may be key to keeping pace with unprecedented demand. For investors mindful of this trend, picking the firms most ripe for acquisition could prove seriously profitable in the year to come.