Q&A: Private equity and M&A in the healthcare sector

November 2024  |  SPECIAL REPORT: HEALTHCARE & LIFE SCIENCES

Financier Worldwide Magazine

November 2024 Issue

FW discusses private equity and M&A in the healthcare sector with Frank Aquila at Sullivan & Cromwell LLP.

FW: Reflecting on the last 12 months or so, how would you describe M&A activity in the healthcare sector? What types of healthcare businesses are being targeted by acquirers?

Aquila: Over the last year, M&A activity in the healthcare sector has been fairly robust, while still being somewhat below the level of recent record years. While we have seen transactions across the sector within healthcare, biopharma continues to be the sweet spot with the most high value transactions. Healthcare services also continues to be an area of significant M&A activity within the sector. In addition to straight acquisitions, we are also seeing larger companies entering into licensing, marketing, co-promote and joint venture deals with smaller companies, as well as seed equity investments in these companies. Overall, the outlook for healthcare M&A is very positive, with buyers focusing on acquiring innovative companies while making divestitures of non-core businesses.

FW: How would you characterise private equity’s (PE’s) presence in healthcare sector M&A? What appetite are PE firms demonstrating to pursue assets in this space?

Aquila: Given that private equity (PE) funds have a significant amount of equity to deploy, they are looking for potential deals in most sectors, including healthcare. Two good examples are the recent divestitures by Baxter International. Last year Baxter sold its biopharma solutions business to Advent and Warburg Pincus and more recently agreed to sell Vantive, Baxter’s kidney care business, to Carlye. Since PE buyers typically focus on growth sectors, they will continue to focus on healthcare. The multibillion-dollar deals over the last year or so clearly demonstrate PE’s appetite for the healthcare space.

FW: What strategies are acquirers deploying to create value and drive returns in the healthcare sector?

Aquila: Like acquisitions in most sectors, healthcare M&A is driven by cost synergies and growth opportunities. Acquirers must identify potential synergies and then develop strategies to realise those synergies. In order to obtain the expected growth, an effective integration plan is essential. Typically, an acquisition will allow the acquirer to expand its research and development capabilities, leveraging the people and technologies of the acquired company.

“The multibillion-dollar deals over the last year or so clearly demonstrate PE’s appetite for the healthcare space.”
— Frank Aquila

FW: Could you highlight any notable transactions in the sector that caught your eye?

Aquila: One of the most interesting healthcare deals in recent memory was Warburg Pincus’s combination of CityMD with Summit Health, which it then combined with VillageMD to create one of the largest physician and urgent care centre companies in the US. Following a similar path in healthcare services were CVS Health’s acquisition of Oak Street Health and Optum’s acquisition of Amedys, highlighting a trend among healthcare companies of expanding their services to better integrate care delivery while reducing costs.

FW: In what ways are new technologies and business processes helping to drive change across the healthcare sector? What impact is this having on M&A strategies?

Aquila: Clearly the game changer for healthcare is artificial intelligence (AI) and generative AI. These, and related technologies, such as machine learning, will drive growth in the near and long term. Technology will lead to new discoveries which will become available much more quickly than in the past. In addition, new technologies such as predictive analytics will lead to early detection of disease and assist in the management of chronic diseases by anticipating complications and enabling proactive care management. Telehealth has expanded exponentially since the pandemic and will continue to grow as the technologies become even more sophisticated. The significant cost of investing in AI and other technologies will lead many smaller healthcare companies to either seek partners or explore an outright sale of the business.

FW: Alongside the opportunities, how would you gauge the risks posed by the healthcare sector to both strategic and financial buyers? What steps can they take to manage these risks and maximise deal value?

Aquila: There are risks to both the sector and to completing transactions, with the most significant risks coming from governmental regulators. Given that healthcare costs have risen as the sector has been able to achieve better patient outcomes – in some cases miraculous outcomes – the cost of healthcare has grown proportionately. As a result, more people are living longer and consuming more healthcare. This is particularly true of most developed countries where the general demographic shift in most of these countries is toward a significantly older median aged population. Payers, the largest of which are governments, seek to limit their healthcare costs. These limitations on cost can most clearly be seen in efforts to cap the cost of pharmaceuticals. We are also seeing regulators taking more time to clear transactions in the healthcare sector, even in situations where the transactions have low or no competitive impact.

FW: Looking ahead, what factors are likely to drive deals in the healthcare sector? How are corporate and PE acquirers likely to respond to market trends?

Aquila: Healthcare will always be a sector with significant M&A activity. While that is a bit of a bold statement, it is actually not as bold as it might first appear. Healthcare is essential and the need keeps growing as the population ages. But more than that, healthcare is ever evolving with new discoveries and methodologies. Since much of the healthcare sector must deal with replacing their products that relatively quickly come off patent, the largest biopharma companies will always be on the lookout for innovative companies with new therapies which can fill their pipeline. Also, price pressure from payers means that companies must always be looking for new acquisitions in order to bring down costs through cost synergies created by acquisitions.

 

Frank Aquila is a senior M&A partner at Sullivan & Cromwell and has served the firm in numerous senior management positions, including as a member of the management committee, as global head of the M&A practice and as co-managing partner of the general practice group. As a leader in his field, he has advised numerous clients in many of the largest and most important global transactions that have been transformational across a range of business sectors‎. He can be contacted on +1 (212) 558 4048 or by email: aquilaf@sullcrom.com.

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THE RESPONDENT

Frank Aquila

Sullivan & Cromwell LLP

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