Healthcare is one of the sectors with strong private capital investments and with the rapid growth of innovation and the need to streamline costs, deals in the private market have grown significantly.
About 95% of the investment opportunities in healthcare lie in the private markets, says Yann Mauron, thematic private equity manager at Pictet Alternative Advisors.
This is especially as more capital is needed for these pharmaceutical and biotech companies to eventually be ready for public use. Developing new solutions for unmet medical needs, which could be new drugs, medical technologies or digital health initiatives, requires not just plenty of scientific expertise but also significant backing from patient capital, he adds.
The developments are mainly done by smaller, private companies, which have high-risk profiles. And thus, there is a growing need for angel investors and private equity to help de-risk and get these companies off the ground, before an eventual listing, says Pictet Alternative Advisors thematic private equity manager David Braga Malta.
However, Braga Malta says the majority of these companies never go public — many of them are still in the second phase of clinical trial stages, before being acquired by “Big Pharma” such as Pfizer, Novartis and Roche, who would then push towards full commercialisation.
“M&As are a healthy part of the healthcare ecosystem. It is a means for the goal to deliver patient solutions. Without an infrastructure that is able to commercialise and distribute these solutions, patients’ needs will continue to be unmet. Typically, companies that are responsible for the research and development of these products and solutions are small, 20-people-strong firms.
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“The private investors come in at this stage before other larger companies come in to make larger acquisition deals — this is as it would require US$2 billion to US$3 billion ($2.71 billion to $4.06 billion) of investment to get to the distribution phase. Because of this, private investors do not have to wait 10 years of drug development to realise returns,” says Braga Malta.
According to Pictet, between 2014 and 2018, over half of all drugs under development changed hands before receiving regulatory approval. Of these, over 70% stemmed from smaller biopharma companies. That is not to say that no privately-owned biotech start-ups have gone public. Over the last eight years, around US$75 billion of net value has been created by IPOs in the sector. Furthermore, 58% of additional shareholder value was created in the acquisition process among the companies that went public but were subsequently acquired.
That said, there is less concentration in the sector within the Asian region — this means that there are not a lot of companies with the same purchasing power as Big Pharma. Thus, the acquisitions in the region are mainly done by mid-sized companies which influence the acquisition value of these companies, Mauron notes.
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Within the healthcare M&A market, players normally determine the acquisition value by analysing the cost of developing the products in-house. This means that there is a natural cap to valuations of the acquisitions, regardless of whether it is a market upturn or downturn unlike other sectors such as tech, says Braga Malta.
However, the duo acknowledges that the M&A market has weakened over the past year. According to Bain and Co’s Healthcare Private Equity Market 2022 report, the number of deals in healthcare private equity is expected to fall about 20%–30% from 2021’s all-time high of 515 deals to around 400 deals in 2022.
This is amid geopolitical uncertainty due to the Russo-Ukrainian war, coupled with global inflationary pressures which changed the trajectory for the year, with the drop especially pronounced in the third quarter last year. Despite this, Mauron interprets the lower transaction numbers as an indication that acquirers are looking for quality instead of value, seeking to be involved in deals that fit them rather than those that are “cheap”.
While there continue to be ample opportunities in pharmaceuticals and biotech which have the capabilities to lengthen one’s healthspan, Mauron and Braga Malta also highlight increasing opportunities in aged care. This refers to the tools and facilities that provide proper healthcare standards to support independent living, especially for those above a certain age.
“The opportunities are not constrained to just extending lifespan and healthspan — there are a lot of ancillary services and solutions that exist within the healthcare industry that may be overlooked,” says Braga Malta.
