Healthcare dealmakers see increased M&A, valuations in 2024: KPMG (NYSEARCA:XBI)

Corporate and private equity dealmakers are anticipating an uptick in healthcare and life sciences M&A activity this year, with higher valuations, according to a recent survey by KPMG.

In its 2024 Healthcare and Life Sciences Investment Outlook report, KPMG said that 61% of respondents are expecting more deals in 2024, with only 9% anticipating fewer. Fifty percent said they see deal valuations increasing this year, with only 30% expecting them to fall, compared with 48% who expected them to decrease in 2023.

“We think this disparity in valuation points of view makes sense as there definitely appears to be a biomodal deal market where highly competitive targets are meriting higher valuations than targets where bidding wars have not materialized,” said KPMG in its report.

Of those surveyed, 31% said their firm was planning to increase M&A activity by less than 10% this year, with 22% anticipating a rise of 10% to 20% and another 6% seeing an increase of more than 20%.

As for headwinds, respondents picked inflation and rising rates as the No. 1 factor expected to impact deal activity this year, followed by competition for a limited number of high value or innovative targets, anticipated effects to the economy, internal pressures, and pandemic-related travel limitations.

Lack of available capital was less of a concern, coming in at No. 6, followed by concerns about new anti-trust policies, and high valuations.

M&A in the life sciences and healthcare sectors has dropped substantially since 2021, which saw a total of 2,719 deals. That number fell to 2,134 in 2022 and 1,776 for the period between Jan. 1 and Dec. 10, 2023. Of those 1,776 deals, 919 were in healthcare and 857 in life sciences.

Also of note, the volume of deals has fallen significantly since it hit a high of 744 in Q4 2021, dropping to a low of 369 in Q4 2023, as of Dec. 10.

The volume of strategic investments in life sciences has also been on the decline, from a high of 919 in 2021 to 778 in 2022 and 662 for the period between Jan. 1 and Dec. 10, 2023. Of the 2023 deals, 189 were in medical devices, 143 in pharma services, 167 in diagnostics and lab services, and 163 in biopharma.

Looking ahead at the biopharma space, KPMG said “a more assertive FTC, the impact of the Inflation Reduction Act, and the potential threat of march-in rights could have a profound effect on the industry.”

“If policymakers are not extremely thoughtful on the degree they implement these policies, the current ecosystem that fuels innovation could be dramatically disrupted, which would domino into the deal market,” the firm added.

As for medical devices, KPMG believes 2024 will see a range of deals focused on robotics, AI, machine learning and IOT. M&A in other areas could also rebound from 2023 levels as elective surgery volumes bounce back from pandemic lows.

Strategic investment in the healthcare space, meanwhile, has been on the upswing, sliding from 687 investments in 2021 to 475 in 2022 before climbing to 566 in the 2023 period ended Dec. 10. For 2023, 225 investments were in the physicians group space, 185 in healthcare IT/digital health, 99 in health systems, and 57 in the payer segment.

KPMG noted that strategic buyers “took up the slack” from financial investors last year in the physician practices segment, with more deals stuck in Q3 and Q4 2023 than even in 2021.

“These acquirers tell us that they are now looking for higher-quality assets with stronger management teams,” KPMG commented.

The firm also noted that major players in the payer segment have been increasingly active as of late.

“The value of scale, including the promise of better operating efficiencies, will continue to drive many deals in this space,” KPMG added.