Healthcare M&A Insights: Q3 2024 & end-of-year outlook

The volume of announced and closed healthcare industry deals in Q3 2024 (498) remain at the lower levels observed thus far throughout the year. Deal volume slowly declined throughout the quarter with 175 deals in July, 170 in August, and 153 in September.  

As is customary each year, we expect that Q4 will have more robust “end of year” deal volume, with some carrying over to early 2025 for tax reasons. We also expect that deal volume in 2025 will outpace 2024 due to several factors, including decreasing inflation and other favorable macroeconomic conditions, as well as greater stability following a presidential election year.

Despite the overall lower volume, there are still major deals happening in the market with hospital systems and rehabilitation & long-term care groups standing out, rewarded by public markets due to their essential services, good margins, and steady growth. As with earlier this year, a number of targeted strategic mega-deals occurred in the hospital/health system sub-sector in Q2 and Q3, including Risant’s acquisition of Cone and the Jefferson and Lehigh Valley merger.

Overall, there remains significant disparity in margins and cash on hand between stronger and weaker health systems, which market conditions make hospital systems well suited to potential greater M&A activity going forward, mainly including smaller systems merging into larger better-capitalized regional and national health systems.

Recent deal activity is also highlighted by two notable IPOs: Ardent Health, a hospital operator, and Guardian Pharmacy Services, a long-term care specialty pharmacy. These public listings may spur further private equity interest, especially as strategic and financial buyers for large health care delivery assets remain limited.

Compared to Q2 of 2024, the following show sector-by-sector quarterly trending entailing double digit percentage changes:

The top healthcare sectors for transaction volume in Q3 2024 were as follows (including those with at least 20 deals):

As in Q1 and Q2, life sciences and pharma dominated the deal volumes in Q3, with almost double the number of deals than in the next largest sub-sector. This reflects the continued innovation in this sub-sector with new therapeutics enabled by advances in precision medicine, AI, and scientific advancement. It also reflects the continuation of the life sciences sector’s traditional business model of continuous portfolio optimization. KPMG’s 2024 Healthcare and Life Sciences Investment Outlook predicted continuing appetite for innovative cell-and-gene therapies and treatments for cancer and rare diseases, and year to date, this appears to have been borne out.

Deal volume for physician practices and services in Q3 2024 (45) was down from Q2 (55). Despite the downturn in deal volume, deal activity for this subsector is currently in the top five year-to-date volume across all healthcare sectors, with most of the volume centered around oncology, musculoskeletal (orthopedics, spine, pain, neurosurgery, etc.), cardiovascular, infusion, OB/GYN/fertility, and primary care services. Many physician practice acquisitions this year have been smaller “add-on” transactions, as private equity investors seek less expensive options amid what some perceive to be temporary market uncertainty. However, we believe that the recent Federal Reserve rate cut will lead to continued viability for PE investment in the sector.

Home care and hospice rollups saw significant levels of interest in 2022 and 2023 but deal making year-to-date appears to remain suppressed. However, long-term trends in technology and customer demand – especially the increasing elderly (70-90 year old) population, means that there will be increasing demands for caring for these people at more convenient, lower cost sites – including home care and hospice – so we would expect to see continued interest in this sector as overall deal making ramps up over the next 6-12 months.

Cannabis saw a major decrease in Q1 2024 and deal volumes remain very low, particularly in Q3, despite regulatory moves such as a proposed reclassification by the DEA in May 2024 to move cannabis from a schedule I to schedule III drug. It will be interesting to see whether, as capital markets reopen, this highly fragmented market will see a resurgence in deal making.

Outside of traditional healthcare M&A, healthcare organizations are also optimizing their portfolios in other ways. For example, in Q3, a number of health systems joined together to create a new operating entity for innovation in Longitude Health. We expect to see more of this innovative structuring, as well as acquisitions of technology and professional services organizations by health services and life sciences organizations as they look to strengthen capability in important and fast-moving areas, such as data and analytics and revenue cycle management.

Moreover, the allure of vertical integration in healthcare is waning, as evidenced by reports of CVS considering splitting up some of its components, and Walgreens and other retailers closing many of their on-site clinics. This shift may lead to new deal opportunities as integrated healthcare companies reassess their structures. Meanwhile, specialty value-based care and cost containment platforms remain attractive, with Surgery Partners rumored to be potentially transacting in the next few months, and Evolent Health reportedly in talks to be taken private, drawing interest from major private equity firms.

Outlook:

While interest rate cuts have begun and political clarity is anticipated following the presidential election, we expect the normal surge in end-of-year deal activity in Q4, with a notable pickup likely in 2025. Regardless of the outcome in November, we believe the healthcare and life sciences sectors will continue to attract private equity interest due to strong economic fundamentals, positioning the sector for a robust year in 2025 as dealmaking intensifies.

Sources and Methodology

 

 

Epstein Becker & Green PC is a national law firm with 21 offices across the country and approximately 180 healthcare attorneys who focus on healthcare mergers, acquisitions, joint ventures and other transactions, as well as all aspects of healthcare regulatory law and compliance. For more information about EBG, please visit us at www.EBGLaw.com.

KPMG is one of the largest providers of professional services—advisory, strategy, audit, and tax—to the healthcare and life sciences industry globally with more than 4,200 industry-specific partners and professionals. KPMG professionals specialize in advising corporate, private equity, and public organizations across all phases of the M&A lifecycle, from deal strategy to diligence to post-close value creation. For more information about KPMG, please visit us at www.KPMG.com.

Ziegler | Best-in-class healthcare investment banking, advisory and capital raising solutions for companies across the healthcare industry. In our core practice areas of healthcare services, healthcare information technology, hospitals and senior living, Ziegler is one of the most active M&A firms offering innovative sell-side, buy-side, recapitalization/restructuring, equity private placement and strategic partnering services. For more information about Ziegler, please visit us at www.Ziegler.com.

This content is for informational purposes only, does not constitute legal advice, and may be considered attorney advertising in some jurisdictions. Epstein Becker & Green PC, KPMG LLP and Ziegler do not comment on any particular transaction referenced herein. The list of transactions was compiled by KPMG LLP and Ziegler using public announcements, other publicly available information, and various industry databases.

The information provided by KPMG LLP and Ziegler herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation.