The volume of announced and closed healthcare industry deals in Q4 2023 (506) was up slightly from Q4 2022 (just under 500 transactions); however, volume remains short of pre-pandemic totals. Deal volume in December and November 2023 was 154 and 153, respectively, down from 199 in October.
As has been the case for the past several years, the life sciences & pharmaceutical subsector again had the highest quarterly deal volume (126) of any subsector, followed by digital health (76), medical device & supplies (62), and physician practices & services (57).
The following sets forth more details on consolidation activity in the major healthcare industry sectors during the end of 2023, followed by our outlook for healthcare deal activity throughout 2024.
Life Sciences & Pharmaceutical
The life sciences & pharmaceutical subsector closed the year strong with 50 transactions in December, up from 33 in November and 43 in October; however, transaction volume for 2023 on the whole was down relative to 2022. Part of this decline may be attributable to growing scrutiny from the federal government on prescription drug prices. On the other hand, many transactions from 2023 reflect continued innovation, particularly for cell and gene therapies, cancer, and rare diseases, which are expected to continue to be very active in 2024 for investments and acquisitions.
Although digital health deal volume fell off towards the end of 2023, the sector still had the second highest deal volume for the 2023 calendar year. Deal activity in this space is expected to continue to grow throughout 2024, as investor interest in AI applications for healthcare remains top of mind, along with other innovative technology approaches, such as increased use of the cloud and consumer-focused applications to improve the care experience.
As mentioned above, transactional activity within the medical device and supplies sector ranked as the third highest in 2023, underscoring sustained interest among investors in new device technologies geared toward care in the outpatient care setting, addressing orthopedic, neurological, cardiac and vascular conditions and enhancing cutting-edge diagnostic imaging and other testing capabilities. Additionally, there is notable investor interest in companies involved in medical supplies, such as those specializing in refurbishing or redistributing medical supplies such as hospital beds and stretchers or developing new and innovative packaging products for medical devices. The outlook for deal activity in this domain is expected to see further growth, particularly if macroeconomic conditions and credit markets show signs of easing in 2024.
Consolidation in the physician services sector continues on an upward trend, even though 2023 activity was lopsided towards smaller bolt-on deals (as opposed to larger “platform” transactions). The hundreds of private equity platforms in a multitude of physician specialties still need to grow (considering their structure and investment thesis), and this factor led to many of the deals in 2023. Further, although we saw very few private equity platform exits in 2023, there is a strong pipeline and we expect to see several platform sales in 2024.
On a more granular level, primary care (inclusive of urgent care) continues to be the most active subsector (with 15 deals in Q4 of 2023), followed by dermatology (6), plastic surgery/medspa (4), urology (4), and various others with a fewer deals each (including, ENT/allergy, orthopedics, oncology, cardiology, eyecare, podiatry and fertility).
Although the sheer number of hospital mergers has settled down over the last several years, including 2023, many of the consolidations involve the acquisition of multiple hospitals, or the merger of smaller and mid-size systems into larger, mega-health systems.
For instance, the year-end announcement of the proposed merger of Lehigh Valley Health Network with Jefferson Health, if approved by federal and state regulators, would create a 30-hospital, $14 billion health system throughout eastern Pennsylvania and New Jersey. Other multi-hospital transactions last year include Tampa General Hospital’s acquisition of Bravera Health network’s three hospitals in Florida (from Community Health Systems), and Novant Health’s acquisition of three hospitals in South Carolina from Tenet Healthcare.
Other “notable mentions” are sectors that for many years have been consistent targets of consolidation, including behavioral health, dental, home health, and diagnostics (lab/imaging), as well as the more recent activity in cannabis industry.
Outlook for 2024
The healthcare industry entered 2023 with significant economic uncertainty driven by inflation and rising interest rates, and global security concerns; however, a recession was avoided, and consumer confidence is on the rise as we enter 2024. Overall, the outlook for 2024 appears positive, as the Fed indicated that several interest rate reductions are expected throughout this year. Also, a recent KPMG survey found that 70% of industry leaders invested more in 2023 than expected, and 61% of them plan to further increase dealmaking in 2024.
There is no end in sight to new therapies and high-tech diagnostics and treatments, and there continues to be strong demand for innovative approaches to the provision of high-quality, cost-effective healthcare. There also is an increase in potential virtual and AI-driven care use cases, as well as a continued trend of more advanced health care services (including major surgical and interventional procedures) being performed in an outpatient setting (e.g., ambulatory surgery centers vs. hospitals). All of the foregoing is likely to generate increased merger and acquisition activity in these outpatient care focused sectors during 2024 and beyond.
For the same reasons, we anticipate growing demand in 2024 for acquisitions of physician groups in most specialties, with continued interest in primary care, dermatology, fertility and eyecare, and the fastest growth in the following newer areas of investor focus – cardiology, orthopedics, plastic surgery, ENT, and medspa.
Moreover, we expect a continued growth trajectory throughout 2024 in the full continuum of behavioral care, including residential care, partial hospitalization, as well as the full continuum of treatment for depression, autism, substance abuse, and addiction disorders. This activity is spurred on by the ongoing national opioid crisis, and the significant uptick in mental health disorders in adolescents and young adults in the aftermath of the COVID pandemic and related isolation and societal disruption.
Another consequence of the substantial growth of care in outpatient settings, and its inverse impact on hospitals’ historic “bread and butter” services, is further consolidation of hospitals – many of which are part of smaller health systems ($1-$5 billion) in a particular state -- into larger, mega-systems with revenues in the $10-$25+ billion range across multiple states. Thus, although we expect to see fewer hospital consolidations in 2024, the transactions will be bigger, involving (or creating) mega, multi-state hospital systems.
On the flipside, there are certain factors that could temper transaction activity this year. First, there is not expected to be a robust domestic healthcare policy agenda for 2024, and political uncertainty created by this fall’s Presidential and Congressional elections could create a bit of hesitance as investors contemplate how any potential policy changes in 2025 could impact their investment priorities.
Additionally, the Federal Trade Commission and Department of Justice are expected to continue to increase scrutiny of larger merger transactions moving forward, as evidenced by their enforcement actions taken throughout 2023.
Lastly, it is also possible that investor interest may be softened due to increasing global insecurity, as a result of the continuing war in Ukraine and escalating conflicts throughout the Middle East.