Healthcare and Life Sciences Investors Look To Increase M&A Activity in 2023

January 10, 2023

Nearly half expect valuations to drop; operational efficiency will be focus of capital investment; most expect inflation impact on dealing making to be mild

Amid a challenging economic environment defined by persistent inflation, rising interest rates, recessionary concerns and falling equity values increasing uncertainty, healthcare and life sciences (HCLS) investors are poised to forge ahead with 60% of respondents indicating they plan to increase their M&A activity in 2023 according to new findings from the 2023 KPMG Healthcare and Life Sciences Investment Outlook.

“2022 is a story of both tailwinds and headwinds," said Ash Shehata, KPMG National Sector Leader Healthcare and Life Sciences. "Hospital systems are dealing with rising labor and supply costs while biopharma and medical device companies have been exposed to supply chain, logistics, and labor issues that slow down production. Now is the time for HCLS leaders to adjust their strategies to build durability and resilience within their companies."

The 2023 KPMG Healthcare and Life Sciences Investment Outlook features insights from a survey of more than 300 industry executives who provide their perspectives on how evolving market factors and the policy environment may impact investment decisions in 2023.

Key Survey Findings Include:

60% of HCLS survey respondents say they expect to increase their M&A activity in 2023 compared to 2022, with a quarter of respondents saying they plan to do at least 10% more deals than in 2023 compared to 2022.

Nearly half of HCLS respondents expect valuations to drop in 2023 compared to just 14% from the prior year. Most healthcare respondents expect to see decreased valuations in Dx companies and post-acute care while life sciences respondents expect to see the greatest decline in diagnostics manufacturers in the year ahead.

Asked if rising inflation and the rising cost of capital could impact their companies’ ability to do M&A in 2023, a majority of investors said they expect it will have a modest effect. However, views vary within sectors, as 39% of healthcare investors say it’ll be a major headwind compared to a mere 26% of life sciences respondents.

56% of respondents said that deal activity exceeded their expectations set on January 1, 2022 with half saying more capital was deployed than originally planned.

Areas of Capital Deployment Focus for 2023

When it comes to deploying capital in 2023, operational efficiency and expansion into new offerings, platforms and milestone-based deals are forecasted to be key capital deployment areas for HCLS respondents.

“The tailwinds that drove M&A in the last two years-the need for innovation and the need to fill pipelines-remain in force,” said Kristin Pothier, Principal, National and Global Healthcare and Life Sciences Deal Advisory and Strategy Leader. “Companies are sitting on a lot of cash and assessing their opportunities to make strategic investments now that will set them up to gain a competitive advantage as we come out of a possible downturn. Whether investing in new technology platforms, enhancing their digital ecosystem, or reimagining approaches to new geographies, deals are likely to continue to reflect the new reality of the industry, a reality that balances scientific and clinical advancement with cost.”

Select Subsector Highlights:

In biopharma, 64% of investors said in 2023 they are more likely to acquire early stage, innovative assets with the same number indicating they will seek late stage, lower risk targets

More than half of medical device investors said in light of FTC policy changes they are focusing more on asset deals while nearly 4 in 10 are focused on smaller tuck-in or bolt on deals

More than 6 in 10 investors in diagnostic and testing companies expect an increase in deal volume in 2023, especially strategic partnerships.

65% of respondents in healthcare IT/digital ranked behavioral health as the service line most prone to transition from in person care to telehealth in 2023.