The healthcare industry has long been a cornerstone of stability and innovation, but recent trends suggest a more dynamic role in the investment landscape. In 2023, amidst economic headwinds such as high inflation and labor shortages, healthcare investment has adapted, displaying both resilience and potential for growth. According to Silicon Valley Bank’s mid-year update, the sector has seen $14 billion in venture capital (VC) raised in the first half of 2023 alone, with the total VC raised in the last 18 months reaching $35 billion. This influx of capital, combined with a decrease in deal numbers to 1,482 in H1’23, suggests a more cautious yet significant investment climate.
Current State of Healthcare Investment
According to KPMG’s 2023 Healthcare and Life Sciences Investment Outlook, the industry experienced several challenges in 2022, including COVID-19 surges, labor shortages, supply chain delays, and rising costs. Nevertheless, rapid innovations achieved during the pandemic continue to shape the industry’s future. Despite these challenges, 60% of investors surveyed expect more deals in 2023, indicating a positive outlook for the industry.
Subsector Insights
- Biopharma: Focus on early-stage development of cell and gene therapies and biologic drugs led to significant product acquisitions and strategic R&D partnerships in 2022. While larger deals were few, smaller transactions played a major role, and deal-making is expected to continue in 2023 despite regulatory and economic uncertainties.
- Diagnostics: The pandemic altered consumer expectations around diagnostic testing, driving companies towards acquisitions and partnerships for decentralized testing. This shift is expected to increase deal volume in 2023 after a dip in 2022.
- Medical Devices: Rapid innovation in areas like diabetic care, cardiology, and robotic surgery is drawing attention, with recovery in elective surgery volume post-pandemic affecting deal volume. Industry leaders are keen to shape their portfolios in these innovative segments.
Hotspots in M&A Activity
- Pharmaceutical and Life Sciences: Large-cap pharmaceutical companies are actively seeking early-stage biotech acquisitions to fill gaps in their development pipelines. According to PwC, the sector is expected to see more small to mid-range deals and joint ventures, with strong competition for innovative assets.
- Healthcare Services: Consumer-facing healthcare companies, especially those focused on vitamins, minerals, supplements, and nutraceuticals, are attractive assets for M&A. The reduction of government support post-pandemic is likely to lead to an increase in distressed deals, particularly in the hospitals sector.
Growth Projections and Trends
McKinsey’s analysis on US healthcare developments projects that healthcare profit pools will grow at a 4% CAGR from $654 billion in 2021 to $790 billion in 2026. Subsectors such as Medicare Advantage, ambulatory surgery centers, and specialty pharmacy are expected to experience higher growth. The industry is navigating high inflation rates and labor shortages, with improvements anticipated post-2023.
VC Investment Landscape
Silicon Valley Bank’s mid-year 2023 update reveals a new healthcare investment landscape in the US, characterized by fewer deals, slower investment paces, and smaller check sizes. However, there are optimistic signs. Venture capital fundraising in healthcare reached $14 billion in the first half of 2023, suggesting a potential return to the record pace seen in 2021. The total venture capital raised in the last 18 months amounts to $35 billion, indicating substantial capital availability for funding new healthcare companies.
Global Investment Trends
The global healthcare industry is experiencing a rebound in mergers and acquisitions (M&A), driven by the need for companies to innovate and grow. According to PwC, abundant capital in the form of private equity dry powder and cash on corporate balance sheets is expected to fuel M&A activity throughout the year. The challenging macroeconomic environment and staffing shortages are likely to motivate healthcare clinics to join consolidation platforms. Sectors like telehealth, health tech, and healthcare analytics are attracting strong investor interest due to their potential to mitigate staffing issues and deliver cost-effective care.
Conclusion
Healthcare, with its blend of innovation, resilience, and growing investment, is increasingly becoming an attractive sector for investors. The current landscape, marked by a strategic shift in subsectors and substantial venture capital inflow, points to a sector ripe for investment. As the industry navigates through immediate challenges, its potential for long-term, sustainable growth makes it a compelling choice for investors looking toward the future.
