Despite headwinds, the healthcare M&A market thrived in 2022. Preliminary results reveal that deal activity hit a historic high of 2,409 deals, breaking the record set in 2021 by more than 150 transactions, according to data captured in our LevinPro HC database. And there’s likely a significant cache of deals to be discovered in upcoming annual and quarterly reports. The level of activity, despite rising interest rates and borrowing costs, inflation and labor costs, highlights the strength of the tailwinds, such as aging demographics, the shift to value-based care and an abundance of private equity capital. The 2023 healthcare M&A market is looking just as active.
The announced transaction value reached $250.8 billion, a steep decline from the $476.6 billion in disclosed spending from 2021. Activity from public buyers and investors slowed in 2022, resulting in fewer high-value deals and announced prices. Private equity-backed buyers announced most deals, and those details tend to be confidential.
The largest transaction of 2022 by price was the purchase of Horizon Therapeutics plc by Amgen Inc. for $27.8 billion in cash, or $116.50 per Horizon share. Horizon Therapeutics is an Irish biopharmaceutical company focused on developing medicines to treat rare autoimmune and severe inflammatory diseases. In 2021, the company generated $3.23 billion in net sales, largely thanks to its biggest drug, Tepezza.
On the services side, there were also several significant and notable deals. Healthcare Realty Trust, a publicly traded real estate investment trust, purchased Healthcare Trust of America, Inc., the largest dedicated owner and operator of medical office buildings in the United States. The deal was valued at $18 billion and closed on July 20. Healthcare Trust of America’s portfolio comprises approximately 25.3 million square feet of gross leasable area, with $7.5 billion invested primarily in medical office buildings.
The healthcare real estate market boomed in 2022, with 212 deals announced for medical office buildings, a 38% increase over activity in 2021. Investors see a healthy market for medical office buildings in 2023, despite rising interest rates and headwinds.
“Medical office buildings offer investors a unique combination of investment advantages in the current economic climate,” John Chang, senior vice president, national director and research services at Marcus & Millichap Real Estate Investment Services, said in a recent interview with the editorial team at LevinPro HC. “They offer a comparatively high yield, strong long-term, demographically-driven underlying demand drivers and usually they have long-term leases with inflation escalators. Investors targeting lower-risk assets with comparatively low management requirements and long-term upside potential have been active purchasers.”
Retailers also made some big pushes into the market this year. The COVID-19 pandemic exasperated the growing demand for alternative sites of care, and investors took notice in the healthcare M&A market. Instead of hospitals, emergency rooms and long-term care facilities, patients (or consumers, based on whom you ask) are turning toward more convenient and affordable care sites such as retail health clinics, home health care and telehealth. Large retailers have the scale and resources traditional providers may lack. Building a new hospital or skilled nursing facility could take years, but there’s already a CVS or Walgreen on nearly every corner in the United States. That’s a significant competitive advantage, and retailers want to capitalize on it.
VillageMD, a subsidiary of Walgreens, purchased Summit Health-CityMD for $8.9 billion, which includes investments from Walgreens Boots Alliance, Inc. and an affiliate of Evernorth, a subsidiary of Cigna Corporation. Summit Health and CityMD merged in August 2019, creating Summit Health-CityMD, a primary, specialty and urgent care provider. Summit Health and CityMD have more than 2,800 providers across more than 370 locations in New York, New Jersey, Connecticut, Pennsylvania and Oregon.
CVS Health entered the home health market with the purchase of Signify Health for $8 billion, or 10.3x revenue and 46.7x EBITDA generated in 2021. CVS Health expects to fund the transaction with existing cash from its balance sheet and available resources. Private equity funds affiliated with New Mountain Capital, which owns approximately 60% of the common stock of Signify Health, have agreed to vote the shares they own in favor of the transaction.
In 2022, Signify Health’s clinicians expect to connect with nearly 2.5 million members in the home and virtually.
The physician market remained strong, with more than 600 transactions announced. Specialties such as eye care and dermatology continued to drive investor interest, but there’s also rising demand for practices specializing in women’s health and fertility, podiatry and cardiology.
However, activity in other sectors, such as Behavioral Health, Home Health & Hospice and Rehabilitation, fell compared with 2021. This decline feels like a “cooling off” rather than any waning market interest. These sectors remain fragmented, and there is fierce competition between health systems, private equity and strategic buyers to build a dominant market share.
Grading the Hospital sector for 2022 is more of a nuanced affair. Although there was a decline in deal activity, that doesn’t paint the whole picture. Several notable mergers between major health systems took place. Advocate Aurora Health and Atrium Health closed their merger agreement, creating a system with more than annual revenues of more than $27 billion and a network size of 1,000 sites of care and 67 hospitals, serving 5.5 million patients.
Hospitals and health systems are under pressure to increase scale to alleviate operating pressures (labor shortages, increased supply costs, etc.) and keep profitability afloat. These conditions will keep driving strategic partnerships and mergers. In 2023, it might be best to look at which players are merging rather than just the absolute number of deal announcements. Analysts are not expecting headwinds in 2023 to subside, but if activity in 2022 is any indication, investors are capable of adapting and thriving in a challenging market.
