Overview
When we spoke to advisors and analysts in 2023, they all expected “more of the same” for the healthcare M&A market in 2024. None of the headwinds from 2023 were expected to be resolved this year, and especially not by the first quarter.
In mid-March, the Federal Reserve (again) declined to adjust interest rates, remaining at 5.25% to 5.5%. The Biden Administration and Federal Regulators remain skeptical of private equity investments in the healthcare and senior care markets and pledged to continue reviewing their activity throughout the year, challenging deals and mergers.
Labor shortages continue to pressure healthcare organizations and providers. Hospitals have been hit especially hard, with nurses nationwide holding multi-day strikes, citing issues with minimum staffing levels and compensation packages.
Despite these challenges, the healthcare M&A market hummed along. Although we only have preliminary numbers, Q1:24 (488 deals at the time of writing) saw only a 5% decrease compared with the fourth quarter of 2023 (513 deals). The year-over-year decline in activity was more pronounced, with Q1:24 numbers dropping 12% compared with Q1:23.
Historically, it’s not unusual for activity to drop between the fourth and first quarters of the following year. We have noticed that trend over the past several years. A fourth-quarter rush of dealmaking usually creates a surge in activity, and that momentum rarely carries over to the first quarter.
Spending in the first quarter of 2024 reached $53.3 billion, a steep decline from the $78.3 billion announced in the fourth quarter of 2023. There were more deals with announced prices in Q1:24 (112), but there were several multi-billion-dollar deals in Q4:23, primarily announced in the Biotechnology sector by major companies such as Bristol Myers Squibb and AbbVie Inc.
Top 10 Transactions in Q1:24
| Acquirer | Target | Price | Target Sector |
| Novo Holdings A/S | Catalent, Inc. | $16,500,000,000 | Other Services |
| Gilead Sciences, Inc. | CymaBay Therapeutics, Inc. | $4,300,000,000 | Biotechnology |
| Health Care Service Corporation | Cigna’s Medicare assets | $3,700,000,000 | Managed Care |
| Boston Scientific Corp. | Axonics, Inc. | $3,700,000,000 | Medical Devices |
| Novartis AG | MorphoSys AG | $2,889,000,000 | Biotechnology |
| Ingersoll Rand | ILC Dover, Inc. | $2,325,000,000 | Other Services |
| AstraZeneca plc | Fusion Pharmaceuticals | $2,000,000,000 | Biotechnology |
| Johnson & Johnson | Ambrx Inc. | $2,000,000,000 | Biotechnology |
| Sanofi | Inhibrx | $1,700,000,000 | Biotechnology |
| Lonza Group AG | Vacaville, California manufacturing facility | $1,200,000,000 | Other Services |
In past quarters, the top deals by transaction price usually consisted of targets in the Biopharma sectors, but in Q1:24, there was a healthy mix of targets. The largest deal was the $16.5 billion acquisition of Catalent, Inc., a contract development and manufacturing organization (CDMO) that helps companies develop personalized medicines, blockbuster drugs and consumer health brand extensions. The deal was valued at 3.4x the company’s 2022 full-year revenue.
Catalent was formed in April 2007 when affiliates of the Blackstone Group acquired the core of Cardinal Health, Inc.’s pharmaceutical technologies and services segment.
As R&D expenses soar and force companies to outsource much of their drug manufacturing pipeline, we expect to see plenty of demand for CDMOs or contract research organizations. Keep an eye on this space.
Cigna also sold its Medicare Advantage (MA), Cigna Supplemental Benefits, Medicare Part D and CareAllies businesses in the first quarter, one of the largest health insurance deals in more than 15 months. The deal was valued at $3.7 billion, and following the completion of the sale, Cigna will “strategically use proceeds from the transaction in alignment with its capital deployment priorities, with the majority of the proceeds allocated to share repurchases,” according to the press release announcing the deal.
The buyer, Health Care Service Corporation, is the United States’ largest customer-owned health insurer.
The MA industry news has not been positive lately, even ones involving Cigna. In September 2023, Cigna paid $172 million to the United States to resolve allegations that it violated the False Claims Act by submitting and failing to withdraw false and untruthful diagnosis codes for its Medicare Advantage Plan enrollees to increase its Medicare payments.
MA plans and providers have been popular investment targets in the healthcare M&A market, but with increased scrutiny from regulators, we’ll see if that continues throughout the year.
Notable Trends
Private equity remained a significant force in the healthcare M&A marketplace, accounting for 30% of all transactions in the first quarter of 2024. This is a slight decline in their level of investment activity in Q4: 23 and Q1:23 when they had both a higher share and volume of deal activity.
From regulatory pressures to high-interest rates, we expected to see private equity slow down in the healthcare M&A market. That still didn’t stop platform companies such as MB2 Dental Solutions, a portfolio company of Charlesbank Capital Partners, from announcing 20 deals for dental providers across the country. MB2 Dental has been one of the most prolific private equity-backed platform companies in the past three years and has announced 127 deals since 2021.
Health systems also made a deep push into the M&A market this last quarter, announcing 30 deals, with only 10 of them targeting a hospital or another health system. Most of their activity focused on expanding their outpatient care offerings, investing in medical office buildings, home health agencies and diagnostic clinics.
The healthcare real estate market also remains robust, with 56 deals announcements in the first quarter. The largest, seen on the chart featured earlier in the article, was Lonza Group AG’s purchase of a 427,000-square-foot manufacturing facility in Vacaville, California from Genentech, Inc.
The building was sold for $1.2 billion, or approximately $2,810 per square foot.
Most of the healthcare real estate deals were committed by real estate investment firms, such as Big Sky Medical, which purchased Blackhawk Medical Center, a 252,000-square-foot three-building medical and office campus, for $46 million.
It is no secret that providing services in a medical office building or outpatient clinic is much cheaper than in a hospital or inpatient setting, so as care moves to these ancillary settings, the demand for these properties will only increase.
Based on deal volume, the most popular sector for investors was Physician Medical Groups, with 127 deals announced in the first quarter of 2024. That’s a slight increase from the 116 announced in Q4:23, but a year-over-year decline compared with the 143 deals announced in Q1:23. Private equity-backed platforms remained the dominant investor in the physician market, with 68 deals announced. Hospitals and health systems announced 10 deals in the space.
One of the quarter’s most significant deals was announced in late March, and it also happens to be a snapshot of dynamics facing the healthcare industry: struggling health systems, pressure from regulators, and a health insurance giant gaining more market share in the provider space.
Steward Health Care decided to sell its physician group to UnitedHealth Group’s Optum to help with struggling finances. The group, Stewardship Health, includes primary care and other clinicians in nine states and a physician contracting network.
Steward Health Care has been under pressure from regulators due to the $50 million debt it’s shouldering. In February, Massachusetts Governor Maura Healey wrote a scathing letter to Steward’s CEO over its refusal to release financial records.
“If appropriate staffing and supply levels cannot be met, the state will take all actions necessary – in consultation with hospital leadership – to protect patients, including freezing admissions, closing beds, canceling procedures, and transferring patients to other hospitals,” the letter wrote.
The buyer in this deal, Optum, already has a substantial presence in the Massachusetts physician space. In 2021, the company purchased Atrius Health, which at the time had 30 locations and more than 700 physicians across the state.
Optum earned $226.6 billion in revenue in 2023, an increase of 22% compared with the previous year, according to UnitedHealth Group’s 2023 financial results.
