Evening Brief – 01.08.24

Consolidation

Healthcare private equity activity managed to resist tough macroeconomic challenges in 2023, but companies that fail to demonstrate solid value propositions may struggle to raise capital this year, according to reports by HSBC and Bain & Company.

According to both reports, while deal valuations for life science businesses and healthcare providers have declined since 2022, investor interest has remained stable in the face of inflationary challenges, geopolitical dangers, and constricted credit markets.

They also discovered that 2024 is expected to be a year of market consolidation as companies are forced to close or merge at a discount due to a lack of new capital.

Using PitchBook data through December 15, as well as information from company websites and its own analysis, HSBC estimated that venture capital investment in the U.S. and Europe in 2023 totaled $46.7 billion across the biopharma, diagnostics, medical device, and healthtech segments, a 28% decrease from 2022. Biopharma was the dominant sector, accounting for around 49% of overall deal value, with $22.9 billion in financings, a 23% decrease from 2022.

HSBC highlighted an increased prevalence of add-on deals against new investor-led financings in 2023, as well as a 50% decline in deals priced at more than $200 million.

Bain & Company’s study was based on data from Dealogic and Asia intelligence firm AVCJ. It calculated a higher total deal value for the year — $60 billion — with biopharma accounting for roughly 48%.

The firm also projected the sector being stable, with healthcare accounting for 15% of total PE transaction volume in 2022 and expected to remain at that level in 2023, even though the overall number of PE deals was substantially lower (444 in 2023 versus 654 the previous year).

“In 2023, technology and business-model disruption led to an ideal environment for real innovation, and we noted that sector-leading companies had significant funding rounds, which we think will continue in 2024,” said Jonathan Norris, a managing director at HSBC and lead author of the report.

“However, with global economic uncertainty expected to continue into 2024, companies that have not hit significant value inflection in development or revenue may have trouble raising new investor-led rounds, leading to low value M&A or private company consolidation, and some may have to shut down,” Norris said.

Nirad Jain, co-lead of Healthcare Private Equity at Bain & Company, agreed. “In 2024, sponsors will need to establish higher confidence in value creation opportunities earlier and think beyond pure commercial diligence,” he said. Successful investors will evaluate a wider set of factors early in their process to create value quickly.”