Health IT to lead 2020 deals, KPMG predicts

Dive Brief:

Deal volume should grow in most sectors within healthcare and life sciences in 2020 compared to 2019, according to a new report from KPMG that includes survey results from 333 investment professionals.
Investors appear less excited by medical devices than by opportunities in health IT and biopharma. The level of investment interest in devices was 20%, compared to HIT and pharma and biotech's 30% and 24%, respectively. "For many years, medical device manufacturers based their growth strategies on incremental product enhancements, adjacent product lines, and geographical expansions," the report said. "While these considerations are still in play, med-tech companies are more focused on the idea of convergence with other sectors, in order to improve outcomes as the industry moves toward value-based care."
The recent repeal of the 2.3% medical device excise tax could help spur investor interest in medtech, KPMG said. The firm expects the industry to grow 5% each year to $800 billion in annual worldwide sales by 2023, and picked non-invasive diagnostics, robotic surgery and AI-enabled devices as some of the most attractive areas of medtech.

Dive Insight:

M&A activity in the healthcare and life sciences sector is strong — up 40% year-to-date in September 2019 compared with the same period in 2018, according to KPMG.

The biggest driver of M&A activity reported in the industry was consolidation and economies of scale, followed by acquisitions to increase earnings per share, changing payment models and portfolio management and rationalization.

Investors expect the robust activity to continue in 2020. Only 39% of survey respondents said the healthcare sector was at or nearing a bubble, down from 50% in 2019. Fewer respondents — 23% in 2020 and 48% in 2019 — believe the life sciences sector is in a bubble.

Healthcare information technology generated the most interest among investors (30%) for 2020, while hospitals and health systems (8%) prompted the least. Investors also expressed interest in the pharmaceutical and biotech sector (24%), behavioral health (23%), home and hospice care (23%), physician, dental and rehab practices (19%) and managed care companies (15%).

The new year has already seen a number of deals. In the payer space, startup Bright Health bought a small California plan focused on Medicare Advantage while Molina nabbed a company serving Medicaid members in the Chicago area for $50 million. Also, primary care chain One Medical filed for an IPO earlier this month and Teladoc announced Monday the $600 million acquisition of InTouch Health.

The percentage of investors who think industry fundamentals are strong is 35% for the healthcare sector and 28% for life sciences. However, the outcome of the 2020 election could disrupt the rosy outlook. Almost half of respondents said the election could have a negative impact on deal activity in healthcare and life sciences.

Changing market conditions could have the opposite impact, leading to more deal activity. These include new market entrants, the shift to value-based care and products to address social determinants of health.

In health IT, investors are most interested in tools involving analytics and informatics, cloud-based EHRs and workflow applications, revenue cycle management software and telemedicine. That follows a Rock Health report predicting more digital health will go public this year. That analysis found that last year saw $7.4 billion invested in 374 companies.

KPMG said pharma and biotech are also likely to boom, with 68% of respondents saying deal volume will be greater in 2020 than it was in 2019.

The outlook for hospitals and health systems isn't as strong. Nearly one-third of investors expect the sector to grow more slowly than the overall healthcare and life sciences industry.

Overall, KPMG analysts said they expect a year of strong investment if the economy remains robust, at least through the summer until elections. "Given the pace of deal activity through the end of 2019, investors seem to have adapted to investment in a changing political environment," they wrote.