The KPMG 2023 Healthcare and Life Sciences Investment Outlook provides insights to investors on the state of eight industry subsectors. It incorporates the latest data about 2022 deal making as well as findings from a nationwide survey of company leaders who reflected on the past year’s activity and described their plans for 2023.
After strong years propelled by rapid innovation and strong demand during the height of the COVID-19 pandemic, most HCLS companies faced business and economic headwinds during 2022, and deal making in several subsectors dropped back toward pre-pandemic levels. Another winter surge of COVID-19 cases at the beginning of the year continued to strain the resources of hospitals and physician practices, which faced employee shortages, supply chain delays, and rapidly rising costs, while life sciences companies faced their own daunting uncertainties. Chief among those was passage of the Inflation Reduction Act (IRA), which opens the door for price negotiation for best-selling drugs. The invasion of Ukraine, surging inflation, and rapid interest rate hikes that led to steep increases in borrowing costs added further complications.
Yet these are changed industries, with advances achieved at remarkable speed during the pandemic now shaping the way forward in many areas. From telehealth and decentralized diagnostic testing to cell and gene therapies and digital therapeutics, rapid innovation continues, leading to strategic repositioning by companies in many subsectors. Despite the extraordinary challenges of 2022, deal making continued, often in the form of smaller acquisitions, partnerships, and licensing agreements. Looking ahead to 2023, 60 percent of respondents to our investor survey expect more deals this year than in 2022. We also believe that a projected decline in industry valuations could be a catalyst for strategic and financial investments.
Here are highlights of what we’ve found in eight subsectors:
- Biopharma. A continued focus on early-stage development of cell and gene therapies and other biologic drugs in 2022 resulted in product acquisitions, licensing deals, and strategic R&D partnerships. Despite a few bigger deals, those smaller transactions accounted for much of the activity, and companies now must factor in both the impact of the IRA and increasing scrutiny by the Federal Trade Commission.
- Diagnostics. Consumers’ experiences during the pandemic altered their expectations about the speed, accuracy, and convenience of diagnostic testing. This spurred diagnostics companies to pursue acquisitions and partnerships to facilitate decentralized testing for a growing number of conditions. That trend could help deal volume move higher after a dip in 2022.
- Medical devices. Questions about how rapidly elective surgery volume will continue to recover post-pandemic dominated the calculations of device makers in many areas in 2022 as deal volume dropped. But rapid innovation in diabetic care, cardiology, robotic surgery, internet-connected wearable devices, and other areas is drawing the attention of industry leaders that want to bolster and shape their portfolios.
- Biopharma services. The services provided by companies in this subsector—from clinical testing of increasingly complex pipeline therapies to securing regulatory approvals and commercializing new therapies—are in ever-higher demand as large companies and small biotechs continue to outsource much of the drug-development process. Deal making could rebound in 2023 as companies maneuver to offer broader, deeper capabilities.
- Hospitals and health systems. Most hospitals, struggling with the higher costs of supplies, capital, and especially labor, now operate on narrow or even negative margins. That’s likely to force even some of the largest systems to consider M&A, joint ventures, and non-traditional partnerships.
- Physician practices. Recruiting and retaining physicians remains a headwind for many practices and a challenge for private equity and other potential acquirers and partners. But many groups are ready to partner with payers and other investors to share the risk of value-based care and help finance rapid technological changes.
- Home healthcare and hospice. In this volatile subsector, hospitals and post-acute care providers are looking for targets for vertical integration, while private equity seeks less-efficient, smaller operations with the potential for profitable growth.
- Healthcare IT. Focusing less now on consumers and telehealth and more on revenue cycle management, value-based care, advanced analytics, and other tools for providers and payers, these companies continue to attract the interest of investors and acquirers.
Our annual healthcare and life sciences investment outlook provides insights at the beginning of the calendar year. Our hope is that the survey responses and analysis provided in this report will help leaders in these industries navigate a complex ecosystem of traditional and non-traditional participants, innovative products and services, and evolving ways of interacting with healthcare consumers.