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The year in Deals: Preparing for 2024
To listen to all PwC Next in Health podcasts, click here. Subscribe and listen to all episodes at your convenience via any device at Apple Podcasts and Spotify.
Overview
Tune in to hear PwC Deals leaders discuss preparing for deals in 2024, exploring the current state of the deals market and sharing valuable insights from their newly released 2024 deals outlook. Key topics include:
- Fundamental changes and strategy trends for 2024 and how it’s shaping the health services and pharma landscapes
- The role of the regulators and their impact on deals
- Business model reinvention and the use of new technology to acquire better data and how it’s shaping the deals environment for 2024
- What’s on the horizon: Key success factors for good deal making in 2024
Topics: Deals, Health Services, legal, regulations, transactions, capital, private equity, business model reinvention, portfolio, alliances, divestitures, biopharmaceuticals, innovation, pharmaceutical and life sciences, IPOs, M&A, medtech, tightening margins, reimbursements, valuation resetting, public companies, buyers, sellers, investments, providers, payers, value-based care, private equity, not-for-profit, standard of care, technology, supply chain, data, inflation.
Episode transcript
Find episode transcript below.
00:00:00:00 Welcome to next in Health podcast. I'm Jenny Colapietro, PwC’s vice chair for Health Industries, working across pharmaceuticals, medtech, payers and providers.
IGOR BELOKRINITSKY:
00:00:14:08 And I'm Igor Belokrinitsky, a principal at PwC Strategy& and where I help leading health organizations with their strategies and operating models.
00:00:23:01 And today we're going to help you prepare for 2024 and in particular for the year in deals in 2024. And to do that, we have two fantastic returning guests with us. We have Nick Donkar, our deals leader for our Health Services Team and we have Roel van den Akker:, who is our deals leader for Pharma and Life Sciences Team.
00:00:44:10 And we love having them on because they help us make sense of the deals market today and where it's headed. And they have just published their 2024 deals outlook and their outlook, they say, is cautiously optimistic. So, we will find out why they're cautious and why they're optimistic.
00:00:59:81 So we're excited to have them on the podcast. Also, if you happen to be at the J.P. Morgan conference in January, Roel will be there and will be excited to discuss the deals environment with you. So, Roel and Nick, welcome to the podcast.
NICK DONKAR:
00:01:16:27 Thank you, Igor. Excited to be back.
ROEL VAN DEN AKKER:
00:01:19.41 Yeah, thank you, Igor. Excited to be back with you.
IGOR BELOKRINITSKY:
00:01:21:13 We're excited as well. And before we start thinking about the next year, let's maybe spend a moment and reflect on 2023, the year and deals that we've just had. What were some of the big drivers and forces that shaped it and brought us to kind of the results that we're seeing? Maybe. Nick, let's start with you.
NICK DONKAR:
00:01:41:10 Great. Thanks, Igor. And again, excited to be here. From a health services perspective, and again, for those of you, my focus will be on health services (Unintel Phrase) ____ 01.48 were noted. The overarching headwinds are several and I think they permeate across both myself and Roel’s sectors. I'll share a couple of them with you and then Roel can chime in obviously from a PLS perspective.
00:02:02:21 But listen, we've got one of the highest interest rate environments we've had in a long time at least in the past, you know, 15 to 20 years as you think about deals and the ability to effectuate an impact on deals and leverage lending between that, between the uncertainty around the market and between, lastly, the legal and regulatory hurdles that continue to pop up here and there, whether it's market reviews around certain transactions or whether it's actually states jumping in and reviewing transactions.
00:02:32:11 Then the headwinds that the legal team and the regulatory environment has created continue to expand and cause some overarching tension in the marketplace. Against that you also have some very positive tailwinds as I think through this.
00:02:45:18 And the first, continues to be Roel and I have talked about this for a period of time now, and that is that the amount of dry powder or excess capital that sits on balance sheets of corporates, coupled with private equity capital sitting on the sidelines is probably the highest, Igor.
00:03:01:01 It's ever been, at least as far as I can recall, because again, you've got funds that have created tons of new ventures and new vehicles that they're looking to deploy. It's just a function of when they can actually deploy that capital to the best of their ability while at the same time lastly at least on the health services side, there's been two other elements.
00:03:20:41 The first is, this notion of reviewing their portfolio strategic alliances, which again has created opportunities for carve outs and divestitures in the marketplace, which is something we haven't seen in several years, at least on the health services side and to a lesser extent.
00:03:35:18 But an emerging trend, that is the whole business model reinvention, which is the disruption of certain players in the marketplace, whether they be retail or otherwise, that have jumped into the health services sector, that have caused the stable entities to really look at their business model reinvention.
00:03:51:81 Let me pause there. Roel and I will turn it over to you for some of the things you're seeing at PLS.
ROEL VAN DEN AKKER:
00:03:57:21 Yeah. Thank you, Nick and Igor excited to be back. I think if we're looking at the biopharmaceutical subsectors, 2023 has actually been a fairly good year from an M&A perspective. If we look at it from a value perspective, on a volume perspective, it probably fell marginally short of our expectations right, so there's still a healthy levels of activity that we witnessed over the course of FY 23.
00:04:20:04 But I think it's a little bit skewed from a statistics perspective by some of the largest transactions that we have seen in a number of years. I think if you get under the hood of what drove the market the way it panned out in 23, I think it's back to a lot of the factors, Igor, you and I together with Nick, have talked about for biopharmaceuticals broadly.
00:04:39:14 It is this concept of latter half of the decade, your losses of exclusivity that continue to drive dealmakers towards transactions that offer them access to meaningful incremental innovation. If you think about our sector, there still continue to be fantastic strides from an innovation perspective in areas such as cell and gene therapy, oncology, immunology.
00:05:04:01 And I think this year we started to talk a lot more about cardiovascular disease than I think we have not in prior years. So, there still is fantastic innovation coming to our sector. You see dealmakers increasingly flock to those areas where there is incremental innovation, real scientific breakthroughs in areas where there's ready standard of care.
00:05:23:41 And that's where the dealmaking has been in FY 23 and where we expect the dealmaking to be in FY 24. You know, Nick has talked a little bit about, you know, the backdrop of higher interest rates, this concept of the regulator and how to navigate that.
00:05:39:14 I think we've seen people gain some comfort with that over the latter half of FY 23. And we think that that will continue to somewhat normalize in to FY 24, which is sort of the basis for our outlook that we've published and it is sort of along the lines of what Nick sketched as well for health services that we continue to be optimistic for the upcoming year.
00:06:01:14 The IPO markets have by and large been shot for biopharma, and that's an important lifeline for the sector. We expect that some of that will slowly open back up in 24, and we continue to believe that with all the ongoing cost pressures, right, whether it's stacks, whether it's interest rates, whether it's the tail of factor, second order effects of inflation, people are going to increasingly look to M&A, the kind of drive the portfolio forward.
00:06:27:20 So those are some of the themes that I'm seeing on the biopharmaceutical and MedTech sign, I think it kind of weaves in quite nicely to kind of the concepts that make us advanced.
JENNY COLAPIETRO:
00:06:37:02 That's great. Now, thank you both for sharing those macro trends and views. I would love to just double click on each sector and go a little deeper. Can you just share like what are the trends that you're seeing specifically in the house services market and how is that landscape changing?
NICK DONKAR:
00:06:53:24 Yeah, Jenny, great question and thank you for that. So I'm (Unintel Phrase) ____06.56 this from a couple of different angles. The first angle is what I call the hangover from COVID that all parties, whether they be payer or provider, are dealing with that have woven in re -level set the landscape.
00:07:10:21 And that is the tightening of margins in certain areas, particularly around labor and how that impacts reimbursements because that also impacts the valuation and margin profile of the business drives a portion of that.
00:07:23:22 So, we've got a continued environment where the labor uplifts we saw in the marketplace as a result of the shortage and tightening and so forth has resulted in that not to be reset. In fact, that’s reset at a higher market. So, you've got to have a company, whether again, you're talking about for profit, not for profit, private equity portcos, they can operate in that environment.
00:07:46:06 Right. And that's an interesting environment to operate in, right. What are the levers you can pull to enhance value, to build value and then what companies are you looking at that have either done that or not done that successfully? Those could be either partners and/or targets for the growth of your business if you think about from an acquisition perspective.
00:08:04:10 So that's the first piece. The second piece to that is valuation reset in. And so as we think about the public company multiples, honestly not going to name any one sector or even any one company, but they're sort of all over the place, right. And do you have a realistic match between expectation of value between buyers and sellers in the marketplace?
00:08:24:17 And the answer is probably not right now. And then you look at those first two factors and you also think, well, okay, we also have deal volume trending down based on the factors we talked about earlier.
00:08:34:15 But if I take a step back from all that, Jenny, and I say from a health services’ lens, while we're down 13% on a trailing 12-month basis from a volume perspective in total deals, we're down 12% from 2022, which is one of the highest years on record ever from a deal volume perspective.
00:08:53:12 And again both Roel and I when we appreciate and enjoy the valuation arbitrage and or the pricing in some of these deals, volume is most important indicator from a health perspective, right. And so 2020 was a base year, 2021, 1500 plus transactions and 2022, almost 1600 or 1700 total transactions reported. We are seeing astronomical growth. So you have to look at your basis of comparison and reference.
00:09:21:08 And I will also say that is one element. The second element real brief here is where people investing in to now, Igor and I talked earlier, when you think about this roll up strategy that's happening, well, we're in the eighth inning of that right now.
00:09:33:18 And so they've only gone through the first (Unintel Phrase) ____ 09.36 realized value on those, built them, traded them. Now we're into things like med spas, pain care, non-reimbursable (Unintel Phrase) ____ 09.45 fertility, self-pay, cash businesses that are in this level of this playbook rollout.
00:09:51:15 You also got a change in dynamics right, with reimbursement being fixed and there is notion of corporate strategy and value based care where if I had a dollar selfishly for every time a payer or provider said value based care in one day, Igor and I would be very wealthy individuals at this point because of just the sheer volume and nature of people wanting to double click on value based care, which is, you know, focus on quality of care and improving patients lives and having that payment being based on the quality outcomes.
00:10:18:16 Those are all elements that I think are important as we think about health services. And then lastly, what I would say, in addition to sort of the normal course physician practice reviews and urgent care spikes or volume, I would say the last piece here that has been interesting and unique over the last 12 months and Igor, we talked about this slightly maybe on the last call, but it's worth mentioning now, and that is all the players are actually talking to each other.
00:10:43:26 Again, I mentioned earlier an enormous amount of capital that needs to be deployed for profit entities doing strategic reviews of their portfolios. And what we're seeing now in certain situations where public companies and not for profit entities are carving out portions of their business and seeking joint venture partners or capital investors with private equity, all sorts of private equity players in the marketplace.
00:11:05:00 And it's something that if you asked me five years ago if I ever thought that would happen, and I would say you were crazy. Now it's becoming routine where they're actually talking more frequently with each other.
00:11:12:17 So, it just shows you that there's healthy conversations happening in the marketplace. And as Roel indicated, for the PLS side, we also think health service is going to be cautiously optimistic and see a nice little rebound in volume here in the next 12 months.
IGOR BELOKRINITSKY:
00:11:27:20 Nick, as always, fantastic comments both on the high level structural, fundamental changes in the industry as well as more specific subsectors and different plays and strategies and Roel, how about you Pharma Life Sciences outlook for next year, big trends and kind of change makers to watch?
ROEL VAN DEN AKKER:
00:11:47:00 Yeah, I think a lot of the points that Nick made can sort of be extrapolated quite easily to sort of my subsector. I think a couple points that double down on, right. I think we're in a new interest rate environment, so I do think and we've talked on prior podcast, Nick, sort of about the need for incremental innovation and clinical differentiation really mattering to M&A going forward, right?
00:12:08:28 Like there was a lot of dollars and investment dollars that got directed to the seventh iteration of a PD1 or to six iteration, right, in areas that were marginally differentiated and that sort of a byproduct of a zero interest rate environment. I think that chapter of the book is closed, which I think generally is good, but it makes that the market is really refocusing on areas where there truly are (Unintel Phrase) ____ 12.31.
00:12:33:27 And we do expect should M&A dollars and processes around public biotechs to kind of skewed towards areas where that innovation truly exists, right. Innovation relative to the standard of care or innovation in sort of new areas from a technological perspective, that's where we believe it will be add for biopharma. And we see some of that panning out already in the deals that we've seen this year.
00:12:56:09 We expect that trend to continue. Another point to sort of highlight, I think, which is also sort of a reflection of this new interest rate environment there is and we've seen some chatter around this in the market over the last couple of months is that hurdle raids for underperforming businesses that reside currently in a conglomerate, holding on to those businesses is ever greater, right.
00:13:16:18 Because the risk free rate has gone up and investors no longer pay CEOs and management team to diversify for them. They want to do that themselves, right? So we do expect to continue to see healthy activity levels from a divestiture perspective. That's something that Nick and I have been talking about for a while.
00:13:33:13 And we not only expect that kind of because there's ample dry powder, as Nick has kind of alluded to previously. We also expected sort of from the supply side, if you will, right through higher rate as it stands today, the opportunity cost of holding on to underperforming businesses or businesses that are not strategic is increasing high, right.
00:13:52:01 So, we do expect that to sort of continue into 24. And then lastly, what I like to talk about is and again, we've sort of alluded to it in the report, but if you look at the S&P 500 through November, it had a pretty healthy FY 23. If you take the Magnificent Seven out, it's a bit of a different story.
00:14:10:13 And if you look at the pharma subsector as part of the S&P 500, compared to the S&P less than Magnificent Seven, it's a less than rosy picture, right? So increasingly, there is a divide between the winners and the losers.
00:14:24:21 And I do think that the focus on delivering shareholder returns is going to be ever greater in the FY 24. Those that are in the therapeutic areas where can deliver that concept of differentiated science, areas of unmet medical need, those are going to be the winners. And if you're not in those areas, you're going to have to proactively pivot the portfolio to get there.
00:14:44:16 So, I do think we'll see more of that. We've seen quite a bit of that in MedTech this year, so that's definitely been going on and I expect more of that to come in FY 24 as some of these trends, you know, continue to pan out.
JENNY COLAPIETRO:
00:14:57:23 That makes sense. Nick, can you speak to the role of regulators and the impact that they've had on deals this year? What stood out to you so far?
NICK DONKAR:
00:15:07:01 Yeah, Jenny, I think what we're seeing just holistically for health services is deals are taking longer because they're requiring additional layers of approval, whether it be through the federal government and/or state. And I would tell you that this has been something that's been bandied about in the press for years, right. With respect to regulators as a whole, it is really a two or three pronged approach.
00:15:31:27 One is, are you creating a monopoly? Is there any concern around reduction of care, cost of care, access to care for all the right reasons to make sure that services aren't being withdrawn from markets and patients are getting the best possible outcome at the most cost efficient manner, right. So, clearly no issue from my perspective around any of that, right.
00:15:52:21 That's ultra important. It really is just a function of when you think about this potential, in California that was recently passed, this extra layer of scrutiny, right. So, if you dealt in the former space for a period of time or distribution of drugs you had, if it was a sizable transaction, you had a regulation potentially at a national level, right.
00:16:12:13 And any state that you did diligence or work in for providing those services had to be pharmacy approved from a licensing perspective. And now if the target or entity resides in California or has a presence in California, there is a state level. So you can see that as the more complex we do from a just a review process perspective, it's going to take longer.
00:16:32:25 And I think that in and of itself is causing frustration in the overall marketplace around doing deals in health services. I don't think it's going anywhere, right. The process, but it's just a heightened level of awareness when you're thinking about a deal as a whole that all parties should be aware of.
00:16:50:11 Whereas in the past, the ability to diligence in deal work in close in a normal manner was not obstructed by potential regulatory review and approval.
IGOR BELOKRINITSKY:
00:17:01:14 Very, very helpful. There's another topic in addition to the role of the regulators, I wanted to double click on. Both of you have mentioned business model reinvention in your write up and in your comments today and very often some of these new business models come from data they come from technology, whether it's in your new drug discovery or back office administration and care delivery and coverage.
00:17:26:02 So, curious to hear your thoughts on the role of some of these new technologies in shaping the deal environment next year.
NICK DONKAR:
00:17:34:14 Maybe I'll start with that and I would maybe answer it in a backhanded way, if I may. But it's tough sledding out there, I think, for dealmakers in the C-suite right now. Particularly in biopharmaceuticals, we have drug pricing going sideways or down in the best of scenarios, right. So that's not helping the bottom line, higher cost, the clinical trials, we have inflation still running rampant.
00:17:56:23 We have global Pillar Two tax rates coming into effect, right. So, the pressure on the P&L, while still delivering on the mission for a biopharmaceutical company, right, which is helping patients live better lives, is ever greater.
00:18:07:17 And couple dealt with the losses of exclusivity that are coming up, I think where we're moving and this is sort of what we alluded to in some of the pieces that we've put out as well is, you know, ever greater need to be creative, right when it comes to dealmaking, but also fundamentally think about the promises of technology and what they can do to really reinvent the business model.
00:18:28:17 Right. I think that's what we really have talked about, right? So the traditional ways of promoting products may no longer be suitable. The traditional ways of running clinical trials may have to get reinvented and I think we've talked about that quite extensively. That concept gets a lot of attention in the market, but I think you have to understand it through the cost pressures and the lens that I just suggested.
00:18:50:10 I talked to my prior response about the performance of the pharmaceutical subsector in the S&P 500. You talk about the cost pressures that continue to face the executives, the growth challenges that are embedded and the pressures of having to do more with less or ever more profound.
00:19:08:15 And couple that with the regulation that Jenny asked about right. That's clearly there. And Nick talked about that. So, when you add all of that up, I do think there's an ever greater need on executives to be creative with new approaches, with new business models, where joint ventures with risk sharing models, the kind of drive innovation, right, forward with funding structures either through private credit or private equity, that move compounds to the clinic.
00:19:34:15 Those are going to be the ways that companies will deliver value, and those that can lean into that are going to be the winners of tomorrow. That would probably be my way of thinking about this and how that will exactly shape out, is going to sort of evolve in FY 24 and beyond. But that's why we spend time thinking about PwC and talking about quite a bit.
IGOR BELOKRINITSKY:
00:19:53:12 That's great and very helpful. And since you're kind of started us down this road, maybe I'll ask both of you your thoughts on what are the key success factors to doing good deals in 24?
ROEL VAN DEN AKKER:
00:20:06:13 It's a tough question. You want to make the start.
NICK DONKAR:
00:20:08:15 Thanks Roel, I think the key success factors for any organization, right, but particularly in this environment, are a couple, at least on the health services’ side. One is you have to assume that whether you're a provider and or a payer, that any type of reimbursement tweaks or changes are going to be substantial just in the current market.
00:20:30:01 That's one lever that you really have limited control over ride pricing and so forth. How do you really focus on doing things better, faster and at less cost? And how are you leveraging your internal frameworks appropriate way within your organization to create value relentlessly for your patients or your members?
00:20:52:71 If you're a payer while at the same time making sure that you can automate or outsource or take any of your back office elements and really do the most with the least amount of money, such that you're focused on that creation of value and whatever that means based on your organization, but I think the eye on the price there is that.
00:21:14:00 And then how as you think about business model reinvention, as you think about the advent of AI and you think about the data sense that obviously Roel talked about earlier, how can we use that to again, continue to streamline, improve, reinvent ourselves and challenge the norm such that we're delivering for our constituents, whoever they are, public markets, private markets, LPs, members, patients, how do we do that work harmonious and that we're achieving great health outcomes in doing so in the most cost efficient manner.
00:21:43:21 That's what I would say the focus should be on. The market will take care of itself. Those that have will be successful, those that have not, mainly defined a dance partner as we think about this, just in the normal course of things, it's, have you looked under the hood recently?
00:21:58:14 Sort of an analogy, but have you looked under the hood recently? Are you having an honest conversation with yourself on how you deliver in the market? How are you thinking about your levers? How resilient are you based on ups and downs in markets? And then have you action that appropriately? It's one thing to talk about it.
00:22:12:27 It's another thing to actually action it such to your well position of the market to be as successful as you can.
ROEL VAN DEN AKKER:
00:22:18:14 Yeah and I would double down on that Igor, have a value lens to everything you're doing from a buy and sell perspective, particularly in this area of higher interest rates. You know, we've seen some more shareholder activism this year.
00:22:30:19 So, I think this concept of value and everything you do is important. The competition for public biotechs is still very fierce. We can read it in the public disclosures that come out at the end of such processes. So being nimble and quick and agile, as Nick said, is critical. Being a buyer and the seller at the same time, like, you know, reviewing your portfolio while you lean in to actually grow in the areas where you have a right to win.
00:22:54:15 Those, I think are the concepts, be technologically enabled in your due diligence. We spend a lot of time talking about that and also have a key eye on talent. And what do you do to retain talent through to deal like particularly in biotech where there is a fierce competition still for scientific and clinical talent that's imperative to delivering the deal thesis.
00:23:15:11 So, not losing sight of that I think is critical. But I think a lot of the points I raised Igor, are dovetail of next but here's a couple specific ones I think that are appropriately adequate for biopharma.
JENNY COLAPIETRO:
00:23:25:22 Excellent. Well, it certainly sounds like it's going to be a very interesting in 2024. So just as we wrap up here, just a few last minute thoughts on what our audience should focus on based on what's on the horizon.
ROEL VAN DEN AKKER:
00:23:37:28 Yeah, thanks, Jenny. I think it's the point I just said, right. We are optimistic for a good 24. Again, what's really going to matter is clinical differentiation in the science. That's where we believe the market will be.
00:23:49:17 You know, lean into the deals, lean into the strategy, have a value lens that everything you deal and be creative. I think that's what's going to be needed to kind of really be successful, both from a structuring perspective, areas where others may not perceive value.
00:24:04:22 Is there something else that you see? I think that's going to be critical to really win at the war that we expect to kind of ensue around some of the areas around that innovation truly exist. But we're excited for it and optimistic about the year and we would love to, you know, engage in conversations with any of you that's more interested in the topic.
NICK DONKAR:
00:24:21:24 Yeah, nothing generally more to add, Roel always does a fantastic job in wrapping up in these things, and I think the themes that he laid out for PLS are very pertinent and on point for health services. The only thing I would double click on just to ensure that is not missed anywhere. I made the reference earlier to different dance partners right?
00:24:41:03 Different organizations and types of organizations coming together, what we saw with some of the transactions last year from a volume perspective, and I venture to say that we will see that in 2024. So my point here, aside from being agile, nimble, being buyers and sellers in the market, which I 100% agree with, I would add, be open to new partners, new dance partners, the nontraditional partners.
00:25:03:15 So whether it's a retail partner and not for profit partner, for profit, I think it that will create some interesting dynamics in the market again with the goal of ensuring best possible clinical outcomes while at the same time maximizing your value quotient or equation across all the different constituents. That's why I would just focus on for 2024.
00:25:22:21 And again, similar health services, I hate to use the phrase cautiously optimistic because it seems like we're hedging, but I do feel strongly that there's going to be a nice uptick in volume again, off of unprecedented volume high years in 21 and 22. I think 24 is going to be very nice and we'll see some of that start out here pretty soon.
IGOR BELOKRINITSKY:
00:25:44:16 Roel van den Akker and Nick Donkar, always a pleasure having you on the podcast. We get a lot of great guests, but you consistently deliver the most insights per second and so we really appreciate it. We wish you a great year and deals and some great dance partners and please come see us again soon.
NICK DONKAR:
00:26:03:09 Thanks Igor.
ROEL VAN DEN AKKER:
00:26:04:08 Thank you.
IGOR BELOKRINITSKY:
00:26:06:13 For this and more on these topics and other health industry insights driven by policy, innovation and care delivery changes, please be sure to subscribe to our podcast. That way you can get all the great future deal updates and other great episodes of our podcast. Until next time, this has been Next in Health.
ANNOUNCER:
00:26:30:23 This podcast is brought to you by PwC. All rights reserved. PwC refers to the US member firm or one of its subsidiaries or affiliates and may sometimes refer to the PwC Network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This podcast is for general information purposes only and should not be used as a substitute for consultation with professional advisors.
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