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Healthcare Industry Signaling Wave of M&A and Strategic “Rethink,” MUFG’s Healthcare

March 23, 2021, 06:00 AM
Filed Under: Healthcare

One year into the COVID-19 pandemic, healthcare companies are rethinking their corporate strategy and evaluating mergers, acquisitions and divestitures, according to the Global Healthcare team at Mitsubishi UFJ Financial Group (MUFG).  

The team delivered its strategic and financial outlook for the healthcare industry to reporters and editors at a recent virtual MUFG media roundtable featuring Andreas Dirnagl, Global Head of Healthcare Research, and Beth Everett, Head of Middle-Market Healthcare.

Strategic reassessment among healthcare companies

Referring to the health crisis triggered by the pandemic, Ms. Everett explained: “There's an inward focus [at] a time of…crisis” when companies “need to rethink” their strategy, focus on their strong suits, decide how to shore up certain product lines or business areas, and evaluate opportunities for future growth.

As a result of “strategic reviews” of this kind, she added, “we started to see companies think about divesting from non-strategic operations, shutting down certain parts of their operations” and being “on the lookout for acquisitions.”

Expectations for mid-range M&A and capital-markets activity

Mr. Dirnagl anticipates elevated M&A activity this year when compared with 2020, though he foresees smaller, bolt-on acquisitions—rather than large, transformative ones—with the purpose of shoring up primary focus areas and filling gaps in product offerings and various other business areas. “We think the majority of those deals are going to be in the $1 to $15 billion range,” as opposed to the $50 to $75 billion megadeals, he said. “We might not set a record year [in M&A volume], but…the first…six or seven weeks of 2021 have already been fairly active.”

Ms. Everett expects much of the consolidation to occur in the middle market and on the private-equity sponsor side, and noted that debt issuers in the healthcare industry are enjoying robust capital markets, which have been healthy for a while and are now back to pre-pandemic levels. She foresees many M&A transactions occurring in healthcare services—a segment comprising medical professionals, organizations such as hospitals, workers who provide medical care to those in need, information-technology providers to the healthcare industry, and others.

Supply-chain shifts and vaccination efforts

Ms. Everett noted that at the onset of the pandemic, there were concerns about the dependence on “a single country like China or India” for the manufacturing of critical, low-margin consumables such as gloves and masks. This dependence, she said, spurred companies to review the “strategic imperative” of their supply chains and shift manufacturing elsewhere or distribute it across a wider network of locations. “We saw changes in supply-chain…and manufacturing locations [shifting] out of places like China [and] into Southeast Asia…whether it's Malaysia, Indonesia [or] Vietnam—all fairly well-developed manufacturing locations for those types of products,” Ms. Everett said.

In Mr. Dirnagl’s estimation, supply chains are holding up “extremely well” in the vaccination effort. “[In] some circumstances…we've seen some issues,” such as bottlenecks in the supply of low-dead-space syringes, “but for the most part…we are at or ahead of schedule” relative to expectations in the third or fourth quarter of last year, he said, noting that the vaccine-manufacturing timeline for certain companies has been reduced from 110 days to 60 days. “Our expectation is that over the next six weeks, you're going to see that supply of vaccine…almost double” on a daily basis, thanks in part to manufacturing efficiencies, Mr. Dirnagl said.

The effects of the new Biden administration on healthcare

Mr. Dirnagl does not believe the political change in Washington following the November elections, however big, will have a significant effect on the U.S. healthcare industry. “‘Bidencare’ equals Obamacare 2.0” and “there's no real discussion about radical or significant switches to healthcare policy [but] rather more evolutionary changes,” he said. “I think the one thing that is now firmly in place is the cementing of Obamacare as the law of the land and as a program and…a benefit that is going to continue going forward.”

In Mr. Dirnagl’s view, the Biden administration will move to “support and strengthen Obamacare and the coverage that it provides”; many holdout states that have not yet expanded Medicaid to allow Obamacare participation are likely to follow and do so; and there will continue to be bi-partisan agreement in favor of pressuring the pharmaceutical companies to lower drug prices and pressing the healthcare industry at large for greater transparency about its infrastructure.

Looking ahead: a stronger orientation to the consumer

Ms. Everett noted the underlying strength of the healthcare industry in the face of the pandemic, which disrupted supply chains, caused delays and cancellations of elective procedures—the mainstay of healthcare services—and led to hemorrhaging hospital revenues. The industry’s resilience, she said, has stemmed from its ability to adapt to changes and embrace transformation.

Moving forward, Ms. Everett added, the industry is becoming more consumer-oriented, with a focus on how to provide better services and accelerate the adoption of new technology for such offerings as telemedicine. “Consumers care about prices, they care about procedures. They want to know more about the provider side of the industry,” she said, adding that “we're going to see continued acceleration of drug approval as a result of what we saw with the COVID vaccines.”


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