The coronavirus pandemic has disrupted entire industries in 2020, but perhaps none so much as healthcare. Contained in one industry is the global competition to develop test, manufacture and distribute a Covid-19 vaccine in record time and the fight to save patients from a virus that has killed more than 900,000 people throughout the world, including 190,000 in the U.S. The healthcare industry is also developing Covid-19 treatments; producing, administering and interpreting tests; and adapting new technologies and better methods for healthcare delivery and interaction with patients.

In recent weeks, there has been a slew of new deal announcements. Leveraging high interest in all things healthcare-related during the Covid pandemic, former KKR executive Jim Momtazee has launched Patient Square Capital, a Menlo Park, California-based private equity firm focused on healthcare deals. Momtazee spent 21 years at KKR, where he helped form the firm’s healthcare group in 2001 and led it for more than a decade.

Private equity investors aren’t the only ones announcing healthcare deals. Strategic buyers are rapidly snatching up targets focused on developers targeting a wide range of diseases, including the coronavirus, but not limited to it. Johnson & Johnson agreed to buy Momenta Pharmaceuticals Inc. for about $6.5 billion to expand in treatments for autoimmune diseases. And Sanofi said it would buy biotech company Principia Biopharma Inc., which develops treatments for multiple sclerosis and a range of autoimmune disorders, for $3.4 billion, as the French drugmaker pivots toward innovative therapies to spur growth.

All these developments are playing out in the deal landscape, and here we report on the issues that are making the biggest impact, most especially efforts to create a vaccine: The world’s largest pharmaceutical companies, in partnership with universities and philanthropists, are competing to develop vaccines while they also turn to acquisitions to maintain their businesses. Nearly as important is the ramp-up for coronavirus treatments and testing, as companies up and down the supply chain immerse themselves in facing the challenges. The business impact on hospitals and physician practices, the evolution of digital healthcare, and the perspective of healthcare investors round out our list of the top five trends driving healthcare M&A.

1. Push for vaccines will spawn more big pharma deals

1. Push for vaccines will spawn more big pharma deals

The global urgency to develop a Covid-19 vaccine coupled with prepandemic M&A momentum has set the stage for a robust dealmaking environment for pharmaceutical companies. The task is monumental: To develop a coronavirus vaccine within a year, even though no vaccine has ever been developed in less than four, and then to produce billions of vaccine doses.

Pharma M&A will likely exceed prepandemic levels because the factors that were driving deals before the coronavirus are still there, says Arthur Wong, director of healthcare corporate ratings for S&P Global Ratings. “It’s going to probably take an accelerated pace,” he says. “The pharma industry is still relatively fragmented, so there are still more merger opportunities out there.”

Before the pandemic, “acquisitions were already becoming an increasing component of future growth” for pharma companies, says Wong, who analyzes healthcare companies’ balance sheets. “We think it’s becoming more and more important; more and more critical to maintain their future growth.”

Many of the world’s largest pharma companies have enlisted in the vaccine race, including companies active in M&A. More than 250 vaccine candidates are under development, according to McKinsey and Co., and partnerships involving giant pharma companies are backing some of the most promising candidates. AstraZeneca (NYSE: AZN) has partnered with the University of Oxford and Pfizer (NYSE: PFE) with BioNTech for potential vaccines now in Phase 3 large-scale human trials. GlaxoSmithKline (NYSE: GSK) has partnered separately on three early-stage vaccine candidates with Clover Biopharmaceuticals, Sanofi (Nasdaq: SNY) and the University of Queensland. Sanofi has also partnered with Translate Bio (Nasdaq: TBIO) on an early-stage candidate. Moderna Therapeutics (Nasdaq: MRNA) has the only other vaccine currently in Phase 3 trials, according to Stat news. The U.S. government has vaccine development deals with the Pfizer/BioNTech team, Sanofi, Johnson & Johnson (NYSE: JNJ), Novavax (Nasdaq: NVAX) and Regeneron (Nasdaq: REGN).

Wong expects to see more megamergers like drugmaker AbbVie’s (NYSE: ABBV) $63 billion acquisition of rival Allergan and Bristol-Myers Squibb’s (NYSE: BMY) $74 billion acquisition of biopharmaceutical company Celgene, which were both in 2019. A recent inquiry by AstraZeneca to rival Gilead Sciences Inc. (Nasdaq: GILD) about a potential merger, which would be the largest healthcare deal ever, reported by Bloomberg, is evidence that merger interest hasn’t died down with the pandemic, Wong says.

The high profit margins and strong cash flows common in pharma translate to a lot of cash on balance sheets. So when companies seek to raise even more cash by issuing debt, unless the new debt is a refinancing, they are usually preparing for future acquisitions, Wong says.

As of July, U.S. pharmaceutical and biotechnology companies had issued more debt in 2020 than in all of 2019, an S&P Global Market analysis shows. They’re also building cash positions by selling off businesses. Pzifer is selling its Upjohn division to Mylan NV (Nasdaq: MYL), creating speculation that Pzifer will use cash from the deal to pursue acquisitions, Wong says. Similarly, Sanofi has generated a lot of cash for potential deals by selling most of its stake in Regeneron.

Pharma companies are under pressure to reduce prices while delivering high levels of growth, so they need to produce new blockbuster drugs or a steady pipeline of new drugs. The surest means to more potential new drugs and technologies in the most therapeutic areas for these companies is through M&A, Wong says.
Even before the 2020 pandemic, big U.S. pharmaceutical and biotechnology companies have raised their net leverage (net debt divided by Ebitda), a trend driven by increased M&A activity, according to S&P Global Ratings.

2. Golden moment for innovators

2. Golden moment for innovators

A range of pharmaceutical, biotechnology and related companies have immersed themselves in the drive to produce treatments and testing for the coronavirus. In addition to potential M&A opportunities created by the strain on companies such as testing labs and vendors in the supply chain, the public attention on these companies is generating investment interest among private equity firms.

The push for coronavirus treatments has created an opportunity for some companies to change negative public perceptions, says Scott Plumridge, managing partner at Halifax Group, a Washington, D.C., -based lower-middlemarket PE firm.

“I personally think this is a golden moment for innovators,” Plumridge says. “With everybody’s focus on vaccine and therapeutic development related to Covid, people really appreciate the importance of R&D and innovation by these companies. A lot of this discussion or criticism for many years now has been focused on excessive pricing of products in the marketplace.”

Nineteen novel treatments are under development to treat Covid-19, including three in Phase 3 large-group human trials, according to Stat health news. Gilead Sciences and AstraZeneca, reported by Bloomberg to be exploring a merger, are producing two of the treatments: Gilead Sciences makes Remdesivir, an intravenous antiviral drug that has been approved for emergency use on Covid-19 patients in the U.S.; AstraZeneca is working with Vanderbilt University Medical Center on a potential antibodies treatment. Pfizer, which is building up its cash reserves potentially to make acquisitions, is developing a potential antiviral medicine for Covid-19 that is similar to a drug for the SARS virus. Biotechnology companies have benefited from the increased testing work and related services demanded for the coronavirus response, as well as from the increased attention to the space from investors, says Landen Williams, partner at WilliamsMarston, a Boston and New York consulting firm that advises on M&A and initial public offerings.

“There’s more money going into that space, obviously, and you see a lot of those deals in the news,” Williams says. “There’s labs and diagnostics and testing for Covid, so there’s the Covid direct winners, and then there’s indirect winners where people are saying, ‘Hey, I want to put my investment dollars in to the biotech industry’ because it’s on the news every day.”

In Massachusetts alone, some 80- plus companies have been involved with Covid-19 vaccine and therapeutics development. In the first half of 2020, biotech companies in the state raised more than two-thirds of the venture capital funding they had in all of 2019, the Massachusetts Biotechnology Council reported.

Williams says the current investor interest in biotech is across all companies in the sector, not just those directly involved in coronavirus efforts.

“I really think it’s kind of a rising tide lifts all boats,” he says. “My perception is it’s not creating problems for other companies trying to raise money; it’s just more attention and more money coming into that space.”

For the vendors to the biotech and pharma companies, such as companies that provide contract services for clinal trials, the pandemic shut down or delayed work for some and generated more business for others.

“Anyone who’s doing something related to Covid, that’s been a real positive,” says Darren Black, managing director at Summit Partners, a Boston-based PE firm. “If you were doing something Covid related, you have a ton of work coming your way on an outsourcing basis. But that’s temporary.”

3. Hospitals and physician practices face many challenges in the pandemic

3. Hospitals and physician practices face many challenges in the pandemic

Hospitals and some types of physician practices have struggled during the pandemic, depressing appetite for acquisitions of those businesses in the short term. But pricing pressures will continue to drive deals in the space.

Covid-19 patients have inundated hospitals, yet the coronavirus has been bad for business. “There’s been such an aversion to accessing the healthcare system for elective procedures or even routine appointments that the hospitals are really suffering financially and they have huge budget shortfalls,” says Landen Williams, partner at WilliamsMarston. “The hospitals in general are not a winner in this environment.”

Specialty practices, especially those where patient visits can be delayed or aren’t covered by insurance, have been hit hard. Starting before the pandemic, there was a decline in deal flow across the board for simple PE rollups of physician practices in specialties such as dermatology, gastroenterology or dentistry, says Jay Reynolds, principal at the Riverside Co. The pandemic exacerbated the problems for those companies because volume for elective procedures and general wellness visits were down, and those practices are volume dependent. Even practices that have gained back 85 percent or 90 percent of their pre-pandemic business can be struggling because the last 10 percent or 15 percent of business is what drives their profit margins, he says.

“There’ve been a lot of interests who viewed it simply as easy as buying a platform, recognizing a platform multiple and then going and acquiring a bunch of smaller practices and reaping the benefits,” Reynolds says.

“It’s not as easy as just buying a platform and tucking some things in,” Reynolds says. “There were some folks who probably participated in the trend to do roll-up strategies when it wasn’t their core skill set to actually manage a healthcare business. And not all of those went well.”

In spite of the coronavirus-generated downturn in business for hospitals and physician practices, pricing pressures will continue to drive M&A, says Wong, the healthcare ratings director at S&P Global Ratings. As healthcare insurers have grown larger through mergers and other large companies such as Amazon (Nasdaq: AMZN) have shown interest in entering the healthcare payments market, the payors have also grown stronger in their position to demand lower prices from healthcare providers. Examples include insurer Cigna Corp. (NYSE: CI) acquiring pharmacy benefit manager Express Scripts for $67 billion in 2018 and insurer UnitedHealth Group (NYSE: UNH) buying Equian healthcare payments firm for $3.2 billion in 2019. That pricing disruption has put pressure on healthcare providers to make their own M&A deals to become more efficient and lower costs, Wong says.

Within healthcare services—hospitals, healthcare centers, physician groups, outpatient surgical centers- -companies are using M&A to increase size and scale to lower costs and to diversify so they aren’t crippled when reimbursement is cut for a particular service line. They’re also looking to build size and scale within certain service lines or geographic areas so they can push back when negotiating prices with payors that are growing larger through their own M&A, Wong says.

Valuations for good healthcare services assets have remained high even during the pandemic, Wong says. And deals haven’t dried up altogether. Recently Steward Health Care’s doctors acquired a controlling interest in the Dallas-based healthcare system from distressed PE firm Cerberus Capital Management through a recapitalization, making it the largest physician owned and -operated healthcare system in the U.S.

4. Telemedicine is coming into its own

4. Telemedicine is coming into its own

As non-Covid patients avoid hospital care during the pandemic, telemedicine and other forms of digital healthcare have become favored M&A targets.

“Digital health is probably the hottest area right now,” says
Landen Williams, partner at WilliamsMarston. “Private equity firms are focusing more on companies that have a technology edge to make them unique.” That includes companies where software is a key distinguishing asset, such as for telemedicine, certain insurance or pharmacy businesses, wellness care, cancer detection or wearable technology.

“I think people see this as a paradigm shift where the whole remote medicine and technology enabled aspect to the delivery of healthcare is accelerated,” Williams says. “It’s an avenue to deliver healthcare safely, but it’s also a potential mechanism to deliver it at a much lower cost, which is obviously a huge focus right now.”

Recent deals in the digital healthcare space have included healthcare data and analytics technology provider Health Catalyst Inc. (Nasdaq: HCAT) agreeing to acquire Healthfinch Inc., provider of electronic medical records analytics software. Earlier in 2020, the company agreed to acquire Able Health Inc., which sells quality and regulatory tracking software for healthcare providers.

Also, Vancouver-based telemedicine company CloudMD Software & Services Inc. recently acquired a Mississippi clinic serving chronic care patients as a part of its plan to build a network of telemedicine clinics throughout the U.S. Earlier in 2020, the company acquired South Surrey Medical Inc., a telemedicine clinic in Vancouver, and Snapclarity Inc., an on-demand digital mental healthcare software provider.

Recent venture capital digital health deals include Grail Inc., a company developing a blood-based multi-cancer early detection test, raising $390 million in late-stage venture capital; Oscar, an insurer focused on tech-enabled healthcare, raising $225 million in late-stage VC funding; and VC-backed telemedicine provider Amwell filing for an initial public offering.

PE firms have shown more interest lately in potential acquisitions of healthcare services that are not practice-management-driven, such as telehealth, healthcare IT and homebased healthcare, says Reynolds, the Riverside principal: “Things that are really more bread and butter, and don’t go away in a pandemic.”

Telehealth has been aided by a relaxation of regulations during the pandemic to allow telehealth services to be delivered across state lines in the U.S., Reynolds says. Telehealth services have also been boosted by breaking the ice with patients who might not otherwise have had exposure to virtual healthcare, he says.

“There are a lot of tailwinds behind that,” Reynolds says. “Because of the exposure as a result of this pandemic, there’s going to be a general comfort level increase that’s going to create a higher new-normal floor for that sector.”

Healthcare services that bring care into the home or use technology to make care easier to navigate are attractive investments because of their focus on consumer engagement, Darren Black, managing director at Summit Partners. Post-acute care delivered in the home is especially attractive because it gets the patient out of the hospital, the most expensive care environment.

Worries about Covid-19 have renewed interest in home skilled nursing, home respiratory care and home intravenous drug treatment, says Plumridge, managing partner at Halifax Group. “These aren’t newfound attractive areas, but rather they’re incrementally attractive,” he says.

The runup in stock prices for home healthcare equipment provider AdaptHealth and home healthcare services provider Amedisys may signal a similar interest in the space by PE firms, Plumridge says.

5. Healthcare investors are getting creative with deal terms and SPACs

5. Healthcare investors are getting creative with deal terms and SPACs

In spite of the coronavirus setbacks to certain areas of business within healthcare, PE investors still have a favorable view of the industry as a whole, especially for the long term. Exit opportunities created by a surge in special purpose acquisition companies, or SPACs, may help that.

“Investors and private equity firms see the longer-term fundamentals are still very positive,” says Williams. “You’ve got the aging population and there’s a lot of these chronic diseases out there. That’s going to continue to drive the demand once we get through the next six to 12 months.”

Healthcare PE investors are making investments selectively and “structuring deals a little bit differently,” Williams says. “The valuations are all a bit lower; they’re looking at distressed situations where they can get a good value.”

For some areas of M&A within the healthcare space, such as with skilled nursing facilities, dealmakers are understanding that the operational risks created by the coronavirus will linger for years, says Walter Cartin, a partner in the Parker Poe law firm in Columbia, South Carolina. “Even if we have a vaccine, the coronavirus is still going to be an issue that’s out there,” he says. “So people are settling in and realizing
if they’re going to move forward with their business, they’ve got to deal with this risk.”

The pandemic has led to some unusual reps and warranties in deal contracts for healthcare businesses like skilled nursing facilities, such as compliance with Centers for Disease Control guidance to manage and mitigate the threat of Covid-19, Cartin says.

Pre-pandemic, a common refrain when one party tried to insert an unusual term in an M&A deals was: “Well, that’s not market,” Cartin says. “That is going out the window. Now it’s more about people getting creative with structuring solutions that manage and mitigate risk on both sides of the transaction.”

Look for SPACs—so-called blankcheck companies that raise money through IPOs for acquisitions—to take off in the healthcare space, says Williams, whose firm is working on a few. SPACs could heighten PE investor interest in the healthcare space because they provide investment exit opportunities.

Recent healthcare SPAC deals

Arya Sciences Acquisition Corp. (Nasdaq: ARYA), a SPAC sponsored by Perceptive Advisors, a private equity firm focused on healthcare technologies, merging with Immatics Biotechnologies GmbH, developer of cancer drugs.

Arya Sciences Acquisition Corp II (Nasdaq: ARYBU) SPAC agreeing to buy Bain Capital’s Cerevel Therapeutics, a neuroscience-focused pharmaceutical company that spun off from Pfizer in 2018, by the end of 2020.

Deerfield Healthcare Technology Acquisitions (Nasdaq: DFHTU), the third healthcare-focused SPAC formed by the Deerfield Management hedge fund and Robert Barasch, listing its IPO to acquire and build healthcare and healthcare-related businesses.

● Acute care telemedicine provider SOC Telemed merging with Healthcare Merger Corp. (Nasdaq: HCCO), a SPAC backed by BlackRock Inc., Baron Capital Group and ClearBridge Investments, in a $720 million deal.

Panacea Acquisition Corp. (NYSE: PANA.U), a SPAC sponsored by an affiliate of EcoR1 Capital, a biotech-focused hedge fund, forming to merge with or acquire biotech businesses.

Reviva Pharmaceuticals Inc., developer of a schizophrenia drug, merging with the Tenzing Acquisition Corp. SPAC in a $119 million deal.