Insight

Emerging opportunities and challenges in an evolving market

2020 healthcare and life sciences investment outlook

Carole Streicher

Carole Streicher

National Partner in Charge, HCLS Deal Advisory, KPMG US

+1 312-665-2138

Kristin C. Pothier

Kristin C. Pothier

Principal, Global & National HCLS Strategy Leader, KPMG US

+1 617-549-2779

Last fall (2019) KPMG asked more than 300 healthcare and life sciences investment professionals for their views on the investment outlook for the two sectors in 2020. Their responses shed light on how the investment landscape will be impacted by significant changes, key disruptors and evolving market trends. The resulting report, “Emerging opportunities and challenges in an evolving market”, looks closely at healthcare and life sciences and eight subsectors, as well as policy and regulatory developments impacting investment.

Current state of health care and life sciences

Healthcare and life sciences deal activity was robust in 2019, up 40 percent year-to-date in November 2019, as compared to the same time period in 2018. The subsectors with the highest volume of deals were healthcare IT; physicians, dental and rehab practices; and home health and hospice.

Only 23 percent of respondents indicated that they thought the life sciences sector was in or nearing a bubble. A total of 39 percent of respondents said they thought the healthcare sector was in or nearing a bubble.  

In both sectors, respondents expressed the belief that, if a bubble is on the horizon, it won’t occur for more than 12 months. However, the 2020 election will likely prompt additional investment considerations.

The number of respondents who believe there are stronger fundamentals across subsectors rose from 2018; from 25 to 35 percent in health care and 20 to 28 percent in life sciences. Respondents believe that the most accurately valued healthcare assets can be found in:

  • High-growth businesses (32%), and
  • Lower-middle-market companies (26%).

And the most accurately valued assets in life sciences can be found in:

  • Private equity- and venture capital-backed companies (35%), and
  • Licensing/joint venture opportunities (26%).


Investment opportunities

Opportunities lie in three main areas:

 


Innovation
 – The healthcare IT, pharma and biotech, and medical devices subsectors are introducing extraordinary innovations that will elevate both the patient experience and potential outcomes.


 


Consolidation – 
The behavioral health; physicians, dental and rehab practices; and home health and hospice subsectors are pursuing consolidation to gain competitive advantage, realize economies of scale, and better address patient needs across the continuum of care.


 


Foundation
 – The hospital and managed care subsectors – still the pillars of the healthcare industry – are pursuing atypical partnerships, as well as changes in care delivery and health plan options to serve the needs of the aging baby boomer population.



Impact of disruption on investment activity

Investors should expect that the healthcare and life sciences industry will likely continue to be an attractive investment target for the foreseeable future. According to Centers for Medicare and Medicaid (CMS), national healthcare spending is projected to grow at an average of 5.5 percent annually from 2018 to 2027, at which point it will reach $6.0 trillion.

Smart investors will differentiate between hype and realistic growth expectations by monitoring regulatory, market and demographic developments, and evaluating opportunities in the context of continuing disruption.

The disruptors that could have a significant impact on investment activity in this coming year include the 2020 election, shift to value in healthcare, paying for innovation in life sciences and new market entrants. Investors should take these developments into account as they make decisions, bearing in mind that disruption can increase both opportunity and risk.

  • 2020 election – When asked how the 2020 elections would impact investment, nearly half of our survey respondents expressed the opinion that it could cause a decrease (37%) or significant decrease (12%) in investment activity in 2020. This result represents nearly three times as many respondents in aggregate as the next highest negative disruptor (Shift to Value).
  • Shift to value in healthcare – 56% of survey respondents think the shift to value will increase investment activity. To the extent that organizations are willing to take on risk, there may be opportunities for investors (particularly in private equity) to pursue investment deals that result in roll-ups and other organizational structures that facilitate alternative payment models (APMs).
  • Paying for life sciences innovation – 70% of survey respondents think that paying for innovation will increase investment activity. There is a broad spectrum of new products coming to market about which investors are increasingly excited—including specialty drugs for rare diseases, advanced medical devices, artificial intelligence from the back office to the operating room, telemedicine technologies, and much more.
  • New market entrants – 61% of survey respondents said that new market entrants would increase investment activity. High-profile technology disruptors are continuing to enter the healthcare arena in areas with significant consumer impact – new models of drug distribution; advanced care delivery models; centralized and transparent platforms for decision-making, etc.


Summary

Despite unknowns related to the 2020 election and uncertain industry regulatory challenges, there are significant investment opportunities across the industry. Such opportunities will continue to gain momentum due to progress toward consumer-centric care delivery, potentially curative drugs and other breakthrough therapies, connected medical devices, new models of vertical integration, and consolidation for scale and efficiencies.

Read the report here.