We are pleased to introduce this inaugural edition of Lexology Getting the Deal Through – Healthcare M&A, which explores the main issues in healthcare M&A transactions. It also acts as a comparative legal guide for cross-border or multi-jurisdictional activities and a barometer for current and future sector trends in each jurisdiction.
According to data from the 2019 Bain Global Healthcare M&A report, the sector had a strong year. Deal volume increased by almost 20 per cent year on year, to 316 transactions, and total disclosed deal value grew by almost 50 per cent, as investors announced several megadeals. High valuations were derived in part from intense competition from financial sponsors and corporate acquirers. Corporate M&A deal value rose by roughly 30 per cent in 2018 as healthcare companies turned to acquisitions to drive revenue growth, given that multiple and margin expansion have slowed in recent years.
Deal activity and values were robust globally, setting post-recession highs across regions. Although North America continued to account for the most deals and highest values, the European and Asia-Pacific regions reached historically high levels in value. In Europe, a handful of large buyouts, including two biopharma deals, led to a significant increase in deal values. And the Asia-Pacific region experienced a spike in activity as investors looked to tap into demand from a healthcare consumer class that has continued to grow in recent years.
Alongside deal activity, there were several global trends that emerged in 2018, including funds pushing beyond traditional health assets into niches such as behavioural health, where special educational needs and mental healthcare providers promise sufficient returns and the rise of digital health, healthtech and home care models. The CMS reports ‘Transforming Health and Social Care’ and ‘AI in Life Sciences’ examine the potential impact of artificial intelligence and other related technologies on the UK health and social care and life science sectors.
We begin our Lexology Getting the Deal Through Healthcare M&A report with an overview of key issues such as the structure of a typical healthcare-related business transaction, the timelines involved, and typical representations and warranties provided by sellers. We then go on to examine the legal due diligence required at the outset of a healthcare business combination including regulatory and compliance, employment, insurance and intellectual property and the exposure to risk if due diligence is not correctly undertaken. The report also details some of the key completion issues – conditions, covenants and insurance and post-completion undertakings.
The regulatory framework for healthcare differs across borders and is a complex area. The report provides details for each jurisdiction on the key primary laws and regulations, such as which third-party consents and regulatory notifications and filings are typically required for a healthcare business combination, and whether there are any ownership restrictions. We also outline some of the specific merger control issues to be aware of.
We then consider some financing and valuation issues, specifically around pricing, security and financial assistance, and the typical tax issues and risks to be aware of. Finally, we examine public relations and government policy issues across jurisdictions that should be addressed. Material legislative or regulatory change in the sector is an inherent risk and an important factor to be considered in the context of a prospective transaction.
We have ended each chapter with some thoughts from the various contributors on current sector trends and expected developments in each jurisdiction over the coming year. According to Bain, we should expect competition for high-quality healthcare assets to remain strong, which will open the door to even more creative deal structures.
As authors of the UK chapter, we continue to see a great deal of investor interest in the UK healthcare and life sciences markets. Despite wider political and economic challenges, there continues to be an increase in demand for health and social care assets and innovative life science products and technologies, driven by, among other things, demographic considerations and the increasing demand for and use of technological solutions in the provision of care. The healthcare services sector provides significant appeal to long-term investors such as property REITS and infrastructure funds. The sector does come with its challenges, including increased regulatory demands, pressure on government-funded social care contracts and the difficulties in attracting and retaining quality staff. We hope this report serves as a useful and practical guide to getting your healthcare M&A deal through and understanding the sector landscape when working across borders. If you would like any further information on any of the points raised in the report, please do contact the CMS healthcare team or any of the other chapter authors.