MUFG Global Healthcare Group
MUFG is among the world’s top-10 lenders to the healthcare industry, with a history of providing billions in loan commitments and healthcare receivable securitizations, financing landmark M&A transactions, and underwriting investment-grade bonds. The team has more than 40 experienced professionals serving large-cap, middle-market and private-equity sponsor clients globally.
Healthcare industry signaling wave of M&A and strategic “rethink”
By Andreas Dirnagl, Global Head or Healthcare Research, and Beth Everett, Head of Middle-Market Healthcare
Companies are reevaluating business and product lines, shedding non‑strategic operations, and pursuing bolt-on acquisitions to shore up primary focus areas and fill gaps
One year into the COVID-19 pandemic, we see healthcare companies rethinking their corporate strategy and evaluating mergers, acquisitions, and divestitures.
Strategic reassessment among healthcare companies
Why is this the case? Because in times of crisis, such as a pandemic, companies tend to look inward, 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, we started to see companies think about divesting from non-strategic operations, shut down certain parts of their operations and be on the lookout for acquisitions.
Expectations for mid-range M&A and capital-markets activity
We anticipate elevated M&A activity this year when compared with 2020, though we foresee 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. The healthcare industry may not necessarily set a record year in M&A volume this year, but the first six or seven weeks of 2021 have already been fairly active.
We expect much of the consolidation to occur in the middle market and on the private-equity sponsor side. Meanwhile, 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. We anticipate 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
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 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 supply-chain and manufacturing locations shifting out of places like China and into Southeast Asia—Malaysia, Indonesia or Vietnam—all fairly well-developed manufacturing locations for those types of products.
In our 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. 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.
The effects of the new Biden administration on healthcare
We do not believe the political change in Washington following the November elections, however big, will have a significant effect on the U.S. healthcare industry. In our view, “Bidencare” equals Obamacare 2.0 and there’s no real discussion about radical or significant switches to healthcare policy but rather more evolutionary changes. We 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.
We see the Biden administration moving 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
It’s worth noting 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, as we see it, has stemmed from its ability to adapt to changes and embrace transformation.
Moving forward, 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 and procedures. They want to know more about the provider side of the industry. It is our belief that we’ll see continued acceleration of drug approval as a result of the COVID vaccination development and production effort.