What’s Ahead for Health Care M&A in 2021
David Crean, a managing director at Objective Capital Partners, spoke with MMG about his outlook for M&A in the health care sector in the year ahead.
This article originally appeared in the Winter 2021 issue of Middle Market Growth. Find it in the MMG archive.
David Crean, Ph.D., is a managing director at investment banking and valuation firm Objective Capital Partners, where he leads the firm’s M&A, partnering, strategic advisory and capital financing transactions with life science and health care clients. Crean has more than 25 years of life sciences R&D and corporate development transactional experience in the pharmaceutical industry, and has been responsible for leading mergers, acquisitions, licensing and collaborations, and establishing corporate strategy. He is also the president of the board for ACG San Diego.
Crean recently spoke with Middle Market Growth Editor-in-Chief Kathryn Mulligan about his outlook for M&A in the health care sector in the year ahead. This interview has been lightly edited and condensed for clarity.
Q. During the first peak of the COVID-19 outbreak last spring, we saw an abrupt slowdown in deal activity. As M&A activity picked back up in the second half of the year, what types of health care businesses did you see come to market?
We saw a combination of several things. For health care companies that had begun the sales process prior to March, COVID-19 just slowed the transactions down. It added several months to processes because companies were trying to get a better handle on how COVID-19 would affect their top and bottom lines, and the probability of a transaction. That’s one group—businesses that were going to get transacted no matter what.
Then there are some that entered the market during the pandemic seeing an opportunity. If I’m a buyer and I have a significant balance sheet and I’m noticing, for example, a company that’s up for sale that’s going through weakness, I can buy on the weakness. We’re seeing some of that.
The pandemic really exposed weakness in business models. If you were a poorly performing company and your quality of earnings was really poor, COVID-19 exposed it. Management teams at health care companies had to say: Maybe we put this sale on pause because we’re not going to get the valuation that we’re looking for. Private equity firms and strategic acquirers interested in this space are not going to pay us what we want, so let’s stop the process and come back to market after we address our weaknesses or change our business model.
It’s difficult to forecast for your business knowing there’s so much risk out there, and so much uncertainty about how long the pandemic is going to last.
On the physician practice side, we’re seeing an interest in exploring M&A because they don’t want to go through this type of disruption again. It’s difficult to forecast for your business knowing there’s so much risk out there, and so much uncertainty about how long the pandemic is going to last. These practices are not focused on infectious disease, they’re not a general practitioner or general medicine; they’re doing elective surgeries, or they’re in plastic surgery or dermatology, and it’s hard to predict when their business will open up.
Q. How active do you expect the health care M&A market to be this year?
I think you’ll see more activity in 2021. We already saw it in the third and fourth quarters of 2020, and I don’t anticipate 2021 to be slower than that. I think if anything, there’s going to be increased activity.
I think you will also see the emergence of companies that were weak and got weaker after last year’s round of Paycheck Protection Program loans dried up. There are certain companies that had liquidity issues; now they have solvency issues. I think what you’re going to see is a lot of companies coming to market, having been forced to look at selling because they don’t have the finances.
There’s going to be a number of buyers. Private equity will be interested, particularly if a business has good technology and they can buy it on the cheap. Same thing with corporates— corporate buyers have tons of money on their balance sheets, and I see them wanting to potentially buy a good company with good technology, or because it has great customer service, or customers they want access to, or they want to expand.
Q. As virtual care and telemedicine gained traction over the past year, how have you seen health care providers access these capabilities?
One route is to partner with a company that’s already doing telemedicine. Why reinvent the wheel, since there are a lot of great companies out there in the digital health and telemedicine arena that are looking for partnerships?
In other cases, if a technology is going to help drive business, and help connect a patient to a provider—whether it’s at their facility or at home—we’re seeing M&A activity there.
To me, M&A or partnership is the new R&D. Why go out and try to build something if you can just buy it and jettison your business to a level where you should have been six months or a year ago?
Q. Are you seeing health care businesses shift toward partnerships in lieu of M&A, or are these activities complementary?
Partnerships are really part of a “crawl-walk-run” model. If I enter a partnership today, and I test-drive a technology and it looks really good, I’m just going to buy it. I’ll use a partnership to see how this works out, but if it’s going to really, truly jettison my business and there’s great synergy, why not just go from that partnership to now we’re going to buy it?
Q. What other motivations are there for entering into this type of partnership arrangement?
At the end of the day, it comes down to what’s in the best interest of the patient. It’s all about patient personalization right now, and there’s a lot of power in the hands of the consumer—i.e., the patient. And for health systems or even physicians to retain patients, you really have to think about what’s in the best interest of the patient. I think you’re going to see more and more health care businesses entering partnership models, and trying various ones—whether it’s a digital health platform or telemedicine, diagnostic platforms, or others—especially when there’s so much uncertainty in the market, and businesses are trying to diversify and shore up the ship. That’s what I’m seeing happening, and ultimately it leads to M&A.
