4 Drivers of Healthcare M&A in 2023, According to a Top PE Investor

4 Drivers of Healthcare M&A in 2023, According to a Top PE Investor

  • Insider asked private equity investor Fletcher Gregory about the future of healthcare in 2023. 
  • He predicted a wave of consolidation in digital health due to the economic downturn.
  • He also said a big tech or retail company may be interested in a healthcare purchase.

This year wasn’t a great one for deals in healthcare, as early companies struggled to find funding and delayed public debuts.

That’s because the ups and downs in the stock market made for a challenging deal-making environment, according to Fletcher Gregory, a principal healthcare investor at General Atlantic, a private equity firm that invests in companies at earlier stages than traditional PE shops.

The market volatility has made it harder to predict healthcare startups’ financial futures and valuations, critical components of M&A, he told Insider. But that’s all going to shift next year.

In 2023, Gregory said four major trends will drive a “wave” of consolidation in digital health: slumping valuations; companies running out of cash; employers cutting their health budgets; and big tech firms and retailers continuing to move into healthcare to find new ways to grow.

The economic downturn will fuel healthcare M&A

Over the past two years, private digital health companies have enjoyed higher valuations as the coronavirus pandemic helped usher in unprecedented levels of investment.

Thanks to a now slowing economy, startups will have more reasonable valuations in 2023, which will make them cheaper to acquire, Gregory said. 

For example, shares of publicly-traded healthcare companies have plummeted, many by more than 50% year-to-date, and that affects how investors value their private peers. 

Additionally, startups that raised private funding in 2020 and 2021 are going to start to run out of cash, another boon for M&A next year, per Gregory. With fewer alternatives to survive by themselves, they’ll be forced to merge with other companies. 

The third factor leading to more deals is that employers, which pay for the majority of Americans’ healthcare, are cutting their health budgets, Gregory said. 

That means employers are going to bring a higher level of scrutiny to whether healthcare startups can actually improve the health of their employee populations and save money on medical bills, he said. 

Startups that only have treatment lines for specific conditions such as diabetes will have to merge or partner with others to cover a broader swath of health issues, Gregory predicted. Otherwise they won’t control enough care to reduce overall cost, he said.

Big tech and retail will continue to move into healthcare 

The fourth major driver of M&A in healthcare may be big tech or retail behemoths continuing to move into the industry through acquisitions, Gregory said. 

Healthcare spending typically doesn’t fluctuate much during recessions, so big outsiders may view acquisitions in the space as protective of their core businesses, he said. 

“With the aging population and with the increased demand for healthcare, broadly, healthcare is seen as a highly defensive industry despite the downturn,” Fletcher said.

What’s more, as consumers gain more control over their healthcare decision making, companies outside of healthcare will want to own some of that real estate, he said. 

For example, Amazon could start to combine aspects of the Prime membership with primary care through its acquisition of One Medical, a primary care startup. It did that with Amazon Pharmacy, where Prime members enjoy discounts on drugs.

Over the last two years, tech giants Amazon, Oracle, Microsoft, as well as retail behemoths CVS and Walmart, have already bought healthcare companies. 

That means the next splashy deal could come from a player that’s remained on the sidelines, Gregory said. 

As for what type of healthcare companies tech firms will actually acquire, Gregory said it could be those that sell health records, primary care, or Medicare Advantage plans.

“There’s a wide set of types of businesses that they would be interested in,” Gregory said.

Missy Krasner, a top digital health investor, echoed this prediction to Insider, saying that Alphabet, Salesforce, or Amazon could move to acquire a company that has patient health records

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