The healthcare and life sciences deal markets were active in 2020 and promise to continue to be robust into 2021, even amid the COVID-19 pandemic, according to the KPMG 2021 Healthcare and Life Sciences Investment Outlook survey.

Investors are making bold moves in some subsectors, based on confidence about the future, reflected in already high valuations that will continue into 2021, as echoed by nearly half of survey respondents.

“While the dollar value of deals across healthcare and life sciences was lower in 2020 than in 2019, the M&A market was extremely active during the second half of the year and early indicators point to a very active 2021,” said Brett Glover, KPMG U.S. healthcare & life sciences deal advisory leader. “And the trend we saw in life sciences in 2020 toward smaller tuck-in deals, strategic partnerships, and joint ventures is likely to continue in 2021, many using creative payment models.”

KPMG’s 2021 Healthcare and Life Sciences Investment Outlook provides insights to investors based upon a comprehensive analysis of ten industry subsectors and the policy and regulatory environments in which they operate. The outlook includes an analysis of 2020 deal activity, followed by an overview of each subsector for 2021 viewed through the lens of recent and future economic, business, and policy developments.

“The 2021 KPMG Investment Outlook leverages insights gleaned from a survey of nearly 300 industry leaders who provide their perspectives on how the COVID-19 pandemic, evolving market factors, and the political and policy environment may impact investment decisions in 2021,” says Larry Kocot, national leader of the KPMG Center for Healthcare Regulatory Insight. “Our outlook contextualizes a number of variables impacting investment and provides a sector-by-sector analysis to help investors assess the opportunities and challenges of investing in the year ahead.”

2020: Variations across Sectors

The global pandemic impacted healthcare and life sciences very differently in 2020. In healthcare, elective surgeries, regular wellness visits, and chronic illness checkups were put on hold, putting the sector on a rollercoaster in terms of patient volume. Healthcare deals slowed in the second quarter but accelerated through the end of the year. In life sciences, there were steady transactions throughout the year despite high valuations, driven in part by optimism fueled by government investment in COVID-19 vaccines and treatments, as well as ongoing activity and interest in breakthrough drugs.

Many healthcare organizations, as well as diagnostics and medical device makers, ranked COVID-19 as one of the top two factors affecting deal activity in both 2020 and 2021. In contrast, biopharma and pharmaceutical services company executives ranked valuation and competition for a limited number of high-value or innovative targets as larger factors influencing deal activity in both years.

Although the pandemic challenged companies in all subsectors, those that fared best launched opportunistic and/or defensive investment strategies, e.g., acquiring products and services to meet COVID-19-related needs. For example, diagnostics manufacturers and labs pivoted to COVID-19 testing, although only some organizations were able to maintain non-COVID-related testing at the same time. And as regulatory requirements were waived to allow broader use of telehealth during the pandemic, technologies to enable virtual visits were adopted by providers at an accelerated pace. This trend not only benefitted tech companies, but also allowed hospitals and physician practices to continue seeing patients while complying with social distancing mandates.

“COVID-19 created a new challenge for healthcare and life sciences companies to innovate both in bringing products to market to combat the pandemic and offering new products and services that support evolving modes of care delivery,” says Kristin Pothier, KPMG global healthcare and life sciences deal advisory and strategy leader. “In some ways, the pandemic served as a catalyst for long-awaited changes in certain subsectors.”

2021: Resilience and Transformation

In both healthcare and life sciences, the companies in the reviewed subsectors can be indexed in terms of their (1) resilience, i.e., the ability to withstand and embrace significant change, not just through COVID, but in general, and, (2) transformation, i.e., commitment to continuous innovation in order to evolve and align with the changing needs of patients and the public. These factors have influenced expectations of rising valuations for biopharma, healthcare IT, and diagnostics companies.

“Resilience and transformation are inextricably intertwined,” Kocot said. “An investor’s outlook could depend on where a company falls within the intersection of these two concepts. While some of what we saw this year was surprising, certain subsectors that have historically shown resilience and agility continued to do so.”

For example, the boost that the biopharmaceutical subsector received from billions of dollars of pre-orders for COVID-19 vaccines and treatments allowed companies to continue to make bets on high-priced breakthrough drugs for rare diseases, such as cell and gene therapies and antibody-drug conjugates. And although medical device manufacturers that lean heavily toward devices used in elective surgeries were hard hit this year, many others are making large numbers of tuck-in deals based on future market need for either diversification or concentration in one therapeutic area.

“With the exception of a few, very specific subsectors, most companies have rebounded and deal making has resumed globally with a focus on cell and gene therapies, healthcare IT, lab services, and precision medicine-based therapeutics and diagnostics that use cutting-edge science to improve the public’s health and well-being,” Pothier said.

Select subsector highlights

• Biopharma experienced the most active deal market in history with 384 deals, with 82% of surveyed pharmaceutical executives reporting that they saw valuations increase in 2020. The focus on early-stage cell and gene therapies and antibody-drug conjugates is expected to continue in 2021, with an increasing use of creative deal structures.
• Diagnostics manufacturer deal volume is expected to increase in 2021, with 63% of survey respondents saying that moving into COVID-19 testing has allowed their companies to make more deals.
• Telehealth companies received the majority of the record-breaking $6.5 billion in funding provided to the digital health sector during the first six months of the pandemic, and the subsector ranks among survey respondents as the most attractive healthcare IT subsector for investment in the next 12-24 months. 
• Behavioral health roll-ups are expected to increase in 2021 to meet the needs of an increasing volume of patients suffering from depression, anxiety, and substance use disorders during the pandemic.

“The level of activity in the healthcare and life sciences deal market – even in the face of a pandemic -- -speaks to the solid fundamentals of companies in many of these subsectors,” Glover said. “Looking to 2021, we expect organizations in certain subsectors to successfully complete acquisitions that were put on hold in 2020, while others will deploy capital by pursuing platform expansion and bolt-on acquisitions or investing internally to improve operational efficiencies.”