The healthcare sector continued to be a hub of private equity (PE) deal activity in 2023, reaching $60 billion in announced deal value, despite higher global interest rates, inflationary pressures, and broader geopolitical uncertainty, Bain & Company said Wednesday.

The consulting firm said in its 13th annual Global Healthcare Private Equity report that biopharma captured the bulk of dealmaking momentum, attributing for 48 percent of global deal value, including six deals in excess of $2 billion.

The findings also showed that in 2024, investors will continue to bet on the transformative nature of generative artificial intelligence (AI); new modalities and innovative therapies, such as glucagon-like peptide-1 agonists (GLP-1s); and India as a place to deploy healthcare capital at scale.

“Compared to private equity dealmaking globally, we saw relative resilience in healthcare dealmaking last year,” said Kara Murphy, co-lead of Healthcare Private Equity at Bain & Company.

“We suspect 2024 will be a year of playing catch up, as buyers and sellers work toward bridging the valuation gap,

“Innovation and technology will continue to be at the forefront of investment themes across the value chain. Investors should carefully consider the evolving role of AI, the impacts of GLP-1, and the growth of value-based care on their portfolio companies and new investments,” she added.

In the Asia-Pacific region, announced deal value reached around $14 billion, according to the findings.

Investors seeking to manage geopolitical risk began to broaden their horizons, with India representing the largest share of announced deal value and continuing to see a long-term rise in biopharma-related activity.

The nation is expected to host 22 healthcare deals in 2023, with deal value reaching $4.6 billion, just below the $4.7 billion in 2022.

India’s economic growth, business-friendly government, pharmaceuticals manufacturing landscape, and thriving middle class continue to propel investment.

Within North America, 2023 deal values landed around $29 billion, with biopharma accounting for 25 percent of deal activity and 54 percent of deal value.

Activity in provider businesses, which historically account for a large share of United States deals, slowed due to inflationary and labor market pressures.

Nonetheless, several provider deals closed across specialties such as oncology, orthopedics, and cardiology with the opportunity to drive ancillary expansions relatively insulated from broader healthcare and macroeconomic pressures.

In Europe, announced deal value fell approximately 44 percent year over year from $25 billion in 2022 to $14 billion in 2023.

Constrained credit markets and continued disruption from labor and cost inflation dampened activity in the retail health and provider sectors.

Europe also saw several announced processes that did not result in a transaction, as buyers and sellers failed to align on valuations.

“Despite the slower start to 2023, we see green shoots in the buyout market,” said Nirad Jain, co-lead of Healthcare Private Equity at Bain & Company.

“In 2024, sponsors will need to establish higher confidence in value creation opportunities earlier and think beyond pure commercial diligence. Successful investors will evaluate a wider set of factors early in their process to create value quickly,” he added.

Looking ahead to 2024, Bain & Company found that generative AI promises to drive significant productivity gains, improve patient and provider experience, lower administrative costs, speed biomedical research and drug development, and help develop next-generation diagnostic equipment.

It said big technology companies are partnering with healthcare organizations to apply generative AI, and investors are deploying capital in nascent companies built around the tool.

Bain & Company also found that about half of the top 20 biopharmaceutical firms published press releases about generative AI in 2023.

While traditional, analytical AI has been used in healthcare for many years, it said generative AI is distinguished by its ability to create new content, summarize and translate existing content, and, ultimately, to “reason and plan.”

Among investors, it said venture capital and growth equity funds have been deploying capital in companies built around generative AI as a core competency.

It said investors need to consider generative AI’s disruptive potential on portfolio companies and new investments and identify opportunities to take advantage of the technology.

Meanwhile, despite deal volume dropping around 23 percent from 2022 and buyout activity slowing, healthcare information technology (HCIT) continues to attract investment due to its ability to drive innovation and offset macro factors such as inflation, labor shortages, and reimbursement headwinds, according to the report.

It said excitement around digitalization, following the outbreak of Covid-19, resulted in a slew of portfolio companies still early in their holding periods.

Despite the decline in transactions, it said HCIT represents 10 percentof healthcare sector deal volume, seeing sizeable deals in 2023.

Looking ahead, it said providers will prioritize increasing their returns on investment, with revenue cycle management, clinical workflow optimization, and patient engagement as top priorities for new investments.

It is also noted that sales in the GLP-1 class of medications surged in 2023.

Looking ahead, it said three implications confront private equity investors, given the potential market for these drugs.

First, demand for inputs or services supporting the manufacturing of GLP-1 therapies will likely increase.

Second, an expanded ecosystem to support patients will be needed, including services to identify, qualify, and enroll eligible patients, as well as physical or digital health platforms to support patients on these therapies.

Finally, investments with business models based on high rates of obesity could see long term growth projections decline.

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