McDermott, Will & Emery on their predicted healthcare deal trends in 2025
As we enter the final quarter of 2024, we can reflect on a busy year that has been characterised by a steady uptick in deal activity in the healthcare and life sciences sectors across Europe.
While transactional volume remains somewhat depressed and challenges continue to exist for dealmakers, the good news is that the green shoots we are seeing now are indicative of what is now widely expected to be a busier year for investors in 2025.
In mid-September, McDermotts once again hosted our annual Healthcare Private Equity Europe conference at The Langham hotel in London, bringing together hundreds of healthcare professionals to not only take the temperature of the market but also identify the challenges and opportunities that lay ahead.
Joined by keynote speaker, the Right Honourable Rory Stewart OBE, who outlined some of the challenging macro and geopolitical headwinds facing investors, we explored a range of hot topics with our panels of lawyers, bankers, investors and healthcare professionals.
The conversations were wide-ranging and hugely insightful, covering everything from private equity trends in life sciences and pharma to the future of medicine and the current shape of the financial markets.
The evolving regulatory backdrop was a theme across many panels, as was a sense that we can look forward to a period of more active transactional activity in the months and years ahead.
The deal environment for healthcare and life sciences
Reflecting on the current market conditions for healthcare and life sciences, deal activity remains highly selective.
Over the past few years, investing in European healthcare has been shaped by a tight credit market, a shortage of healthcare workers, rising labour costs and digital transformation shaping the opportunity set across our industry.
While healthcare deal activity has been declining globally since 2021, European volumes remain higher than pre-pandemic levels, with 17 deals closed in the first half of 2024 and 38 in the whole of 2023, versus 33 in 2019 and 20 in 2018.
The deal mix in Europe has shifted, however, from buyouts to more strategic M&A as the macro environment has changed and private equity firms have faced constraints on capital.
European deal activity has also increasingly focused on biotech and pharma services deals since 2022, with biotech accounting for 72 of the top 100 European healthcare deals in the first half of 2024.
Sharon Lamb, partner and head of UK healthcare at McDermott, says: “Looking forward, the sentiment we are hearing is of cautious optimism.
“Right now, despite sluggish M&A, multiples are holding up as we observe investment committees continue to hold their bar to prioritise premium assets.
We can also see that most investors are still prioritising value creation, with a growing appetite for technology and services deals and strengthening investor sentiment across Europe, North America and Asia Pacific.”
Private equity fundraising for specialist healthcare funds was robust in 2023/24, albeit our audience was split on the likelihood of it rebounding to bumper 2021 levels within the next three years, with 53 per cent saying it would be unlikely.
LPs are focused on performance, are hungry for distributions, and are increasingly keen on co-investment opportunities.
Fatema Orjela, private equity partner at McDermott in London, says: “For where we are in the cycle, LPs are particularly keen to see returns and are pushing hard for exits.
“GPs appear to be seeing stabilisation of the financial performance and balance sheets of their portfolios having moved past some of the headwinds of the pandemic.”
She adds: “Good management teams remain focused on operational effectiveness and staying resilient to continued cost pressures, including interest rates, wage inflation and increased capital costs, albeit with a bit of breathing room for operational growth investment.
“The stage is certainly set for a clearing of the logjam, with there being sufficient demand to buy and sell, and high quality assets available to trade hands to the ultimate benefit of LPs.”
As the macro backdrop gets clearer, our panellists were optimistic about transactional activity picking up in the next 12 months, particularly in the mid-market, though deal timelines may remain elongated.
The bifurcation that we currently see in the deal landscape, whereby premium assets find strong demand and enjoy solid valuations while second-tier deals are much harder to get away, looks set to be a feature for some time to come.
In all, 58 percent of our audience felt the deal market of 2025 would most closely resemble 2019, rather than 2021 or 2023.
While any deal recovery tends to move slower in Europe than North America, thanks to different levels of risk appetite and stakeholders typically taking a more considered approach before leaping into innovation, some regulatory headwinds may slow US activity.
Krist Werling, partner and co-head of McDermott’s private equity practice group, says: “There are some pretty significant regulatory swings taking place in the US, with an effort from certain states and the federal government to seek more transparency from private equity, in healthcare services in particular.
“For example, the California legislature last session proposed legislation that would require approval of any new healthcare services transactions that involves funding from a private equity or hedge fund-thankfully, the legislation was not signed by the California Governor but is an example of the focus on PE investment in healthcare in the US.”
The regulatory landscape also remains challenging for cutting edge companies in Europe, with developing legislation in relation to devices, AI, data privacy and cybersecurity all impacting.
There is a need for further harmonisation and regulatory change creates some opportunities, with regulators engaged in addressing issues to enhance patient outcomes.
What’s next for medtech
The pace of innovation in medtech continues to revolutionise approaches to healthcare and drive deal opportunities.
The level of innovation that has taken place in the past decade is incredible and the amount of capital that has been invested in tech-fuelled healthcare is also driving an exciting new era, with deepening scientific understanding of disease and the rate of new drug development escalating.
We see a growing focus by companies on the experiences of end users and moving up the value chain to ‘own the patients’.
We also expect more deals in 2025 as medtech becomes a growing element of healthcare and pharma services, fuelled by AI and personalisation trends.
There is a lot of optimism about the application of AI tools across healthcare but investors are cautious.
In the medtech space, there are many tools already being used in the R&D space, but issues of liability arise as AI involvement shifts from clinical decision-making into diagnostics.
Jamie Ravitz, partner and co-head of the life sciences industry practice at McDermott, says: “Medtech is now an embedded part of both healthcare services and pharma services, as we move through an truly dynamic period of medical innovation.
“We have seen more deals this year and AI is a key tailwind accelerating activity into 2025, with lots more investment going into new tools and personalisation technologies.
“There are plenty of exciting trends for investors to get behind moving forward.”
Buy and build in pharma services
In a challenging exit environment, at a time when transactions have been hard to execute, we have seen investors dedicating more time to value creation plans as hold periods have lengthened.
Investor priorities over the past few years had put a focus on cost rationalisation, but we now see more attention being paid to top-line growth and increasing appetite for add-on M&A.
Pharma services has proved to be a particularly attractive sector for buy and build strategies, given the recognition of an underlying need for better medicine to reach more patients, driven by more innovation and new ways of doing things.
We have observed something of a macro shift in innovation in Europe, as it increasingly shifts its centre of gravity away from big pharma companies and into leaner biotech businesses.
These biotechs have less inclination to invest in large-scale operations, creating opportunities for smarter commercial approaches working with partners in pharma services.
Buy and build strategies work well for investors in pharma services, given the existence of clear well-tested playbooks and the evident benefits gained from scale, geographical presence and access to additional technologies that allow companies to stay with customers for longer.
“There is a continuing desire to work with partners,” says Ellie West, private equity partner at McDermott, “as both big pharma and smaller biotech businesses look to do things faster and more effectively.
“Covid led a shift to decentralised trials using a hybrid approach integrating in-person and online delivery, and that short-term disruption has driven a long-term opportunity.”
Investors are particularly keen to pursue buy and build strategies in the less cyclical parts of the value chain, with generalist funds increasingly moving to support commercialisation strategies as more specialist investors eye opportunities in areas like vaccines and emerging therapeutics.
Integration is critical to the delivery of these strategies, with culture a key element that should be a focus during acquisitions, particularly on cross-border mergers.
The most successful deals involve starting early, building a shared vision and ensuring management support is aligned around a flexible mindset.
Navigating a successful exit
The current challenges in the exit environment remain a critical lynchpin to unlocking further deal market activity in 2025, with financial sponsors under pressure to return capital to LPs so that liquidity can in turn be recycled back into further fundraising.
Exits have been difficult to achieve for some time and sponsors are therefore sitting on assets for longer than they would like to as they wait for the landscape to improve.
A survey of attendees at HPE Europe found that 65 percent of our audience blamed high valuation expectations as the biggest challenge for exits today, followed by capital market uncertainty, high interest rates and a lack of buyers.
Successful exits are best achieved when sellers are not under pressure for a sale, when the buyer universe is strong and there are multiple bidders interested, and when the asset and the marketing story are in optimum shape.
The number one advice to sellers is to ensure they build options, recognising that has been difficult in the last few years while capital markets uncertainty has been hindering the ability of sellers to run dual-track processes.
We also asked our audience where they expected to see the most exit activity over the next 24 months, with 55 per cent predicting the most exits will come from biosciences, 23 percent pointing to healthcare services, 18 percent to tools and diagnostics and a further 5 percent expecting deals in specialist pharma.
Certainly it is true that biotech start-ups are finding themselves in structural need of capital and that sector lends itself to more transactions, so we expect it to remain a busy market in 2025.
Michal Berkner, partner in the London transactions practice at McDermotts, says: “For those considering the best time to exit, there are really three key things that need to come to pass.
“First, the business needs to be ready, with a strong track record, good current trading, and a clear value proposition for a new investor.
Second, the buyer universe needs to be in good shape, whether the target acquirer is a financial sponsor or a strategic, and finally, finance needs to be available.
“It is a good idea to begin building banking relationships a year or two ahead of time in order to build options at a time when there is more focus on due diligence and processes are taking longer.”
Looking forward
Healthcare has proved something of a bright spot in a difficult European M&A landscape through 2024, with a fair amount of transactions happening as the financing markets have reopened and bilateral M&A has occurred even while new sponsor-to-sponsor deals have been limited.
The valuation gap has been a key impediment but we now see that barrier easing. Ayman Mahmoud, co-head of the London transactions group and the London finance, restructuring and special situations group, at McDermott, says: “Ever since Covid there has been a layer of macro uncertainty around base rates and national elections that has led to a lack of visibility for investors and has elongated that bid-ask spread.
“There is now a clear desire to get stuff done, but people are waiting for a bit more visibility. We hope we will get to that point soon and we expect more confidence to drive more deals next year.”
With interest rates starting to come down and finance available, we share the views of our peers in looking forward to a busy year for healthcare and life sciences investing in Europe in 2025, with many exciting opportunities on the horizon.
