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by Baker McKenzie

Healthcare meets tech: fit for purpose

Increasing pressure on healthcare systems, massive tech growth and consumer-led demand are the perfect recipe for strong M&A activity in the emerging healthtech sector.

With healthcare making up eight out of the top ten largest M&A deals last year, activity in this sector is buoyant.  However, the need to cut costs, increase efficiency and improve systems has led healthcare companies to collaborate with tech companies who can offer in-depth digital expertise. Whilst tech companies have the platforms to help, and the potential revenues are vast, they don’t necessarily have the market share or, crucially, the consumer trust. This point of convergence is therefore mutually beneficial and driving the market forward with significant recent growth in healthtech M&A activity.

The demands, which are being underpinned by an ageing population, increased desire by consumers to manage their own health and the push for efficient delivery mean that legacy healthcare companies are developing their digital offering. “On the healthcare side we’re seeing much more M&A but largely acquisitions of small start-ups which have got the tech or data analytics expertise” according to Baker McKenzie’s Global Transactional Healthcare Group head Jane Hobson. “To survive, companies have to enhance their technology and in order to do that it’s not just buying it in but actually acquiring the expertise to go with it.”

The opportunities to achieve tremendous growth through M&A while sidestepping the lengthy development process involved in organically developing the tech are evident. However, when a traditional and risk adverse industry such as healthcare meets a fast-paced consumer-driven industry such as tech, there are inevitable challenges too.

Start-ups with cutting-edge ideas are an attractive target for legacy healthcare companies. “These are promising but not necessarily proven technologies; they sometimes work, they sometimes don’t,” points out Alan Zoccolillo, head of Baker McKenzie’s North American Healthcare Group and New York co-managing partner. “So there is a fair amount of risk in paying for what could be the next great technology which turns out not to be.”

The other hurdle faced by healthtech adopters is consumer trust in digital health. Safe data storage and GDPR is currently top of the agenda; couple this with the sensitivity that inevitably characterises the healthcare industry and the challenges are clear. “Data breaches are like large environmental catastrophes in this sector. They impact the company in a variety of ways, from a regulatory standpoint to civil liability with patients and the costs associated,” says Zoccolillo.

Whilst regulators are taking a proactive stance, and healthcare companies are navigating using new tech in a regulatory compliant way, this is still new ground. “Healthcare has long been founded on very traditional methodologies based on science, and has therefore been appropriately slow moving,” says Tim Sheppard, IQVIA’s SVP & General Manager for Northern Europe, a clinical research and health information technology company that harnesses the power of human data science for better health outcomes.

“There has been a change as the power of the patient is increasing, but I’m somewhat sceptical about how successful the tech giants will be in the healthcare industry, which is very personal. Trust is a big thing with patients, I don’t think it’s easily commoditised or made more useful by those who thrive on mass delivery.”

M&A activity in healthcare is set to reach $400bn this year. While it is not without its challenges, from securing consumer trust to safe data storage, cost cutting in care systems and consumer demand for digital healthcare devices means that the potential for rapid growth in healthtech is there. “There has been a realisation from healthcare providers that they need to be much more efficient,” adds Sheppard. “The penny has dropped, and tech is now the focus.”

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by Baker McKenzie
Distress to Impress

With indicators pointing to the peak of the current financial cycle, an economic downturn could be imminent, bringing with it an uptick in distressed M&A activity.

An unpredictable global economy, changes in regulatory frameworks and political turbulence have long acted as markers for a financial downturn. Increasingly companies are looking closely at assets, lending and exposure in the face of a potential shift in the economic cycle. It’s not necessarily bad news, for a downturn can bring with it opportunities for future growth.

The first half of 2019 saw some very high value deals, such as Bristol-Myers Squibb’s $74 billion acquisition of Celgene, but, according to Mergermarket, activity fell by 24.2 percent in the second half. “2019 was a tale of two cities,” says asset management firm CQS’s Head of Special Situations Group, Ivelina Green. “Stronger companies have been getting stronger and companies under duress have faced tremendous pressure.” Given future predictors, this is exactly the time to be strategically forward thinking. “We are most probably late cycle. It’s not going to end imminently, but both companies and investors need to be very cautious and really think about their late cycle investing strategy.”

Future Imperfect

While there has been a softening in M&A activity, the distressed market is showing strong signs, triggered in part by political uncertainty and trade sanctions. The market is currently at a pivotal point, with plenty of liquidity but a lower volume of deals. This has created “two parallel universes” says Mats Rooth, Head of Baker McKenzie's Stockholm Banking and Finance Group. “We’re seeing a definite uptick. The common assumption is that activity will kick off soon, given signs such as people setting up trusts preparing to park distressed assets. That’s a real indication, along with the fact that  banks and alternative lenders (debt funds)  are still lending but they’re becoming  much more picky.”

Retail has been a lucrative source of distressed M&A deals in recent years thanks to significant advances in technology and rapidly changing consumer behaviour. However, investors are increasingly looking at more varied targets. These include all highly levered industries including real estate, which are vulnerable to interest rate fluctuations. However, aside from external factors such as sudden liquidity crunches or black swan events, industry is not necessarily a defining factor in the resilience of a company, says Debra Dandeneau, Chair of Baker McKenzie's Global Restructuring and Insolvency Group.  

“If I had to say where you'd find the biggest likelihood of becoming vulnerable to distress it is not sector based. Companies that have some sort of hiccup in terms of management are classic, especially where there is no fundamental problem with the business but there is a lack of agility, flexibility and responsiveness to environment.”

Risky business

With distressed M&A activity picking up and the current run of several strong economic years expected to come to an end, investors are poised to use earmarked capital on those companies whose risk exposure was too great. So, what can businesses do to minimise their vulnerability to downturns and other pressure factors? Ivelina Green of CQS notes that careful attention must be paid to internal structures. “You can have the best CEO in town but if you don’t have a middle management team that really knows the business, you’re going to fail.” However, she says the most obvious answer to limiting risk exposure is to stop borrowing. “Companies often think leverage is sustainable, that their current performance will continue in perpetuity, then suddenly the cycle turns and they’re in trouble. Stop borrowing - no one is holding a gun to your head. Companies need to be forward looking, it’s vital to be thoughtful about how much leverage you can sustain and whether the return on capex is worth it.”

There are significant opportunities to be found in distressed M&A markets, whether or not the top of the cycle conditions continue. “We’re constantly trying to read the tea leaves,” says Dandeneau, “but even if we don’t have a global meltdown there will always be companies stubbing their toes. Investors are consistently ready to take advantage of that.”

High returns, the ability to create value, and the chance to acquire attractive bolt-ons means that distressed M&A can be a lucrative playing field. However, as Mats Rooth points out, one of the biggest challenges is access to information given the reluctance of companies, and the banks that have them on their books, to broadcast their problems. “If you can be a white knight there are golden opportunities, but you shouldn’t parade yourself too aggressively,” he advises. “It’s all about having your ear to the ground to pinpoint the best deals.”

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