Health horizons: opportunities emerge as sectors converge

Despite an overall decrease in global M&A levels across all sectors over the past two years, and uncertainty around when investment activity will bounce back, interest in HLS continues to weather unfavourable headwinds.

In fact, this year we have witnessed a surge in HLS megadeals that have seen biotech and healthcare startups raise upwards of $100 million.

Several macro-economic drivers are likely responsible for the increased levels of interest in the sector.

Technological advancements in the HLS space, ageing populations, particularly in Asia, and an accelerated interest in telemedicine and agile vaccine development triggered by the pandemic all have a part to play.

Meanwhile, both the pandemic and trade tensions have highlighted the value of supply chain security, resulting in an increased focus on local manufacturing infrastructure.

Based on extensive research among 351 senior counsel and C-suite decision makers working at companies in the HLS sector in Europe, 361 investors in Europe with HLS portfolios, and a panel of our in-house legal experts, our latest report on HLS sector investments provides in-depth analysis of the landscape in which these major deals are taking place.

We explore the key trends shaping the sector, as well as offering expert guidance on how businesses and investors can overcome the challenges they currently face.

According to Alexandre Regniault, partner and healthcare and life sciences sector head:

“The powerful insights within this report are proof of the intrinsic value of healthcare and life sciences as fields for investments. Straight away, we see that investors are hungry, with a substantial 86% expecting their company to increase its investment allocation in the HLS sector in the next three years. Combine this appetite with the depth of opportunity provided by the sector’s strong innovation pipeline and this becomes a recipe for success.”

Contributing to this positive outlook is the sense that relatively speaking investing in the HLS sector is viewed as an easy win.

As Robert Turner, partner and asset management and investment funds sector head states:

“From an investor perspective, external factors such as geopolitical tensions are actually incentivising HLS investments by making investing in other areas much more difficult.”

At the same time, the opportunities on offer play into investors’ need to invest capital raised via private credit strategies.

Partner and financial institutions sector head Charlotte Stalin points out that

“private credit has been a hot topic in recent years. Now, funds are looking for businesses offering five-year investment opportunities to allow them to quickly service their debt. HLS businesses have significant funding needs, and they also tend to be very cash generative whichmake them perfect candidates for investment.”

As well as highlighting corporate and investor optimism regarding the state of future HLS investments, our report dives into the key trends shaping the sector.

Unsurprisingly, we’ll see that European corporates and investors view their home patch as offering great opportunity when it comes to HLS investing. Regniault cites the example of Denmark as an innovative hub for manufacturers and research and a basis for the development of global pharmaceutical products and medical devices.

That said, corporates and investors do also show an interest in opportunities outside of their domestic region, with North America, South America and the emerging Middle East and Asia Pacific HLS markets all attracting attention.

According to Turner, "general interest in the Middle East as an investment region has not only been very high, but it’s been our fastest growing practice in recent years. In fact, the level of management talent looking to become active within the region is higher now than at any time in my career. Of course, this influx of asset management and investment funds talent may in turn lead to further requirement for HLS investment in the region.”

Another factor driving interest in the sector is the vast potential for technology, particularly AI, to revolutionise healthcare. However, as we explore in the report, this is an area where corporates struggle, with many from our study stating that staying ahead of technological innovation is a challenge they face in making or attracting investments.

Our study also reveals that environmental, social and governance (ESG) considerations are taking centre stage within the HLS sector.

Investors are acutely aware of the potential for HLS investments to positively impact society and are interested in opportunities to invest in social infrastructure including elderly care, intellectual disability care and private hospitals over the next three years.

However, an increased focus on the impact of HLS activities on the environment has propelled ESG to the top of business and investor agendas.

Regniault states that “a deeper understanding of the environmental cost of healthcare has emerged in recent years. At the same time, our awareness of the impact that global warming and deteriorating biodiversity have on human health has also grown. There has often been a tendency within the HLS sector to view the environmental aspects of ESG as a risk, while the social elements are more often framed as an opportunity. And yet, when we explore this key trend, we see that proactive engagement with all aspects of ESG can in fact reveal a range of opportunities for innovation, cost reduction and growth.”

Of course, all of these investment trends have one thing in common.

According to Stalin, “success rests on business and investors’ ability to navigate complex, and in some cases patchy, regulatory frameworks.”

Our research shows that this is something both corporates and investors find hard to tackle.