Healthcare Investment Banking Peculiarities and Recent Deals

The healthcare sector offers great investment opportunities today. Dr. Nimish G Patel, CEO of HBS Investment Group, in his article for Forbes, describes several positive trends that investors can consider. One notable trend, for example, is the quick growth of telehealth, with the US market projected to grow at a rate of 22.9% from 2023 to 2030.

Another trend is the increasing focus on mental health and well-being, with the market expected to expand by 9% from 2021 to 2026. Additionally, developments in biotechnology and precision medicine are driving investment in areas like gene therapy and CRISPR technology.

In this article, we’ll talk about healthcare investment banking, what services it offers, what companies can benefit from its services, and describe recent deals in the healthcare M&A market.

What is healthcare investment banking?

Healthcare investment banking refers to the financial services provided to companies operating in the healthcare industry. These services involve a range of activities aimed at helping healthcare companies raise capital, conduct mergers and acquisitions, and manage complex financial transactions.

More specifically, healthcare investment banking services include:

1. Capital raising. Assisting healthcare companies in raising equity capital through equity offerings, debt financing, and other fundraising strategies that help support their growth, research and development, or expansion plans.
2. Mergers and acquisitions (M&A). Advising healthcare companies on buying, selling, or merging with other companies to achieve strategic objectives, expand market presence, or gain access to new technologies or products.
3. Strategic advisory. Providing strategic guidance to healthcare companies on various corporate finance matters, including financial restructuring, divestitures, joint ventures, and strategic partnerships
4. Valuation services. Conducting comprehensive valuation analyses to determine the fair value of assets, businesses, or intellectual property for transactional purposes or financial reporting.

Here are the key types of companies that might require healthcare investment banking services:

1. Pharmaceutical and biotechnology companies. These companies develop and sell drugs, biologics, and other healthcare products, often requiring substantial capital for research and development, clinical trials, and regulatory approvals.
2. Medical device and equipment manufacturers. These companies design, manufacture, and distribute medical devices, diagnostic equipment, and medical technology solutions. Therefore, they often need capital for product development, improving manufacturing processes, or market expansion.
3. Healthcare services providers. This category includes hospitals, clinics, laboratories, and other healthcare facilities that offer medical services to patients. These companies may require financing for facility expansions, equipment upgrades, or acquisitions of other healthcare providers
4. Healthcare IT companies. These companies develop software solutions to improve healthcare delivery, patient care, and administrative processes. They often seek investment to support product development and expand their customer base.

Healthcare investment banking peculiarities

Investment banking in healthcare presents unique challenges and opportunities compared to other industries. Here are key reasons for that:

1. Regulatory complexity. Regulatory complexity in healthcare varies by country. For example, in the UK the government manages healthcare entirely, while in the US both public and private companies are involved. Governments regulate pricing, coverage, and approvals for new drugs and treatments. Bankers need a deep understanding of these regulations to manage transactions effectively.
2. Complex M&A activity. Healthcare is one of the most active and rapidly growing sectors in the global economy. As a result, it experiences strong M&A activity. In 2023, it demonstrated resilience, attracting significant investor interest. This trend is expected to continue in 2024. To effectively advise clients in this dynamic sector, investment bankers should always be aware of market trends, regulatory changes, and emerging opportunities. 
3. Market volatility. On the one hand, healthcare stocks have shown stability even during turbulent markets. This stability comes from steady sales growth, diverse revenue sources, and the ability to control prices. On the other hand, healthcare stocks can be highly sensitive to regulatory decisions, clinical trial results, and public health trends. Bankers need to assess and manage these risks effectively.

Source: alliancebernstein

4. Long development cycles. Studies show that it takes three to seven years to develop a medical device. The process of developing a new drug takes even longer — on average, 10 to 15 years. Additionally, both require significant capital investment. Bankers in healthcare must be patient and willing to work through lengthy development cycles and regulatory approval processes.

Biotech M&A market: recent deals

In 2023, the top 10 biotech M&A deals amounted to $115.8 billion, surpassing previous totals from 2022, 2021, and 2020, which were $65, $53, and $97 billion, respectively. Let’s explore the most notable transactions of this period. 

1. Pfizer and Seagen

Deal value: $43 billion

Premium: 33% above previous closing price

In 2023, Pfizer made a significant move in the healthcare market by announcing its $43 billion merger with Seagen. This strategic decision came at a crucial time for Pfizer, which was facing financial challenges due to declining demand for its COVID-19 products.

With this acquisition, Pfizer accelerated the development of breakthrough cancer treatments, leveraging Seagen’s Antibody-Drug Conjugate (ADC) technology. Seagen’s portfolio, which included transformative medicines like ADCETRIS and PADCEV, complemented Pfizer’s existing oncology offerings and strengthened its pipeline with over 60 programs.

Additionally, to address regulatory concerns, Pfizer decided to donate royalties from sales of Bavencio to the American Association for Cancer Research (AACR), demonstrating its dedication to advancing cancer research.

2. Bristol Myers Squibb and Karuna Therapeutics

Deal value: $14 billion

Premium: 53% above previous closing price

Bristol Myers Squibb, a leading pharmaceutical company, completed the acquisition of Karuna Therapeutics for $14 billion. Karuna Therapeutics specializes in developing innovative therapies for neuropsychiatric disorders, with a focus on conditions like schizophrenia and Alzheimer’s disease.

Bristol Myers Squibb viewed the acquisition as a strategic opportunity to expand its portfolio and gain access to Karuna’s groundbreaking schizophrenia treatment, KarTX.

This acquisition aligns with Bristol Myers Squibb’s broader strategy to enhance its presence in the neuropsychiatric field and deliver treatments for patients with complex neurological conditions.

3. Merck and Prometheus Biosciences

Deal value: $10.8 billion

Premium: 75% above previous closing price

In April 2023, pharmaceutical giant Merck completed a $10.8 billion acquisition of Prometheus Biosciences, expanding its presence in the field of immune-mediated inflammatory diseases.

The main focus of the acquisition was PRA-023, now known as MK-7240, a promising treatment for diseases like ulcerative colitis and Crohn’s disease. PRA-023 exhibited impressive results in phase 2 trials, showing considerable improvement rates compared to placebos. This positioned PRA-023 as a potential competitor to other leading drugs targeting the TL1A pathway.

Merck’s CEO, Robert Davis, highlighted the strategic significance of the Prometheus deal in expanding Merck’s presence in immunology and meeting unmet patient needs. Additionally, through the acquisition, Merck gained access to four other candidates for bowel and immune-related diseases.

Top investment banks for the healthcare industry

Here are the top banks offering services to the healthcare industry, divided according to various market segments:

• IB giants. JPMorgan Chase, Goldman Sachs, Morgan Stanley, Barclays, Citigroup, and Deutsche Bank are prominent players in healthcare investment banking. They offer a wide range of services, including M&A, IPO, debt and equity financing, and strategic advisory. These banks typically secure the highest share of fees and deals in M&A within the healthcare sector.
• Elite boutique firms. Firms like Lazard, Centerview Partners, Evercore, and Guggenheim specialize in providing high-touch, customized advisory services to clients in the healthcare industry. They excel in complex transactions such as large-scale mergers, divestitures, and restructuring.
• Middle-market banks. Houlihan Lokey, Cowen, Piper Jaffray, and Jefferies assist mid-sized companies in the healthcare sector, offering a range of services including equity research, capital raising, M&A advisory, and financial restructuring. They focus on providing personalized attention and tailored solutions to meet the specific needs of clients.
• Industry-specific boutiques. Banks like KeyBanc, Leerink Partners, Ziegler, Triple Tree, Brentwood, and Crosstree also specialize in serving clients within the healthcare industry and provide similar services like M&A advisory, strategic consulting, and industry-specific research and analysis. They offer deep industry knowledge, personalized attention, and customized solutions.

No single bank or group dominates every vertical, as the healthcare sector is highly varied. That’s why different banks may excel in specific areas such as pharmaceuticals, medical devices, or healthcare IT.

Key takeaways

• Healthcare investment banking covers financial services for healthcare companies, including raising capital, advising on mergers and acquisitions, and providing strategic guidance.
• Key types of companies that might require healthcare investment banking services include pharmaceutical and biotechnology companies, medical device and equipment manufacturers, healthcare services providers, and healthcare IT companies.
• Challenges in healthcare investment banking include dealing with complex regulations, M&A activity, and managing market volatility.
• Recent major deals in healthcare include Pfizer and Seagen, Bristol Myers Squibb and Karuna Therapeutics, and Merck and Prometheus Biosciences.
• Top banks in healthcare range from big names like JPMorgan Chase to specialized firms like Leerink Partners, offering various services depending on client needs and transaction types.