Deal activity and valuations in the healthcare sector during COVID-19

Issac Jacob

There has been a measurable impact on healthcare deal activity and valuations as a result of COVID-19. Major equity indices experienced a remarkable dip following the COVID-19 outbreak but appear to have stabilised and recovered the lost ground. Debt market spreads, especially sub-investment grade, spiked in March but have been gradually reducing as lockdown is lifted and business activity resumes.

COVID-19 had an immediate impact on equity valuations

But the current pandemic is a global healthcare crisis that will require a healthcare solution going forward. During periods of economic contraction, healthcare is viewed as a defensive sector and generally less susceptible to broader market gyrations. With a virus as the driver of the current economic situation, it is unsurprising that some healthcare companies are witnessing stronger trading and investor appetite.

The healthcare sector has fared relatively better than other industries during epidemics/pandemics

There have been significant short-term disruptions that vary by healthcare sub-sector but medium and long-term fundamentals remain in place with regard to healthcare products and services. For the healthcare segments we work with at CG Results Healthcare, M&A activity has continued at pace and valuations remain robust even in the face of recent market volatility. As an example, the western CDMO sector is garnering strong valuations due to the heightened demand for local or regional supply chains.

In the post COVID lockdown environment deal activity will resume, but the manner in which deals are executed, both from a seller and buyer perspective, may adapt to the new normal of travel restrictions and social distancing.

In an optimistic case scenario where we avoid a second or third virus outbreak and obtain a vaccine, it is possible for deal activity to attain a run-rate that approaches pre-COVID levels in about 12 months. But in the event that we go in and out of a series of slowdowns over the next few months, there will surely be a negative impact on deal activity, with some sub-segments getting hit harder than others. A prolonged period of economic contraction may result in a general reset in valuations, credit rationing or reduced equity market options for companies, which could lead to increased restructuring and M&A activity.

Read the full report here for our analysis of the impact on deal activity and valuations in the healthcare sector, sub-sectors with strong performances, virtual deal-making and most importantly, our outlook for the next 12 months.

Click to read Healthcare M&A Activity and Valuations