Preparing for the 2025 healthcare investment landscape — in conversation with Sharon Lamb, Partner at McDermott, Will & Emery
As the healthcare and life sciences sector emerges from a period of consolidation and slower deal activity, investors are eyeing 2025 with cautious optimism. HPE Europe, a conference hosted by multinational law firm McDermott, Will & Emery (MWE), convened in London this autumn to explore key investment themes and strategies for the year ahead, with HBI in attendance.
Sharon Lamb, Partner, McDermott, Will & Emery
The conference, with a keynote delivered by former UK government minister and MP Rt. Hon. Rory Stewart OBE on the likely impact on investors of the macroeconomic and security situation in Europe and Asia, revealed several key themes that will influence healthcare investors and deal activity throughout 2025. Among those were the matter of the volume of ‘dry powder’ ready to be deployed within the market next year, the challenge of valuation gaps in dealmaking, and the movement in portfolio development towards add-ons that cover multiple stages of the value chain.
In an interview with HBI, Sharon Lamb, Partner at MWE, shares her post-conference insights on the healthcare investment landscape, exploring a range of topics, from market dynamics and geopolitical uncertainties, to regulatory changes and the evolving role of technology in healthcare.
The market outlook for 2025
Q: What do you think 2025 is going to look like in terms of activity, volume, and deal size?
Sharon Lamb: “2024 has been a year of consolidation and slower deal activity.
“There has been significant portfolio optimisation, with investors looking for efficiencies within portfolios, and to achieve portfolio balance for the next year.
“For 2025, I think most of the conditions are ripe for a very active year. That is, deals have been held back awaiting exit. There has been stabilisation of inflationary pressures, while the market has a lot of dry powder.”
However, Lamb adds a note of caution:
“What I would say is that a lot of this may depend on interest rates continuing to fall. And it’s clear even in the weeks since HPE that there are some geopolitical events that will always play a factor in whether interest rates come down, and which will impact the appetite of investors, particularly in certain geographies.”
The impact of geopolitical uncertainty and shifting regulation
Q: With recent changes in national governments across Europe, the upcoming US elections, and that geopolitical instability to which you referred, is it too early to say whether 2025 will be the year the brakes are finally off for dealmaking?
“There are a number of features that mean that we can have some confidence. First of all, the factors that we spoke about already — dry powder, deals wanting to happen, and a genuine appetite for investors to move ahead.”
Lamb emphasises the resilience of underlying trends in healthcare:
“Another overarching macro factor are the drivers behind investing in healthcare and life sciences.
“Factors such as the provision of healthcare, in public and private systems, continue to be driven by ageing populations, with their requirements for care and increasing demand. So you can’t, whatever happens geopolitically, ignore the way that those macro trends affect the wider healthcare market.”
On the challenge of predicting geopolitical events, Lamb reflects:
“When it comes to crystal ball gazing, I think that Rory Stewart [former UK Secretary of State for International Development, the conference keynote speaker] made a really good observation in his speech, regarding who would have predicted what has happened with the war in Ukraine. It’s obviously really difficult, when there is geopolitical uncertainty, to predict what conflicts might emerge, and how those security issues can affect investors.
“Meanwhile, here are two key issues coming out of the EU AI Act – the first is some of the imprecision around what the regulatory guidance, and standards will look like as these are still to be issued.
“The second is that the Act has relatively short implementation timelines, for example when compared to the implementation period of other regulations of med tech. The third issue is that med tech companies which have AI companies as part of their device are likely to face a significant regulatory burden. This is because the Act now requires double certification for medical devices and diagnostics with AI.”
See here for further HBI coverage on the EU AI Act.
Valuation gaps and market dynamics
Q: The issue of pricing, and pronounced buyer/seller spreads, was a much explored topic at HPE 2024.
Do you anticipate a narrowing of the valuation gap between buyers and sellers heading into 2025? Or do you think that we will continue to see buyers and sellers diverge on multiples?
“I think it depends on the sector. One of the themes that came out of our discussions is that, what we might call category A assets or, the top end assets, continue to be able to demand and attract high multiples.
“However, within some sub-sectors, we are seeing more realism on multiples.”
Nonetheless, Lamb notes that certain market trends indicate valuation gaps will persist:
“Overall, the delay of assets to market would indicate that there may be a multiple valuation gap — an expectation gap — because otherwise those assets would have come to market already.
“If you look at the number of processes that are lost in auction or just simply paused, or that we were expecting to come out in 2024, that seems to be an indicator of a continuing expectation gap on multiples.”
Owning patient journeys, and new forms of pharmaceutical engagement
Q: Are we seeing an accelerating trend towards portfolios with clusters of companies that service the whole of the patient journey?
“We are seeing that portfolio add-ons are looking to capture different parts of the supply chain.
“I think this is particularly true where, just looking at pharma services, there’s still a significant amount of fragmentation around services. We do see opportunities for platforms seeking to expand what would have been the core offering at the beginning through add-on opportunities.
“We see this with pharma services companies who have identified they are able to serve a more holistic offer to their pharma and biotech clients and offer a cradle to grave service. We are talking drug development and research all the way through to commercialisation.
“One of the interesting things about med tech is that we are beginning to see an integration of med tech, health-tech, within the pathway of care, making such integrations more systemic, and bringing that tech journey closer to the patient.
“Now we see those technologies moving closer towards pharmaceutical companies. Consequently, the pharmaceutical companies are using health technologies to engage directly with patients themselves.”
Q: Do you see a trend towards pharmaceutical companies starting to take on more of a service provider relationship with patients?
“I think this is an evolving position.
“One of the key issues about medicines use is the matter of medicine optimisation. Wasted prescription cost is a cost to wider health systems all over the world. The ability to have a closer relationship between the patient and the patient’s use of medicine would be beneficial to health systems and pharmaceutical companies more widely, because it would allow for more effective and efficient use of medicines. I think the opportunities there are evident both to pharma companies and to those paying for those drugs.”
Market knowledge and the importance of specialisation
Q: Should investors be looking to further develop their in-house capacity and competency to address this need for greater due diligence, or should they apply more resources to procuring external, specialist advisory and consultancy?
“Healthcare and life science assets are highly regulated, often have significant barriers to entry in a particular market, and may be subject to political and policy changes. As a consequence, it is important that investors have a deep understanding of the sector and the impact of changes in regulation, reimbursement and policy.
“Investment committees currently have a high bar and this means that specialist advice, whether external or internal, is key in understanding the benefits, or risks, of particular investments.”
Q: Why do MWE host HPE Europe?
“One of the key themes that came out of our conference, HPE Europe, is that investment committees are being more selective and asking more challenging questions before it comes to committing to an asset.
“At MWE we think that this means that a specialist space like healthcare and life sciences, requires investors to be more knowledgeable. They need to have greater strategic input on the direction of travel of a sub-sector, of an asset, and of the regulatory changes affecting their investments.
“Consequently, one of the reasons that we host HPE Europe is to enable detailed and in depth discussion, where specialists in the space can really showcase and share their knowledge about what the head and tailwinds are affecting particular sub-sectors.”
Summary
As investors eye potential opportunities in 2025, the healthcare and life sciences sector appears poised for increased activity, buoyed by significant dry powder and pent-up deal flow.
However, success will hinge on interest rate movements in the Eurozone, UK, US, and elsewhere, and the degree of geopolitical stability. The US elections in particular, as well as further developments around the war in Ukraine, degree of containment of conflicts in the Middle East, and the stability of the situation between China and Taiwan, all have the ability to up-end any existing investment thesis.
The trend towards integrated service offerings across the patient journey, particularly in pharma services and med tech, suggests a continued evolution in how healthcare assets are valued and developed, meriting significant attention over the coming year.
We would welcome your thoughts on this story. Email your views to Chris O'Donnell or call 0207 183 3779.
