3 Healthcare Investing Trends to Watch

The landscape for healthcare investing is evolving, driven by the beginning of a new interest rate environment, positive trends in the use of healthcare products and services, further normalization of corporate earnings post-COVID and companies pursuing disruptive technologies and innovations. These were some of the key topics at Morgan Stanley’s 22nd Annual Global Healthcare Conference, which gathered executives from leading healthcare companies and institutional investors to discuss the most important investing themes for the industry.

Hundreds of public and private companies and more than a thousand investors attended, representing more than $7 trillion dollars in aggregate market cap. Morgan Stanley’s bankers spoke about current and future factors punctuating the improving environment for mergers and acquisitions (M&A) and initial public offerings (IPOs), while company executives across biotech, healthcare technology, pharmaceuticals and life sciences spoke about their pipelines, investments in AI and other technologies and their customers’ uptake of products and services. 

Healthcare M&A Outlook 

The firm’s healthcare bankers shared perspectives on the gradual rebounds in the M&A and IPO markets. An interest-rate-cutting cycle and reduction in the cost of capital, alongside a record $4 trillion in financial sponsor dry powder that needs to be deployed, may fuel more deals.

“We’re in the early parts of an M&A and capital markets recovery,” said Dan Simkowitz, Co-President of Morgan Stanley. “We expect private equity firms to start monetizing some of their portfolios. Many are waiting to see how the market reacts to the start of the rate-cutting cycle.”

For more dealmaking to happen, buyers and sellers will also need to align on value, especially post-COVID as some companies’ earnings have tapered since the pandemic years, leaving both sides trying to determine the right valuations. “Against a backdrop where the cost of capital has increased and macro uncertainty persists, buyers have been disciplined and careful about pricing deals,” said Ari Terry, Co-Head of Healthcare M&A. “Sellers, on the other hand, have been slow to adjust their valuation expectations to the current market reality.” 

While it’s been a slower M&A market in 2024 by dollar volume, unit volume is about on par with prior years, said Tedd Smith, Co-Head of Healthcare M&A. “I continue to be pretty optimistic in the outlook based on our client dialogues and what we see in the pipeline,” he said. 

The firm’s bankers also shared insights on the M&A environment by sector: 

• The medical technology (MedTech) and HealthTech industries have been more active in M&A, relative to payers and providers that are adjusting to a new normal for earnings post-COVID. 

• Biotech asset values were negatively affected by the high cost of capital, although valuations could climb as interest rates come down.  

• Large pharma companies are increasingly interested in controlling the design of drug trials, which could lead to acquisitions that offer that capability. However, pharma companies are more averse to doing large deals in the current regulatory environment. 

• Biopharma companies are increasingly focused on the cardiometabolic space, which is a fast evolving and increasingly large opportunity. 

The firm’s bankers also spoke about how an M&A rebound could further accelerate the resurgence in IPOs. In 2024, healthcare composed 20% of total IPO volume and had the greatest number by sector. Healthcare IPOs are gaining momentum mostly in therapeutics, diagnostics and MedTech. 

“In order to see an increase in IPO volumes, we need to unlock more capital, and M&A exits will allow investors to re-deploy capital into new ideas,” said Kalli Dircks, Managing Director in Global Capital Markets. The re-deployment of capital post M&A occurs when public companies are acquired, and that previously invested capital is freed up for new ideas. Typically, capital markets allow for efficient re-deployment through IPOs and follow-on offerings. 
 

AI Applications in Healthcare 

Investors are scrutinizing capital expenditures on artificial intelligence, wondering when they will see the return on healthcare companies’ growing AI investments. Company executives spoke about using AI to simplify tasks, increase productivity, reduce administrative costs and, in some cases, even help with product development. 

In pharma and biotech, investments in AI are focused on drug discovery and expanding to other use cases: 

• Drug discovery: Currently, it costs more than $1 billion and takes eight to 10 years to develop a new drug. While AI for drug discovery is still nascent, companies spoke about how AI may help reduce expenses and time to market. 

• Compound screening: AI is being used to perform rapid screening of thousands of chemical compounds, to test for desired biochemical effects. 

• Dosage: Companies are using AI to help them determine the right doses for patients that balance risks and benefits. 

• Supply chain: AI can search for and minimize bottlenecks in pharmaceutical supply chains. 

• Regulatory filings: Pharma companies are using AI to provide feedback to regulators. 
   

Among healthcare services companies and providers, the use of AI revolves around efficiencies and reducing expenses: 

• Cost savings: Payers are using AI to cut expenses in headcount, claims and denials that can benefit margins. 

• Productivity: AI is helping physicians spend less time on administrative tasks, which can alleviate burnout and labor shortages. 

• Resource allocation: Large technology companies are partnering with healthcare to gain market share in healthcare services such as predictive analytics, which help providers analyze data, create efficient work schedules and reduce expenses. 

In MedTech, companies are investing in and developing AI to help with functions such as disease detection and surgery. “Both strategics and investors are actively analyzing potential opportunities from the use of AI to analyze clinical data, make diagnoses and ease clinical workflows,” said Peter Harrison, Global Head of Medical Technology. 
 

• Imaging and diagnostics: AI is being used to interpret CT scans and x-rays for early disease detection and to attain higher accuracy when compared to methods such as liquid biopsies. 

• Surgeries: AI is helping aging surgeons perform better and prevent future labor shortages. 

Innovation and Utilization Trends  

Investors were interested in hearing what companies shared around innovation. Many company executives referenced new technologies, particularly in digital health and biotechnology. Apart from AI applications, innovations included: 

• Non-invasive, cell-free DNA testing 

• Blood tests that use DNA from tumors to detect small amounts of cancer in the blood earlier than traditional methods such as imaging 

• Detection for kidney transplant rejection much earlier than is possible with a biopsy 

• A next-generation intraoral scanner, which is a handheld device that creates 3D digital impressions of teeth and gums 

Investors also listened for indications about utilization, to help determine trends in the number of patients using healthcare services such as hospital visits, surgeries and prescriptions. Higher utilization can mean increased revenues for providers, pharma companies and insurers, and the commentary from companies was mostly encouraging: 

• For some new oncology technologies, doctors are expanding usage to more of their patients. 

• Population growth and rising demand from baby boomers and those with chronic conditions is helping with strong utilization for healthcare providers.

• Also, these strong utilization trends have driven demand, especially in the U.S., for MedTech infection prevention and contamination control products.