Healthcare Investment Banking

A Look at Investment Banking in a Dynamic Yet Stable Industry

Investment banking can be an exciting and lucrative role for candidates who have the fortitude to work long hours under intense pressure. One of the most sought-after roles in investment banking is to work on deals in the healthcare industry.

Healthcare is widely seen as one of the safer industry groups to work in. Long-term industry trends are positive, and the healthcare industry is widely viewed as “recession-proof.” While no industry is entirely recession proof, healthcare investment banking does generally offer more safety compared to other industries and the opportunity to work on many transactions and capital raises.

What is a Healthcare Investment Banker?

An investment banker helps companies raise capital and complete mergers and acquisitions (M&A). An investment banking career is extremely demanding, with analysts frequently working 100-hour weeks. The competition for positions is intense, compensation is very high, and the work is very high-profile.

More specifically, a healthcare investment banker focuses only on advising healthcare companies on capital raises and M&A transactions. Fortunately for the banker, the deal “pipeline” is always strong as people will always need healthcare, and companies will look to make acquisitions for growth purposes, as well as raise capital to invest to meet a population’s healthcare needs.

What Do You Do as an Analyst or Associate in Healthcare Investment Banking?

Healthcare investment bankers provide advice on mergers and acquisitions and capital issuances to healthcare companies across a wide range of diverse sectors, which we will discuss below. Like any investment banking role, healthcare investment bankers will work on pitchbooks and presentations and financial models, along with various client and ad hoc requests and monitoring market trends.

Deal activity tends to be high in the healthcare industry as companies need to constantly innovate to grow. This results in a fairly large amount of mergers and acquisitions and capital market activity. For example, given how long it takes for a pharmaceutical company to research and develop a new drug (many years), it may instead opt to acquire a smaller pharmaceutical company in order to gain quicker access to a particular drug.

Healthcare Sector Overview

In general, the healthcare sector falls into three broad categories:

  1. Life Sciences: Life sciences companies are pharmaceutical companies and biotechnology companies (biotech). Pharmaceutical (pharma) companies research, develop, and produce medications and drugs using various chemicals. Pharmaceuticals typically focus on either patented (branded) drugs or generic drugs. Biotech companies also make drugs, but these are generally derived from living, biological organisms, thus making them different from pharmaceutical companies.
  2. Healthcare Services: This category is a catch-all for services like traditional hospitals, urgent care facilities, rehabilitation facilities, hospice care, as well as pharmacies and managed care companies (health insurers).
  3. Medical Devices and Technology (MedTech): Medical technology companies design, manufacture, and sell medical devices like surgical instruments, implants, imaging machines, and pacemakers, as well as clinical communication and workflow technologies.

The healthcare industry will be impacted by multiple factors, including the following:

  1. Aging demographics: An aging population tends to consume more healthcare. For example, according to the US Census Bureau, the number of Americans aged 65 and older is projected to nearly double by 2060. This trend will lead to higher demand for healthcare services, particularly those related to aging and managing chronic diseases.
  2. Anti-obesity drugs: The market for anti-obesity drugs is a major source of growth over the next several years. While this will positively impact many drug makers, their impact on other healthcare services is unknown and could actually result in a decrease in overall healthcare spending as obesity and obesity-related conditions are reduced.
  3. Government policy: It’s important to note that healthcare economics are different across countries due to differences in healthcare regulations. For example, some countries offer free healthcare, meaning that all citizens receive healthcare without having to pay for services; instead, the government pays for or directly provides, the healthcare. However, some countries have universal healthcare. In this regime, healthcare is available to a very high percentage of citizens. Alternatively, some countries have limited or nonexistent insurance. Therefore, patients must pay to get any healthcare service. Any changes to government policy can have a direct impact on the healthcare industry. The presence of government influence in the healthcare sector creates uncertainties for investors, so it is important to monitor policy changes and more.

Healthcare Investment and Recession

Most healthcare services are considered relatively inelastic. Regardless of the economic outlook or business cycle, people still need access to medical services and prescriptions. This stability is one of the reasons healthcare investment banking is considered very attractive.

However, note that not all healthcare services are inelastic. Elective, cosmetic surgery will be more elastic than required prescription medicine.

As another example, if branded drug prices increase, consumers may opt for cheaper generic drugs. Therefore, generic pharmaceuticals will be more inelastic than branded pharmaceuticals.

Healthcare Valuation and Financial Modeling

For the most part, the valuation of healthcare companies is similar to valuing companies in most other industries: using valuation multiples and performing discounted cash flow (DCF) valuations.

One exception to this is the valuation of biotech companies or branded pharma companies. These companies are often valued using a probability-adjusted DCF (also known as a risk-adjusted net present value or rNPV).

In a probability-adjusted DCF, the free cash flows are multiplied by the probability of a drug’s success. For example, if a drug has not yet passed early clinical trials, then the probability it will become a successful drug is low since most early-stage drugs fail.

However, if the drug has already passed several trials, then the assigned probability will be higher.

Other Resources

Thank you for reading CFI’s guide on Healthcare Investment Banking. A career in healthcare investment banking can be highly rewarding, both financially and personally. This is one of the most sought-after careers in banking and can lead to numerous exit opportunities.

Below are some additional CFI resources on investment banking and healthcare:

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