At the beginning of each year, we like to do a deep dive into the healthcare investment landscape. We do a retrospective on the previous year's activity, comb through all of the commentary from early-year conferences such as J.P. Morgan's annual healthcare conference, and pull data from the various financial services firms that track year-over-year trends in investment. From all of these signals, we distill down to a smaller number of insights that we believe are revealing about the future trajectory of the industry in some way. In today's post, we'll share what we're taking away about healthcare investment in 2025.
Insight #1: The provider space is experiencing ebbs and flows in dealmaking activity—reflecting this sector's increasingly uneven financial performance.
The hospital sector is one of the few healthcare segments that saw deal volume increase—albeit very slightly—in 2024. Particularly notable: an increasing percentage of deals in this space involve a financially distressed party, and the size of those financially-distressed parties has also been increasing. In other words, we're seeing distressed systems—not just individual hospitals—that are being picked up by higher-performing peers. The hospital sector is also experiencing a record number of deals—an astounding 62.5%—which involve a divestiture, as large multi-state systems are rightsizing their portfolios and finetuning their geographic footprints.
These trends might seem surprising at first glance, given that the general industry commentary suggests that provider margins finally started to stabilize in 2023, and improved even further across 2024.
That narritive is largely based off the data above. The numbers most frequently touted are those in dark gray—i.e. median hospital margins. Those numbers look quite a bit better than the numbers in teal—the health system-reported operating margins. That's because as the industry has become increasingly consolidated, an increasing amount of expense and overhead is captured at the system level, not at the individual hospital level. Still, the general trend holds true at the health system level as well: average margins increased across the course of 2023 and 2024, even if the absolute numbers don't l ook quite as rosy.
But the past few years have cemented another important dynamic within the hospital sector: that of 'margin divergence'. Put simply: the variation in performance within the hospital sector has widened over time. So while median or average margins provide a general sense of how the hospital sector is doing, they don’t predict an individual organization's performance with any great level of accuracy. And the spread between the top and bottom performers is very significant, as is the percentage of hospitals that were still operating at a loss as recently as last year.
In many ways, the dealmaking trends within the hospital sector are a more accurate indicator of financial performance than median margins.
Insight #2: Drugmakers are betting big on chronic disease treatment amid an overall slowdown in investment.
In the life sciences space, after several years of elevated investment volume, activity has finally simmered back down to pre-pandemic levels. There were only two life sciences deals in 2024 that exceeded $5B (for comparison, there were nine that exceeded that threshold in 2023).
This decline in activity is a signal that this particular subsector is regrouping and realigning after several scientific, regulatory, and financial shocks: the significant drop-off in demand for Covid-era treatments and vaccines, the impending patent cliff for many high-price blockbuster drugs, and the ongoing impact of the IRA's drug price negotiation model. Adding fuel to the fire was the recent announcement that Ozempic would be on the IRA negotiation list for 2025.
Even before this announcement, top GLP-1 manufacturers were laser-focused on getting these high-demand drugs on the market as quickly as possible. In fact, the largest biopharma deal of the year was Novo Nordisk’s purchase of a manufacturing company for almost $17B. In that same vein, Eli Lilly spent a billion to purchase an injection-drug production facility, with the goal of getting more of its metabolic drugs out the door faster.
In addition to increasing manufacturing capacity, major drug companies are also buying up smaller developers that are in the later stages of clinical trials for advanced chronic disease medications. Novartis bought up a couple clinical stage cancer drugs, Eli Lilly added to its autoimmune pipeline, and Abbvie made a big investment to get an experimental new Alzheimer’s drug.
These investments are emblematic of the recent shift we've seen in the life sciences space: in addition to continued focus on high-price tag treatments for rare diseases, drugmakers are increasingly focused on the chronic disease space—i.e. treatments that are applicable to much larger target populations, even if they carry (relatively) lower price tags.
Insight #3: The weight loss market remains a hot commodity, but some subsegments are falling off as the market matures.
While overall interest in the weight loss space remains high, we’re starting to see investor attention reflect some meaningful shifts in this subsector.
In addition to considerable interest in investments that are designed to ramp up manufacturing capacity, we’re also seeing continued interest in online prescribing platforms as consumer become more familiar with these types of services.
That’s in stark contrast to the compounding pharmacy space. As a refresher: these are pharmacies that are allowed to produce either tailored version of drugs for individuals that might need personalized formulations. But they can also produce identical versions of drugs that are on the FDA shortage list. Across the past couple of yeras, given the immense demand for GLP-1s, compounding pharmacies got a huge lift. But last November the FDA removed tirzepatide—the GLP-1 receptor agonist used in Zepbound and Mounjaro—from the shortage list. And in February of 2025, they removed semaglutide from the list as well. Both of these moves have prompted legal challenges, but courts have historically tended to defer to the FDA’s authority in cases like this. In the near term, at least, this is major blow to compounding pharmacies.
One slice of the weight loss sector that’s a bit of a question mark for the future is investment in the treatment for the side effects associated with these drugs—e.g., muscle mass loss. Newer formulations of the drugs under development are looking to mitigate these side effects, which in the long run, could cool investor interest in separate treatments.
Insight #4: AI continues to buck the trend in the funding slowdown, and clinical applications are picking up steam.
Aside from GLP-1s, the big story in biopharma investment is AI. After a slight dip in 2022/2023, investment in AI-enabled biopharma exploded last year.
There is an ever-growing number of applications for AI across the entirety of the drug chain, from designing wholly new proteins and modeling bodily interactions to identifying clinical trial participants and creating synthetic data from scratch.
Of course, AI investment is not concentrated only in the biopharma space (far from it).
The rise of generative AI applications in healthcare has made room for both large incumbent organizations and smaller startups to play in this space, with the bigger players taking the lead on foundational models that require vast datasets, while startups are focusing on much more specialized use cases and/or smaller groups of clients. The big EHR players sit somewhere in the middle, helping enterprise clients build out AI architecture with multiple use cases per organization.
Across the board, we continue to see particularly high developer and investor interest in administrative applications of AI.
AI has the potential to make new leaps forward in documenting, preparing, submitting, evaluating, denying, appealing, and resolving claims. In fact, it's somewhat reminiscent of the gains in automation made in the mid-2000s, which drove a revenue cycle arms race, and resulted in drastically lower AR days for providers, higher denial rates for payers, and a new costs for everyone. But when one considers the vital role days cash on hand plays in the ability to secure debt and invest in the new capabilities, it's hard to overstate the impact that cash acceleration/deceleration can have in healthcare. All of this is driving increased excitement about the potential of administrative AI-enabled solutions.
The surge in investment in administrative AI is beginning to have spillover impacts into the clinical realm. In the past year clinicians have shown increasing receptivity to AI-enabled clinical functions, in part because their exposure to administrative solutions has increased their comfort with—and even outright enthusiasm for—the potential of AI more generally.
Insight #5: The new administration may be less friendly to healthcare dealmaking than originally expected—but in this case, perception is at least as important as reality.
While 2024 saw an overall decline in deal volume, investor sentiment is up in the wake of the 2024 election—with general consensus that the Trump administration, like most Republican administrations, will be more pro-business and likely to take a more light-handed approach to antitrust.
While it's still too early to say exactly how new leadership at the FTC and DOJ will approach antitrust, early signals have not entirely conformed to investors' expectations (or hopes). While the new head of FTC, Andrew Ferguson, initially suggested that he would like to introduce looser merger guidelines, the FTC and DOJ later issues a joint memo stating they ended to maintain the relatively strict merger guidlines adopted by the Biden administration in 2023.
Of course, healthcare investment is not limited to outright M&A activity, and investors are sitting on plenty of dry powder given the depressed dealmaking activity seen across the past couple of years. That undeployed capital—combined with greater investor enthusiasm (warranted or not)—is likely to lead to increased dealmaking activity this year, particularly in sub-sectors of the market that the new adminstration is likely to support, such as AI.
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