Under the microscope: The recent healthcare deals market
May 13, 2016
Looking back over the last year, deals in healthcare have been driven both by changes in the wider environment, and specific trends within the sector.
At the global level, the most obvious factors are demographic and social change. In developing markets like India and China the priority is capacity building, with the state looking for cost-effective ways to deliver basic healthcare to people who have limited or no provision at all. Both the established healthcare businesses and new entrants are exploring how this can be done digitally, for example, through mobile phone apps and remote consultations. And as the middle class grows, opportunities are opening up to provide more choice to those who are able to pay for it. India is also developing into a ‘health tourism’ destination, with people travelling in from countries like Malaysia, Russia, and also from the Middle East and Africa to have treatment there, driven by a low cost, high quality, provider base. This in turn is making Indian businesses attractive to overseas operators and to PE houses, for example IHH Healthcare Bhd, the Malaysian hospital group, acquired a majority stake in a Hyderbad based group for $200m in August 2015 (following a $45m investment in another group in March 2015). You can see the consequences in the rising size of deals in India, with the average up from around $15-20m, to $70-120m since 2010.
In developed markets, populations are ageing, and that’s bringing with it a whole range of healthcare challenges, from the need to provide aged and dementia care, to a greater prevalence of chronic conditions like diabetes. This is driving the continued interest in the care home sector, for example, especially from property investment companies. We’ve also seen deals designed to achieve economies of scale and reduce costs, either through the consolidation of a platform (as in the High Street optical market in the UK), or the replication of a care or treatment model, as with Acadia Healthcare’s acquisitions of Partnerships in Care and, more recently, Priory, and UHS’s acquisition of Cygnet and Alpha in the UK.
It’s generally easier to achieve such synergies in services that are ‘one step removed’ from patient care, such as imaging, diagnostics, or lab testing. Hands-on care is much harder to scale up, especially across borders and regulatory jurisdictions. ‘Horizontal integration’ between providers is likewise more common in markets where there is universal healthcare provision, like the UK. In markets where provision is not provided free by the state, some of the focus has been on vertical integration, with insurance companies acquiring providers to help reduce costs and control quality more closely, for example.
Quality has been a factor in a number of other recent deals too. Chinese buyers, in particular, are using M&A as a quality strategy, acquiring overseas businesses as much for their expertise as their business or their brand. This is a trend that extends to other sectors too, and not just healthcare.
Turning to the dynamics within the market, and there’s activity across all the different segments: corporates and PE houses are still active buyers, and governments are exploring PPP deals (there’s particular interest here from authorities in the Middle East, where public sector budgets are under pressure, as a result of the low oil price). There continues to be a lot of corporate and PE money in the US looking for a good home, and some US players are investing in the UK, on the grounds that it’s a similar market, but slightly less saturated (as noted above with Acadia and UHS). We’ve also seen increasing cross-border activity within Asia, some of it driven by regulatory changes in markets like Thailand and the Philippines, where barriers to foreign ownership have now been removed. All in all, we expect the number of international deals to keep on rising, especially in core services such as hospitals.
Private Equity: What do they look for in Healthcare?
PE houses have traditionally seen Healthcare as an attractive investment. It’s a necessary service and a stable sector, which has seen insolvencies much more rarely than other sectors; the returns may not always be as high as other sectors but they’re predictable and resilient, and demographic trends mean that demand can only rise. Likewise, in many markets, the provision of healthcare is fragmented, which continues to offer up opportunities for consolidation, cost-savings and operational synergies, which is the PE sector’s stock-in-trade. On the downside, some PE houses can be wary of investing in a sector where the challenges can be extremely sensitive, and investments can be severely damaged by medical mistakes or negative media coverage. The fact that state budget cuts are putting pressure on fee levels, in areas such as social care, is also an issue, though more so for PE houses that already own these businesses, rather than for new acquisitions, where the funding expectations will be priced into the deal.
So taking it all together, healthcare is a steady investment for PE, although there will always be the possibility of super-returns, for example in the digital segment, where start-ups are developing new and niche applications. Many of these are too small to attract significant PE interest at the moment; we will discuss this further in our next blog.
So what do we expect in 2016? In summary, a continuation of the trends seen above; the sector is a great place to invest, international opportunities are only going to grow and, as the impact of funding challenges becomes clearer, pricing is likely to become more predictable.
How do you see the rest of 2016 playing out? Share your thoughts below or schedule a meeting to discuss your situation in confidence.