The Asia Pacific healthcare deal market is vibrant. Deal flow climbed to about 770 in 2017, up 74 percent from 442 the previous year, according to S&P Capital IQ data. Deal value increased to a net of USD$32 billion in 2017 (accounting for closed and cancelled deals) up from net $9.1 billion in 2016. Thus far 2018 appears on track to be another record-setting year.
Beyond the headline-grabbing numbers, what can we learn from the transactions market? Here are a few observations:
- Buyers: In recent years private equity investors have emerged as important players in the transaction landscape, for example KKR’s purchase of Laser One. However, most transactions still involve corporate buyers. Private equity tends to focus on Japan and Australia while family owned companies and conglomerates dominate Southeast Asian markets. China remains a hybrid PE and corporate market, especially in the hospitals segment.
- Deal Theme: Investment themes are migrating from pursuing standalone opportunities to creating platform-shaping transactions, such as hospital networks; diagnostics centers; dental clinics; and cancer treatment centers. A recent example: C&C Incubator’s Qingdao Meinian Health Technology deal designed to build scale and achieve regional consolidation in the healthcare record-management software market.
- Targeted Asset Mix: Hospital, pharmacy and service-related transactions have become the most attractive assets. What began as a subtle shift a few years ago and is now a norm: Asia investors are targeting healthcare services rather than molecules. As demographic shifts occur across Asia, expect to see more deals focused at the extreme ends of the life spectrum, for example fertility clinics at one end and home nursing and elder care transactions (such as Keihan Life Support) at the other.
- Transaction Size: The average deal size is getting smaller at USD$56 million over the past 12 months versus USD$67 million for the prior three-year period. This is because of the recent focus on rollups of multiple smaller companies instead of pursuing large single transactions.
- Geography: Traditionally, investors focused on building a competitive position within a few country markets, e.g. Japan, Korea and Australia. As investor capability, knowledge of regional competitive dynamics, patient needs and healthcare provider behavior has increased, confidence in structuring cross-border deals has grown, driven by operating model fungibility.
Looking forward, we anticipate that in 2018-2023 deal flow will continue to increase as more investors enter Asia’s health markets. Growth drivers include expanding household income; more public-sector spending; the infusion of IT services into care models; and aging populations.
For new or existing investors, the key questions are where to participate and how to win. A range of opportunities exist in analytics, solutions, support and systems (laboratory services, micro-hospitals, retail pharmacies, visiting nurses, hospital outsourcing, etc.). Given the plethora of shiny opportunities, investors need to carefully consider their overall strategy and dig deep in due diligence. Not all that glitters is gold.
- Shriharsha Sarkar
Principal, Consulting Services Asia