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Treading the M&A route

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Mahesh Singhi, Founder & MD, Singhi Advisors speaks on the trends ruling the healthcare sector and finds that M&As are a favoured route to growth these days

The Indian healthcare sector is expected to grow at an exponential pace and is widely anticipated to clock revenues of around $280 billion by 2020. However, key companies in the sector, which are traversing a higher growth curve, still need to build their pipelines and deliver topline growth. Continuing expansion initiatives by the companies will remain the chief driver for M&A activities for pipelines and marketed products in 2018. Apart from drug makers, augmented activity has also been witnessed from health insurance players and healthcare service providers. In a move indicating broader consolidation between health insurers and companies overseeing drug benefits of patients, Global health insurance service company Cigna Corp agreed to buy pharmacy benefit management organisation Express Scripts Holding Co in a cash and stock transaction valued at $ 54 billion.

The fundamentals are in place to steer M&A activities on a higher trajectory. The sector is currently riding a wave of confidence, debt is freely available to fund ambitious M&A programmes and sector players are overwhelmingly conducive to leveraging a positive sentiment. Regulatory pressure is largely building in terms of development and approval as well as on the pricing and cost containment fronts. While big pharma companies have the capabilities to access large funds for combating these forces, smaller firms and the biotech sector remain largely restrained in their
abilities to arrange funds with the situation highly exacerbated by significantly constricted credit lines. In this backdrop, pharma companies and biotech companies are treading the mergers and acquisitions route as an effective alternative to bolster their pipelines and improve efficiencies.

Global healthcare markets were roiled in January 2018 when Amazon announced a partnership with JP Morgan Chase and Berkshire Hathaway to form a company to deliver advanced healthcare facilities to their employees. Amazon is also reportedly in plans to widely expand its medical supplies business and become a major vendor for healthcare service providers. While the recent developments were indicative of Amazon’s intentions to disrupt conventional healthcare paradigms, the company has not displayed a proven capability to transform its aims into reality. Other technology companies around the world have already begun to expand their presence into the healthcare space.

Alibaba and Tencent of China have invested in tools that make use of artificial intelligence (AI) to aid in diagnostics. In early 2018, Apple announced the integration of electronic health records (EHR) into its health app and have launched a pilot involving medical institutions. Samsung BioLogics has developed pharma contract manufacturing facilities. Present sector trends allude to the fact that as compared to other industries, healthcare has been slow to embrace digitalisation. However, conventional trends are fast changing as market participants have recognised the enormous potential of empowering techniques and tools such as advanced analytics, machine learning, smart devices and autonomous robotics.

The healthcare consumer of today is aware of the changes in the sector. Technological innovations and advanced clinical practices in the sector mean that the modern healthcare consumer has access to multifold choices. Following years of contending with restricted healthcare delivery mechanisms and the limitations associated with them, consumers today can pick among a variety of delivery models such as telemedicine, home-health, concierge care and online self-help.

Companies and investors are also changing their asset evaluation methods when it comes to valuing healthcare-heavy assets such as hospitals. There is a greater understanding and recognition among hospitals about the overwhelming need to revamp their delivery models to meet the evolving demands of the consumer. Healthcare players are also aware of the need to trim costs to sustain profitability in the face of new competition.

Healthcare investors are looking into the investment potential of biopharma and medical companies that are developing personalised treatments to face new competition.

Given the inordinate length of the current global economic expansion, healthcare companies and investors will continue to recognise the healthcare industry as countercyclical and recession resistant. Investor focus is strongly expected to be concentrated on areas that have historically generated strong returns which chiefly include contract services and retail health. Valuations are likely to traverse a higher trajectory to sustain competition from corporate acquirers given the ongoing demand for quality healthcare assets.

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