APAC- Healthcare Industry Analysis

Analysts: Jennifer Liu (McGill University), Martin Dai (Western University)

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Introduction


Since the global COVID-19 outbreak, the healthcare sector has received a high level of attention from investors, especially in developing effective vaccines. While the healthcare industry deal values plummeted Q1 2020 in the Asia-Pacific region, we observed a strong rebound in M&A activities Q3 2020, with deal values reaching a level comparable to pre-COVID-19 (Q4 2019) and a 217% increase in deal values from Q1 2020. Valuations for MedTech and pharma firms have both risen, which is likely driven by the COVID-19-related demand. A noticeable trend is the rise of technological disruption, where businesses are seeking to incorporate technology with healthcare services. We will discuss how the cross-sector integration is likely to drive industry transformation and affect future deals, and how APAC countries treated and adopted the transition from in-person to online pharmacy and medical services. Zooming in, we will focus on two main players, Australia and China, and highlight post-pandemic directions of their healthcare M&A activities.



Industry Landscape


COVID-19 seriously hit the healthcare sector but also reintroduced this industry to investors. Deal volumes for pharma increased 36% in APAC yet decreased in both EMEA and the Americas by 2% and 22% respectively. Winners from COVID-19 enjoy rising valuations, including MedTech companies supplying testing, personal protective equipment (masks, hand-sanitisers, etc.) and pharma companies developing COVID-19 vaccines and treatments.


The pandemic has put many healthcare businesses under the pressure of adopting digital technologies and remote patient-care delivery. The new concept of telehealth, integrating healthcare with telecommunications to provide remote consulting and treatments outside of traditional facilities, was accelerated in 2020 and well-recognized by investors. Telehealth IPO activities grew rapidly and are expected to maintain the bullish trend, which implies increasing M&A deals among telehealth companies in the future. Besides COVID-19-driven demand for remote diagnosis, artificial intelligence (AI) and Internet of Things (IofT) have been introduced to daily treatments to reduce misdiagnosis and make hospital workflows more efficient. Two main drivers of value are the innovation in treatments and customer experience enhancement. Firms with strong research & development (R&D) capabilities or focusing on vaccine developments enjoyed positive expectations and revenues during the pandemic. That being said, large pharma companies with abundant capital are more inclined to invest in innovation-led value creation and seek opportunities to gain technological competitive advantages by merging or acquiring tech firms.


Inherent inequalities in healthcare systems are a long-standing debating issue. COVID-19 brought social determinants of health into attention given the unequal opportunities to access testing resources, emergency treatments, and vaccines. Disproportional medical resources allocation within a country, especially among developing countries, continues to receive attention. We believe dealmakers will put more weight on ESG criteria when evaluating a deal, which means a candidate with positive ESG characteristics is more likely to be executed or valued higher.


Australia


Recovery from COVID-19 and Achieving Scale COVID-19 dominated the Australia healthcare system in 2020. Healthcare deal volumes decreased in 2020 but still maintained a robust activity trend over the past three years. The portion of healthcare services in total deal volumes has been steadily rising over years, reaching over 40% in 2020. Currently, Australian government contributes to 70% revenue of the Service sector. As COVID-19 puts more burden on government spending, healthcare businesses have to bear the pressure of rising costs, which implies the need of achieving scale through M&A transactions.


On the buyer side, strategic buyers continue to play a dominant role in terms of deal volumes. Unlike strategic buyers, who aim to achieve long-term synergies, PE buyers focus on achieving scale quickly and payout in three years, which usually attract higher deal values. Despite the dismal market environment caused by COVID-19, an increasing percentage of strategic acquirers and fewer mega deals possibly explain the correspondingly decreasing deal values.


China: Where to Pick Up from COVID-19?


M&A Deal values in China healthcare H1 2020 (US$5.0 billion) were only 20.2% of deal values in 2019 full year (US$24.7 billion), which can be explained by an overall downturn in Chinese capital markets due to the COVID-19 outbreak. China real GDP growth fell to -6.8% in Q1 2020, the first negative quarterly growth reported since 1994. However, the economy quickly picked up and sustained growth rates from Q2 (3.2%) to Q4 (6.5%) 2020. The economic recovery vitalized M&A activities in China as we saw the total deal value in 2020 rose 30% to US$734 billion and the deal volume also increased 11% to 10,551 transactions.


During the pandemic, contract research organizations (CROs) were brought into public attention. CROs provide research and testing services, including molecule research, preclinical and clinical trials, to healthcare companies. COVID-19 vaccine development acting as a catalyst, China is encouraging novel drug development, in which field we are likely to observe more M&A activities. On November 9, Pharmc acquirers and fewer mega deals possibly explain the correspondingly decreasing deal values. Cross-border M&A transactions will likely continue to grow as foreign direct investments gain more confidence in the Chinese market. Positive news from Sinovac and Sinopharm, two front-runners in vaccine development, proved China’s ability to make significant progress against coronavirus in a timely manner. We anticipate more inbound deals.


Strong IPO pipelines and positive policies implemented by Chinese government are expected to boost M&A activities. Looking forward into 2021, the healthcare industry in China will likely enjoy the overall growing M&A deals driven by domestic and private equity activities. Whether China will manage to control the spread of COVID-19 in the future remains crucial to determine how long this trend will last.



Conclusion and Forward-Looking Remarks


Having seen a strong rebound in healthcare M&A activities in APAC markets, we believe healthcare is a go-to sector for investors during and post-pandemic. Companies focusing on COVID-19 testing, vaccines, and future preparedness will continue to benefit from the prolonged pandemic and remain attractive to acquirers. COVID-19 alarms every country to rethink how they should prepare for the next global public health crisis. As living standards improve, people will put more emphasis on healthcare issues and turn to better treatments, accelerating the transformation cycle and bringing opportunities for existing and potential players.


Technological disruption remains to be the main challenge. Large players expand their value chains by heavily investing in innovation and acquiring tech companies. Small or mid-size players struggle and seek merging opportunities to achieve scales in order to reduce costs and secure a larger market share. The concern of cybersecurity comes next. The high integration rate of mobile devices in treatments urges companies to prioritize patient privacy and inappropriate access to sensitive information. Following significant costs of personnel, technology, and physical systems put more burden on healthcare companies.


Looking forward, we are likely to see new leaders acquire weakened firms and weaker firms combine to challenge new leading firms in the APAC healthcare sector. Firms with strong R&D capabilities and technical expertise have become and will remain to be attractive targets. Large players open doors to tech partners and monopolize cutting-edge technologies, limiting opportunities for small players to achieve scale.


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