Key points:
- The healthcare sector remains an attractive investment option in challenging economic times.
- Healthcare providers are increasingly looking at M&A opportunities in light of the competitive landscape, funding and cost pressures and vendor retirements.
- The digitisation of the patient experience is expected to bring a significant level of interest in healthtech companies.
Despite widely-reported economic pressure on New Zealand businesses, the rapidly changing healthcare sector is still a hot space for investment.
Private equity firms, in particular, are acquiring specialist medical practices such as radiology and fertility clinics—businesses that are seen as attractive investments with strong, dependable cash flows backed by government and insurance funding.
Longer-term trends that are changing the healthcare sector include New Zealand’s ageing population, a rise in chronic diseases, and the emergence of more sophisticated technology which is digitising the delivery of healthcare services. This is increasing public demand for online consultation services and changing the way that medications are delivered to patients.
In order to keep pace with the competitive landscape and burgeoning health technologies, healthcare providers are increasingly partnering with private equity firms and corporates. This gives them greater access to capital and management expertise and also enables doctors to focus on what’s most important—providing high-quality patient care.
We have identified some of the key trends we’re currently seeing in the healthcare M&A space in New Zealand and what investors should consider when investing in a healthcare provider.
Finding the true value of a healthcare provider
In light of the current industry trends, defensive attributes of businesses in the medical space and (until recently) low interest rates, valuation multiples have expanded recently. In addition, the profitability of a number of healthcare providers soared over lockdown as the need for medical services increased.
This presents challenges from a valuation perspective, as it requires profits to be adjusted to take the effects of Covid into account. The expansion in valuation multiples and “super profits” have often resulted in valuation gaps between vendors and purchasers.
For what it’s worth—protect yourself
Valuation discrepancies between parties have resulted in earn-out arrangements becoming more prominent in transactions.
This has put into focus the importance of implementing clear and robust earn-out mechanisms in sale and purchase agreements. This can be achieved by setting objective and realistic earn-out targets, limiting the parties’ ability to manipulate the financial performance of the business and implementing an appropriate dispute resolution mechanism.
An additional advantage of an earn-out from a purchaser’s perspective is that it incentivises the vendor to remain involved in the business following completion of the deal in order to assist it to meet the agreed performance targets.
Ensuring patients stay enrolled
We’re seeing a growing trend for vendor doctors to be required to remain working in the business for two to three years post-completion. This recognises the importance of ensuring continuity of care from a patient perspective. In some instances, contingency arrangements are negotiated by which a material part of the purchase price is paid to vendor doctors subject to their continuing employment with the practice post-completion.
Vendor doctors are typically subject to a broad restraint of trade to avoid the risk that patients and staff move with them if they establish, or work in, a competing practice. To avoid compromising the enforceability of restraints of trade, care must be taken when drafting them to ensure that their scope—especially in terms of geographical scope and time period—is no greater than what is reasonably required to protect the interests of the practice. They should also be supported by comprehensive confidentiality obligations to ensure that vendors can’t use patient lists if they join a competing practice.
Factor in back-payments
Capitation funding increases in New Zealand haven’t kept up with the rising costs faced by medical practices for a prolonged period of time.
In addition, the negotiation of the new Primary Health Care Multi-Employer Collective Agreement could see practices being required to make back-payments to affected nurses. This contingent liability should be considered as part of a purchaser’s due diligence process and apportioned in the sale and purchase agreement.
A changing of the guard
Like many New Zealand businesses, healthcare providers are finding it difficult to recruit and retain staff.
This is particularly the case in the regions. With borders re-opening, junior staff are increasingly heading overseas. In response to this, we are seeing a greater appetite for medical practices to offer minority shareholdings to key staff in order to incentivise them to remain with the practice.
The current GP workforce shortages are compounded by an ageing cohort with an increasing proportion approaching or past retirement age. According to the 2020 General Practice Workforce Survey, half of the current GP workforce intends to retire within the next ten years. The proportion of specialist GPs intending to retire within the next two years has increased steadily year on year, rising from 4% in 2014 to 14% in 2020.
The rise of healthtech
We’re seeing a marked increase in the digitalisation of the patient experience. Think virtual doctor services, patient health analytics technology, and the wide use of smart health devices.
These trends have accelerated over the last couple of years with Covid driving the implementation of technological innovations across all areas of healthcare. These rapidly changing technologies and ways of delivering health services are modernising the business models of medical practices, bringing a blended model of in-person and virtual care which is likely here to stay.
The digital health landscape is becoming increasingly fragmented. Given the challenges of achieving scale and profitability in a crowded market, we expect to see healthtech companies combine their offerings through acquisitions and integrations. We also expect to see a significant level of interest in healthtech companies given their long-term growth prospects.
Healthcare sector pressures present opportunity
New Zealand healthcare providers are currently facing the challenge of combating funding issues, increasing cost pressures and recruitment and retention issues. Despite this, we expect the healthcare sector to remain attractive from an M&A perspective by providing protection in economic downturns and access to strong growth prospects.
This article was prepared by Partner Ron Arieli. If you would like further information, advice, or assistance please contact a member of our Corporate and Commercial team.
Disclaimer: The content of this article is general in nature and is not intended as a substitute for specific professional advice on any matter and should not be relied upon for that purpose.
