12 November 2024
Is investment in healthcare set to rise?
The healthcare industry has long been a hot bed for mergers and acquisitions (M&A) activity, being viewed as a robust option for both trade and private equity consolidators and investors. It is fair to say that 2023-24 has been challenging for the industry, with rising interest rates eroding opportunities for “easy arbitrage”, leading to uncertainty. In certain subsectors, this, combined with growing scrutiny over the ability to generate super profits from government funds, has resulted in hesitation from private equity and venture capitalists.
With interest rates stabilising and a growing acceptance that several areas of healthcare require private business intervention to ease the burden on the NHS or public purse, there is a renewed optimism that we will see an increase in investment activity from 2025 and beyond, subject to an increased need for robust due diligence.
Given the breadth of the industry, there is little wonder as to why healthcare has tended to be attractive to investors, with a wealth of opportunities to suit different risk appetites.
In this competitive industry, attracting buyers requires a strategic approach. Buyers focus on various factors to ensure a sound investment, whether they are looking at pharmaceutical businesses, care homes, private hospitals and clinics, medical devices and med tech, or any other healthcare business. Understanding these factors and addressing potential weaknesses can significantly increase the likelihood of a successful sale. This involves conducting thorough assessments and due diligence, gathering robust operational data and preparing detailed documentation to support the business’s value. We look at what areas pharmaceutical, care and private hospitals and clinics need to consider.
- Pharmaceutical sector
- Care sector
- Private hospitals and clinics
Pharmaceutical sector
Financial performance, with consistent revenue streams and strong profit margins, provides stability and profitability, making pharmaceutical businesses appealing to buyers. However, there are often businesses at the pre-revenue stage with huge upside potential which are equally attractive to investors looking to capitalise on them.
For example, it is not uncommon for pharmaceutical businesses to have one core product generating significant revenues or presenting future opportunities. These can be particularly attractive to investors or consolidators who are looking to diversify their product portfolio and strengthen future pipelines to reduce their dependency on current product offerings, ensuring future revenue and mitigating risks associated with market fluctuations. Being able to evidence a strong future pipeline is a key factor to consider.
Regulatory compliance, including FDA approvals and a clean history, enhances the business’s credibility and reduces legal and operational risks. Intellectual property and strong research and development (R&D) capabilities indicate a competitive edge and potential for innovation, which are crucial for long-term success.
Efficient manufacturing, reliable supply chains and a skilled workforce ensure operational efficiency, which is vital for maintaining product quality and meeting market demand. Market dynamics, such as a strong competitive position and a loyal customer base, highlight the business’s market strength and potential for sustained growth.
Care sector
High standards of patient care enhance a facility’s reputation and success, leading to higher occupancy and better reviews. Implementing rigorous staff training, adopting best practices and showcasing positive outcomes, such as delivering or exceeding contracted care requirements, attract more residents and increase revenue.
Adhering to regulations like CQC or Ofsted standards ensures legal operation and high care standards, preventing fines and reputational damage. Staying updated with regulatory changes, conducting regular audits and addressing issues promptly helps maintain high ratings and transparency in compliance records.
Strong financial performance and profitability make a business attractive due to its stability. Great-performing businesses may find there is little room for occupancy-driven growth unless extending existing premises or opening additional sites. Being able to evidence a strong track record of negotiating regular fee or funding increases is often key for demonstrating growth potential. Regular sustainable cash flows are also an important factor for raising debt. Buyers seek reliable returns on investment, accurate financial records and optimised operational costs. Having a track record of adding new service offerings or successfully opening new sites helps demonstrate consistent performance and a clear plan for future growth.
Adequate, well-trained staff ensure consistent, excellent care, enhancing the business’s reputation and attractiveness. Investing in training, competitive salaries and benefits creates a positive work environment, ultimately helping to retain staff. Highlighting staff qualifications and training programmes reassures buyers, increasing confidence and potentially leading to higher valuations.
Private hospitals and clinics
High standards of patient care and satisfaction are crucial because they directly impact a facility’s reputation and success. Facilities known for excellent patient outcomes and positive reviews are more likely to attract and retain patients, ensuring steady revenue.
Specialising in a service or treatment can differentiate a facility in the market, attracting a specific patient demographic, which often commands higher fees, leading to increased profitability and a stronger market position. Being able to demonstrate a sustainable, wider-reaching demand for such services and the scalability of current offerings are important factors for attracting investors.
The use of advanced medical technology and electronic health records improves patient care, streamlines operations and enhances data management. Modern technology can lead to better patient outcomes, increased efficiency and reduced operational costs, making the facility more attractive. Proven benefits of advanced medical technologies may also present reverse synergy opportunities to buyers, increasing the business’s attractiveness as an investment.
Efficient management and operations reduce wait times and improve patient flow, leading to better patient experiences and higher profitability. This also includes convenient locations, flexible hours and enhancing online presence. Buyers value facilities with strong operational practices because they indicate a well-run business that can maintain high standards of care while being financially viable.
By focusing on key areas such as patient care, specialisation, accessibility, technology and operational efficiency, healthcare businesses can enhance their attractiveness to potential buyers. Implementing best practices, investing in staff training and maintaining high standards of care not only improve the overall quality and efficiency of the facility but also increase buyer confidence. These steps can lead to higher valuations and a smoother, more successful transaction, ensuring that the business stands out in a competitive market.
How our deal services team can support your healthcare business
Considered planning and strategic positioning are essential to maximise the value, mitigate the risk of disruption to your business or value erosion, and ensure the long-term success of the transaction.
We have advised on over 100 transactions in the healthcare industry over the last five years. As a full-service firm, we guide clients through the entire sale, fundraising or acquisition lifecycle – helping them prepare the necessary information and maximise value throughout the process.
For more information on how we can help you enhance and protect value, please see our guide.
If you would like to discuss your options, please get in touch James Carnegie or Ed Rozwadowski.