Investors Look to Global Healthcare Market for Long-Term Growth, Near-Term Safe Haven, Says PwC

30 January 2012

The healthcare sector is well positioned to see an increase in mergers and acquisitions (M&As) globally due to its perceived benefit as a safe haven both in the near and long-term future, according to PwC in its first edition of Global Healthcare Deals Quarterly.

In the inaugural issue, PwC states that the healthcare industry will attract an increasing share of deal activity as a result of its strong corporate balance sheets and significant private capital support despite a softer economic outlook in 2012.

Healthcare was the third largest sector for global M&A activity in 2011, displacing finance in the top-three global middle market deal value rankings by Dealogic.

PwC highlights the following three key factors driving expected deal flow:

• Economic resilience, attractive demographic growth, and infrastructure build-out present a relatively safe investment for investors in a challenging macroeconomic environment.
• Within the sector, the declining value of incremental innovation implies a shift from investing in healthcare products such as drugs and medical devices towards technology and services.
• Innovative delivery models that offer better, cheaper, faster healthcare in countries such as Australia, India, and the Middle East are likely to attract new capital.

Within Australia, proposed market reforms represent significant opportunities in aged care. PwC expects increased consumer cost-sharing, pricing deregulation and an expanded scope of services. An increased transparency of providers' performance and costs would create a competitive market for services differentiated on quality, cost, and service offerings.

These changes in funding would favour well-capitalised operators while challenging cash-strapped facilities, as customers may shift to periodic payments from lump-sum bonds. In addition, relaxation on bed license limits would present opportunities for new market entrants.

"As we have stated before, the proposed market reforms appear to encourage polarisation, either through consolidation into value-priced Superhomes, or differentiation into high-end niche operators offering specialised services. Investors may find niche offerings the more compelling for investors. Unlike the Superhome model, scale is not a main profit driver. Rather, we see the opportunity for market entry through acquisition of an established residential care provider with a strong brand," said John Cannings, Partner at PwC.

The Australian government spends close to AUD$10 billion (US$10 billion) on aged care annually, an amount that is expected to grow at 5% CAGR through 2016 (excluding the impact of proposed reform initiatives).

The global report states, Australian consumers contribute at least an additional AUD$3billion (US$3 billion) in annual out-of-pocket costs. The market is broadly divided into two main categories: community care packages, which offer care at home to more than a million elderly Australians; and residential care, a segment comprised of roughly 1,200 service providers and 200,000 beds.

"We expect community care will grow as a proportion of the market; reflecting a global trend, with Australians seeking to stay in their homes as long as possible, entering care facilities only when all other options have been exhausted," said Mr Cannings.

A full copy of the PwC Global Healthcare Deals Quarterly is available for download at www.pwc.com/healthcaredeals.

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