Healthcare space in 2018 was driven by bolt-on deals. This year, companies in this domain will need to focus on portfolio optimisation, informs Mahesh Singhi, Founder & MD, Singhi Advisors
Total M&A value in the healthcare space in 2018 was driven by bolt-on deals, small-to medium-sized acquisitions that account for less than 25 per cent of the buyer’s market capitalisations, and not megamergers. These deals generated 43 per cent of the year’s total deal value (USD 198 billion) and 81 per cent of the deal volume. Though the sector has a robust market capitalisation and maintains surplus cash reserves, it is not being deployed optimally. Life science companies amassed more than USD 1.2 trillion in firepower in 2018 but only 16 per cent was deployed on acquisitions. This represents a steady decline from 2014, when companies deployed 27 per cent of their firepower on M&A. The year also saw focused companies outperform their less focused counterparts.
In 2019, companies in the healthcare domain will need to focus on portfolio optimisation. Divestitures will increasingly be used to unlock value. Companies with low-digit market share will find it difficult to differentiate their products to payers and providers as networks of relationships and therapeutic focus assume paramount importance for commercial success. Digital alliances will need to be key focus areas with companies concentrating on building relationships with new digital entrants to improve R&D efficiency and differentiate products with real-world evidence.
Further, the growing burden of deductibles and `copays’ will slowly reshape non-emergent healthcare purchases to look more like other consumer transactions. Public demands for transparency in pricing and quality will stimulate development of tools to facilitate comparison shopping. Meanwhile, employers will engage in more direct contracting, while payers seek joint ventures with delivery. Payers will also pursue more risk-based reimbursement arrangements.
Growing emphasis on total cost of care, in my opinion, will drive integration across the care continuum by contracting organisations. Acute care providers will continue to evolve their strategies to make care more accessible and appropriate through retail and urgent care clinics, telehealth services, centralised scheduling with physicians, and coordination with post-acute care providers. Consolidated delivery organisations will focus on sharing data, standardising processes and aligning incentives. Thus, consolidation among acute care providers and acquisition of physician practices are there to stay.
Luring investors
The Indian healthcare system that is evolving is driven by policy changes and technology is not immune to these disruptions, and mirrors these shifts. The performance of the healthcare vertical in India is growing solid and its inherent recession-proof character continues to lure investors. But on the flip side, an over-emphasis on short-term metrics means not enough companies are focussing on digital innovations that will drive future growth. This remains a major cause for concern and can be listed as a risk on the downside for the industry going forward.
The issue has been amplified by the nature of the deals that still focus on portfolio optimisation, not accessing digital capabilities that remained at the core of M&A activities in 2017-18 as leading companies sought to create scale in must-win therapeutic areas and acquire near-term revenues leaving some key strategic considerations behind. It may be noted that high levels of innovation capital, especially venture and IPO dollars, fuelled investor confidence in last fiscal. However, if companies want to outperform the markets in the long-term, they must develop innovations that can provide double-digit revenue growth. Going forward, absence of such a strategy will tie them up to sub-optimal revenue trajectory.
Rapid advances in a broad spectrum of technology like imaging, diagnostics and diabetes show how data and algorithms will be central to tomorrow’s value-creating products and services and make them deliver on the lines of investor expectations and create value in this transformational age. Hence, medtechs, as companies dotting the medical technology landscape have come to be known, must rethink their business models, using data to create new products and services that put their customers at the centre.
Consumers, who are increasingly getting trained to expect better experiences as peer-to-peer sharing and mobile have transformed their retail, banking and mobility activities, are already using data to demand greater participation in healthcare decisions. The changing regulatory ecosystem has also played a role in changing the role of consumers in the space. These demands build up new pressures for providers and payers, who are responding by using data to improve efficiency, quality and personalisation of the core care delivery.
Data handling
As payers and providers become more sophisticated in their handling of data, they will broaden their focus from the sickest and most costly patients to the general population, enabling improved outcomes at scale. As patients increasingly embrace the opportunity to take a proactive role in their own healthcare, wearables, sensors and new digital interfaces will become critical tools for personal healthcare management.
Entrants from the tech sector, who have deep customer engagement and advanced data and analytical skills, see the health space as a fertile new ground for growth. Moreover, there are clear signs that leading technology companies are moving beyond fitness and wellness care bracket tracking care management using easy-to -use consumer-facing devices. Some are also developing data-rich platforms that make it easy to share data proactively with consumers and providers to avoid adverse health events and optimise care management at individual levels.
These new entrants have considerable firepower to accelerate their health activities. This will be a major advantage as healthcare providers seek to assemble the breadth of talent, technology and expertise needed to take the next steps toward personalised healthcare.
Changing times
In an industry built on constant innovation, R&D spending is another important parameter which has major implications for future revenue growth. Despite the urgency to create new products and services that can drive revenue, medtech companies appear to be underinvesting in R&D. This needs to change for driving revenue growth in going forward.
The world is changing and the medical device industry must change too, to be in sync with the changing times. To thrive in this transformative age, companies must adapt their business models to meet the increased expectations of consumers and other health stakeholders, making sure they are central players in a data-driven health economy. Future value will no longer be created through the sale of products, but by using data in new and innovative ways to improve the customer experience.
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