Opinion: Justin Crowther

Despite the gloomy economic clouds gathering towards the end of the year, 2011 has been a fascinating year in the healthcare market.

It is still uncertain in what shape the Health Bill will emerge when it finally passes through parliament but that still hasn’t stopped M&A activity in 2011. Key trends continue, whether it be increased emphasis on homecare, consolidation in the specialist care space or cross border M&A in the medical devices and pharmaceutical sectors. Private equity continues to support the sector, as evidenced by the significant number of buy and build deals done in the homecare space.

So what do I hope for in 2012. In an ideal world the following three things: Southern Cross becomes a distant memory and the social care sector can look forward again with renewed optimism; there is progress and more importantly greater clarity on the Health Bill allowing stakeholders (including private operators) to invest to deliver services and change that is required; and certainty in the Euro, either move quickly to fiscal and political integration or agree that the euro needs to break up, only then will confidence begin to return.

2012 should still see strong levels of M&A activity and private equity investment in healthcare (Catalyst and our international partners continue to work on a number of exciting projects), it is a strong counter cyclical sector but the deal-doing environment will be greatly helped by some greater clarity and economic optimism.

Having recently attended the Laing and Buisson Healthcare Conference I thought it was worth sharing some of the messaging from Bob Ricketts, Director of Provider Policy at the Department of Health.

Many in the private sector have been disappointed by some of the government and DoH rhetoric over recent months, feeling that the important role that the private sector can play in achieving NHS objectives has been downplayed. In his presentation Mr Ricketts reaffirmed key DoH objectives: Commissioners need innovative affordable solutions; need to accelerate the shift from hospital to community/home settings and get serious about tele-care and tele-health; transform patient pathways; focus on tariff and contract reform; and encourage different models of commissioning and contracting.

Ricketts also reiterated the opportunity for private sector providers, suggesting that the following characteristics of offerings from the private sector would stand the best chance of succeeding: deliver results for patients; offer innovation for commissioners: sweat the technology; run lean pathways; control costs; exploit scale/ focus on the knitting; foster effective partnerships.

Overall I thought that the messaging was pretty positive. However businesses currently supplying into the NHS or hoping to in the future would do well to consider the above and compare it to their own business models and propositions.

The eurozone remains in crisis, unemployment is up, the Health Bill is stuttering through Parliament - despite all of this though, there has been a lot of deal activity in the healthcare space in the last few months.

Probably the most interesting announcement was the award by NHS Surrey to Virgin Medical of the £500 million 5 year contract to provide community health services. The size of this award and the fact that the NHS awarded this contract to a private sector contract demonstrates that sizeable opportunities do exist for the private sector to provide local services funded by the NHS. This should give the private sector a lot of confidence in the long term direction of travel. Two things will be interesting: will Assura Medical be able to deliver?; and will they decide to rebrand and become Virgin Healthcare?

There have also been a number of other smaller transactions over the summer including: Advanced Childcare buying Clifford House; Ark Home Healthcare acquiring part of the homecare business Anchor Trust; HCA acquiring corporate healthcare specialist Roodlane Medical; and Lifeways and Enara continuing to consolidate the fragmented domiciliary care sector.

What does this all mean in reality though? In my opinion, firstly that the healthcare sector is still a really interesting space with plenty of opportunity for private sector businesses and that some parts of the NHS really do want to outsource core services; secondly that private equity capital continues to deploy capital to grow businesses and consolidate service provision across a range of healthcare services. This should hopefully raise service quality and provide best value for purchasers and commissioners.

I believe more will follow, despite the uncertain political backdrop.

The symbiosis of social media with the traditional healthcare sector may seem a leap of faith to some, however many healthcare companies and practitioners are rapidly becoming adopters and the M&A market is starting to hot up. The recent acquisition by a Japanese corporate, M3 of online doctors platform Doctors.net.uk is one example of this.

I found some recent research into the behaviour of European doctors particularly interesting when trying to think through where this market is headed. Surprisingly (or worryingly to me!) 60% of European doctors regularly use Wikipedia for professional use, and 69% use social media sites, including Facebook, Linkedin, Youtube and Twitter, according to a report by Insight Research Group. Furthermore, half the 300 doctors interviewed recommend specific websites for patients to visit, 87% point to certain sites for further background or education on their condition, and 69% suggest sites for more information regarding treatment and medication. These statistics could be interpreted in a number of different ways...

The pharmaceutical industry is also increasingly embracing the power of social media and networks. There is a growing role for social media in clinical trials. A US based company, PatientsLikeMe has built an online platform for collecting self reported patient data for patients who have started to take a certain drug. It is in the patients interest to ensure that the data is complete and accurate as possible, as they will drive actual care decisions (and is also more cost effective).

There are sceptics, but most healthcare companies and professionals are increasingly utilising social media and putting it right at the heart of their thinking. This is no longer the future, it is increasingly the present.

Whilst the progress of the Health and Social Care Bill dominates the current healthcare agenda, in the background there have been a series of transactions involving both corporate M&A activity and private equity investment in the sector.

Examples of deals include Care UK selling its children’s residential services business to Keys Education and Care (allowing Care UK to focus on other sectors of the market), Bowmark Capital supporting the £25m management buy-out of Glenside Manor Healthcare Services and listed IT company System C accepting an £87m cash takeover from American health giant McKesson.

I think the increased activity demonstrates the following: that private equity has lots of capital to deploy into businesses operating strong business models with attractive market fundamentals and that strong exit opportunities exist for well positioned business, with overseas acquirers very active.

My view is that the second half of this year will see a number of further healthcare deals completed. Hopefully my next blog will talk about an exciting Catalyst healthcare deal!

The main news of 2010 was the NHS White Paper: "Equity and excellence, liberating the NHS."

This aimed to cut a swathe through bureaucracy, setting out a timetable for the demise of all 152 primary care trusts and the loss of 10 strategic health authorities. Power is to be devolved to patients and professionals, with unparalleled freedom to focus on health outcomes. The path to the new promised land maybe uncertain but the needle has well and truly been moved!

The coalition has also promised to maintain real levels of health expenditure. That might be so but the reality is that funding is going to be challenging, and as a result the NHS will need to seek new efficiencies and implement new methodologies of delivery.

All of the above I think create real opportunities for the private sector to continue to deliver healthcare services into the NHS, and separately to private pay consumers (either directly or via insurance). New contracts will be tendered and innovative techniques and products encouraged. This will all throw up opportunities for the private equity industry to deploy capital and encourage corporates to be more active in 2011.

I think 2011 will bring exciting opportunities for healthcare practitioners, companies and investors. The path for change and evolution has been laid out.

Whilst healthcare practitioners and observers were expecting change the White Paper which emerged this week exceeded all expectations. The needle is about to move significantly!

At the highest level the existing infrastructure that delivers money and allocates resources in the NHS, the PCT’s and SHA’s are going to be phased out and the patient budget of approximately £80bn is to be allocated directly to new bodies, GP Consortia. These are basically groups of GPs coming together to run GP the primary care budgets on behalf of patients. Two bodies will then regulate and oversee the industry, Monitor (regulating the marketplace) and the Care Quality Commission (checking standards).

Where to start! There are so many questions and a lot of detail still to work through. Execution risk is enormous. However if we try and visualise the landscape in 5 years time you may see:

• 10-15 GP consortia controlling a budget of £80bn
• Underperforming consortia being allowed to fail and being taken over by better performing organisations
• Badly performing GP surgeries and GP’s being excluded from consortia
• More focus on prevention and keeping patients out of expensive secondary care facilities
• Improved patient service and better choice for patients (driven by better information provision)

And our prediction is that there will be far more involvement from private providers. Whether this is organisations delivering services or commissioning services the opportunity is significant! There will also be opportunities for other private sector providers including insurance and IT providers to benefit from the host of commissioning support services which will be required to make this bill work.

Most unlike the NHS the pace of change maybe relatively quick! The coalition is impatient and the next instalment will be in September when the fine details of the White Paper are released. We will keep you posted!

There have been a number of private equity backed transactions in domiciliary care since my last blog, which started with Lyceum Capital backed Carewatch acquiring three businesses in early April. Lyceum has added a total of 11 businesses to Carewatch, which they acquired in 2008 for £37m from Nestor.

This deal was followed by August Equity’s Enara acquisition of 6 domiciliary care businesses. August Equity has been one of the most prolific acquirers in this space, completing more than 15 bolt-on’s since 2009. August also acquired Active Assistance in March, a live-in care service for people with spinal and neurological conditions, which has been merged with their portfolio company, First Call Care Services.

The last private equity backed domiciliary care deal in April was Sovereign Capital backed City & County Healthcare’s acquisition of Sterling Homecare. This was Sovereign’s first bolt-on transaction and we are likely to see many more in the near future following their £25m commitment to expanding City & County.

These deals demonstrate the buy and build strategy of private equity firms and continued opportunities which exist for consolidation in this fragmented market.

These investments also show that confidence is returning to private equity investors, who are keen to deploy capital now. There have been a number of recent healthcare deals involving private equity, including ISIS’s investment in spinal implants distributor Surgi C and Synova Capital’s buyout of the Dental Buying Group. The healthcare services sector continues to punch well above its weight in M&A, and our view is that this will continue well into 2010 and beyond.

After a number of reputed attempts, Virgin have at last managed to get a foot into the UK healthcare market after acquiring Assura’s GP Provider medical services business. Virgin paid a mere £4m, together with a £4m loan note, for a 75% stake in Assura Medical. Virgin had previously attempted to enter the healthcare market back in 2008, but pulled out at the last minute for reasons never made apparent.

It is clear now however that Branson has committed to the sector, and Assura will give him the instant scale in primary care he has been longing for. The PCT contracts will also help to build a solid foundation with the NHS, which could eventually lead to Virgin running NHS hospitals as well – a distinct possibility now, given that outsourcing of NHS hospitals to private operators will begin soon, with Hinchingbrooke being the first.

Virgin are obviously relaxed as to the impact of the election and I share their view. The direction of travel is set and that will lead to more involvement for the private sector in coming years. Whether the Virgin brand succeeds though, only time will tell.

Meanwhile, Bridgepoint have announced a recommended offer to buy Care UK for £281 million, representing a significant 50% share premium based on the share price prior to offer talks which began last September. This price shows that private equity is confident paying strategic prices for scarce, quality assets with good growth prospects. It may also signify that the banking market is returning for the "big ticket" deals.

Investments by private equity firms in UK based healthcare companies have been falling over the past few years. Only 12 investments were made in 2009, compared to 23 in 2008 and 36 in 2007. This is symptomatic of the broader market correction, although the sector, especially the care sector, has been hit by excess leverage in a number of businesses, with the result that private equity houses have focused on portfolio companies rather than new investments. Sellers have also been concerned about selling at a time when business valuations have fallen.

However already in the early days of 2010 the ingredients are in place which should lead to an upturn in investments. Those ingredients include a more stable economic environment, increased debt appetite (albeit at sensible lower levels than 2006-2008) and a sector generally that has strong long term prospects. The majority of private equity firms we have spoken to are expecting a revival in investments levels. Already in 2010 there have been some notable transactions, including Apax Partners £975m acquisition of Marken (a clinical logistics provider), GI Partners acquisition of Shirebrook Care Group and Ontario Teachers Pension Plan’s £150m acquisition of Acorn Care & Education. Bridgepoint have also made an estimated £300m offer for Care UK, which has attracted significant media attention.

In my view, a number of private equity players will also plan to exit some of their current investments now that the market appears much more settled and will look to provide returns for investors. IPO’s are likely to be a popular method of exiting some of the larger investments, especially as the equity markets have shown steady growth over the last few months. Two businesses rumoured to be considering a listing are General Healthcare Group and the Priory Group for example.

As long as the banking sector continues to provide access to credit for transactions, then the next 6-12 months should prove to be an active period for private equity once again.

Shock, horror - that the NHS does not rate highly in terms of speed and choice compared to its peers is the (sadly) not unsurprising conclusion from a new survey published by the Economist Intelligence Unit.

In its report, which compared the UK against corresponding systems in the USA, Germany and India, primary areas of concern included waiting times for operations, with just 18% of UK respondents expressing satisfaction in this area (versus 30% of Americans), and a perceived lack of influence over treatment decisions, with nearly 60% claiming they are not encouraged to choose a doctor or hospital (as opposed to 70% in the USA claiming that they are).

The findings are likely to be disappointing for a government striving hard to reduce waiting times and foster an environment of patient choice, in the hope that competition will improve standards across both primary and secondary care.

Reassuringly for the private sector, despite some political rhetoric from the health secretary Andy Burnham recently, both government and its opposition appear steadfast in their belief that striking a partnership with the private sector will ultimately lead to a better quality of care.

This, combined with potential efficiency savings, should see significant opportunity for the private sector in 2010. With money from investors increasingly finding its way into the healthcare sector seeking its positive returns, I am convinced that 2010 will also see even more M&A activity than ever before.

The acquisition by Synova Capital of Clearwater Care is an encouraging sign for a healthcare market that in terms of M&A and private equity investment had completely stalled since early 2008.

Clearwater is a provider of specialist residential care facilities and supported living services for people with learning disibilities, with 14 care homes located in the South East.

The deal was notable for a number of reasons:

1. Initial deal for Synova Capital, a relatively new mid market private equity firm
2. The key members of the Management Team, MD and FD, were introduced as part of the deal. Both have a strong track record in the sector
3. Focus on supported living mirrors the strategy of a number of businesses in the space currently
4. Bank of Ireland provided a debt package, this is a positive sign that confidence is returning to the debt markets

I think this deal demonstrates that the sector continues to have strong fundamentals that make it attractive to the investment community. With a return of banking confidence I expect to see a steady upturn in deal flow in the next 6 months.

Government reforms to the National Health Service in England have sought to increase the choices available to patients and stimulate competition between healthcare providers. In Primary Care this has been underpinned by the introduction of the Alternative Provider Medical Services (APMS) contract, which allows Primary Care Trusts (PCT's) to contract services from organisations that are outside the NHS.

The initial APMS contracts were awarded at the end of 2008, start of 2009. The majority of the APMS contracts were awarded to GP led companies, (or companies that had a significant element of GP ownership), with the corporate providers Atos, United Health and Care UK only securing circa 10 practices.

The momentum of contract awards has rather slowed down recently, due to two factors. Firstly there have been rumblings that some of the initial contract terms have proved to be relatively onerous and therefore commissioners/providers are needing to revisit some of the contract terms. Secondly with an impending general election in 2010 many commissioners have little incentives to embark upon protracted contract tendering processes now.

However a recent positive trading statement from Assura and with the "direction of travel" in Primary Care moving toward greater involvement of the private sector (albeit slowly) I am sure momentum will once again pick up again in 2010. Next year is also likely to see further investment in private sector operators looking to take advantage of the opportunities that will arise. The market may also see some consolidation of existing players in order that companies can gain scale and the associated economies that come with it.

2011 sees the end of the current public spending round and NHS practitioners and providers are gearing up for a tightening of NHS finances, in light of the current economic backdrop. This is likely to increase the focus on more centralised and more effective NHS procurement. The NHS's Purchasing and Supply Agency (PASA) is to close under plans recently revealed, with functions transferred to the Treasury's Buying Solutions organisation.

I see this further centralisation as an opportunity for private sector firms to further supply primary and secondary healthcare services. NHS management recognise the need for the private sector and the "direction of travel" is to further outsourcing. Unit costs are reduced and choice increased. The Department of Health has stated that it wants PCT's to be commissioners not providers of services. Yes there is resistance, the BMA have recently launched a high profile campaign against further outsourcing and market reforms, but the genie is out of the bottle as evidenced by the recent awards of a number of APBS (Alternative Provider Based Services) to private sector companies to provide GP and primary care services.

Yes the public spending round will be tough, but health is a priority. I believe that significant amounts of private equity capital will be invested in the next couple of years to support businesses that provide outsourced primary and secondary care services. The public finances will require it!