UK Healthcare Market Overview
Despite being considered a defensive sector, the UK healthcare M&A landscape has not been immune to the slump in deal volumes felt across the wider market. Deal volumes have decreased substantially year on year as owners and investors weigh the combined impacts of higher interest rates, geopolitical tensions, supply chain challenges, inflation, and a potential change in the UK government.
Whilst both sides are adjusting to these challenges, we are still witnessing a valuation gap between the price vendors are willing to accept and those acquirors are willing to pay. This gap has narrowed over the past few months, and there is more of a sense of optimism that deal volumes will pick up as the interest rate tightening cycle appears to have peaked, and rates are expected to fall.
Investor Activity Overview
Trade Acquirors
Trade purchases have surged, and now account for 70% of total M&A transactions, a notable increase from last year. The UK's economic uncertainties have paved the way for trade buyers to strategically capitalise on synergies and attractive valuations to earn favourable returns on their investments
Asset Carveouts
A rise in asset carveouts has been observed, potentially driven by tough economic conditions motivating companies to assess the viability of underperforming assets and to pay down more expensive debt
Middle-market Deals
There has been a relative uptick in middle market transactions, reflecting investors' preference for strategic, lower-risk ventures amidst market volatility and the difficulty in securing debt financing. This shift is evident in the increase of middle-market deals initiated by both domestic and international bidders
International Deals
Economic uncertainties in developing economies are pushing investors towards the relative stability of developed markets. A significant 46% of bidders in 2023 hailed from outside the UK, with a notable influx from non-European regions. This includes countries like Egypt, Philippines, India, and Singapore
PE Activity
Despite the significant volume of PE dry powder to be deployed there was a noticeable decline in PE deals in 2023. Volumes declined across both primary and secondary deals as processes were put on hold, vendor expectations were difficult to meet, and debt financing was harder to secure. Several funds have delayed exiting portfolio companies due to valuation concerns and there is likely to be an increased volume of PE portfolio companies coming to market in the next 12 months as LPs continue to exert pressure on funds to return capital. Healthcare subsectors that continue to receive significant PE interest include healthcare IT, outsourced pharma services, and outsourced services to the NHS
Sector Analysis: NHS Insourcing & Outsourcing
Current State of NHS
The NHS continues to struggle with extensive backlogs, an insufficient supply of staff to meet demand and restricted capital investments. However, the nature of NHS funding and spending may change with the United Kingdom general election expected in 2024. NHS waitlists have grown to 7.68m individuals awaiting treatment as of July 2023, and as such independent service providers (ISPs) are increasingly providing solutions in the form of insourcing and outsourcing to alleviate backlogs
Insourcing
Insourcing is a solution that utilises NHS infrastructure to provide care to patients. The insourcing model allows the NHS the opportunity to alleviate the pressures of the backlogs while ensuring the day-to-day operations of the NHS are not disrupted. Whilst undoubtedly a solution to the burgeoning backlogs, the insourcing model is discouraged by the NHS as it represents inefficient allocation of resources, which are already under pressure, and it carries more political risk than outsourcing
Outsourcing
The NHS outsourcing model contracts ISPs with capacity to take on NHS patients for a fee. In 2020-2021 ISPs delivered c.368.0k NHS-funded elective episodes, c.5.2% of all NHS elective episodes. Since the 2012 Health and Social Care Act there has been an uptick in expenditure on ISPs, at a CAGR of c.7.6% from 2013 to 2021
Outsourcing provides a way for the NHS to address issues such as backlogs, limited capacity and resources, without having to invest in their own service provision or allocate resources to insourcing agencies. Outsourcing is beneficial not only to patients but also to the NHS as outsourcers can provide excellent value services without the need to invest in the infrastructure. With rising pressure on bed occupancy, there is a drive for a shift towards moving care into a community or home care setting, creating a change in the efficiency of the care pathway
The key drivers of the NHS outsourcing model include an aging population and the requirement to invest and innovate to diagnose and treat patients efficiently, the shift towards patient-focused and technology-based care approaches and the extensive backlogs creating struggles in the NHS
The UK insourcing industry has grown significantly as NHS waiting lists spiraled in the wake of Covid. There have been several transactions in the space driven by both PE and trade consolidation. Healthcare Business Solutions (UK) Limited was acquired by AXA Health (Feb 24). Medinet which was acquired by Fremman Capital (Jul 23), has since acquired HealthHarmoine (Feb 24) and Remedy Solutions (Aug 23). ID Medical was acquired by US talent software and staffing company Aya Medical (Jan 24), and Summit Partners acquired 18 Weeks Support (Mar 22).
AHCF expect there to be significant consolidation in the NHS outsourced provider space as insourcers look to decrease their reliance on insourcing revenues which are perceived to be more politically risky. The provider selection regime (PSR) which came into force in Jan 24 has also relieved ICBs of the requirement to regularly stage competitive tenders which will mean that organic growth is harder to achieve, thus putting more reliance on growth through M&A.
Sector Analysis: Pharma & Biotech
Overview
The UK's biopharmaceutical sector drives innovation, and employment, with an annual £5bn R&D expenditure. In his March 2023 budget, the chancellor also announced a host of measures designed to boost the UK's life sciences credentials building on the £520m announced in the Autumn 2023 Statement with £45m additional funding for medical charity research, £50m for the Apprenticeship Growth Sector pilot and £92m on ‘joint government and industry investment to expand facilities to manufacture life-saving medicines and diagnostics products’
Pharma’s M&A Landscape
Pharmaceutical giants are actively leveraging M&A, both domestic and cross-border, as a strategic tool to bolster their pipelines, especially as patents for numerous blockbuster drugs are set to expire later this decade. In 2023, deal volumes in the pharma sector remained robust, mirroring the previous year's activity. This underscores the sustained allure of the industry, with PE investors eyeing lucrative returns and trade buyers keen on bridging innovation gaps through strategic acquisitions. However, regulatory scrutiny, evident in the delays of some major deals in 2023, has instilled caution. To navigate this, many are pivoting towards acquiring a plethora of small to medium-sized entities. This is primarily due to higher returns offered on already proven IP which is further along the development path
Market Dynamics
The pharma landscape is evolving rapidly, with companies increasingly focusing on addressing chronic diseases, personalised medicine, and gene-based treatments. With escalating development costs, M&A emerges as a strategic lever, especially given the recalibrated valuations offering acquisition opportunities. The ebb in early-stage investments since 2021 suggests that many startups, initially buoyed by easy access to Series A funding, might grapple with securing subsequent rounds
Investment Landscape
Private equity's foray into pharma has matured, with nuanced strategies encompassing IP-focused investments, royalties, and collaborations with pharma entities to ensure a path to commercialisation. Areas like gene therapy, CROs, CDMOs, market access consulting, and traditionally underfunded domains like rare diseases and dementia are poised to remain on PE's radar. Pharma & Biotech M&A transactions typically have EBITDA multiples ranging from 20.0x to 30.3x
Sector Analysis: Healthcare IT
Overview
The UK's healthcare IT (HCIT) sector is experiencing a transformative phase, catalysed by the pressing need for digital solutions. With the HCIT market projected to grow at a CAGR of 8.6%, reaching £5.2bn by 2028, digital interventions are becoming essential. The NHS, grappling with extended wait times and operational backlogs, is pivoting towards digital consultations and the digitisation of patient records as it aims to drive efficiencies
Investment Landscape
The appeal of the HCIT sector is evident, with 36 deals observed in 2023. The focus of these transactions underscores the value of data, software, and tech-driven services. As the HCIT landscape evolves, there's a noticeable shift from patient management software to more patient-centric solutions, encompassing digital well-being and care platforms.
NHS Long Term Plan
The NHS is the largest purchaser of digital technology in the UK due to its size. Due to its structure, complexity and role in the market, there is a need for efficient HCIT infrastructure to support the NHS. The NHS LTP aims to improve access to convenient primary care by creating a digital-first primary care option for every patient. This plan is to shift towards digitally enabled services integrating into existing models of care. The NHS LTP has the potential to bring the point of care closer to the patient, freeing up clinician capacity. The Chancellor's announcement of £3.4bn of funding for the NHS to invest in digital technology and embrace AI as a way of freeing up practitioner time is a step in the right direction and a requirement if the NHS is going to continue to function to the standards people demand with increasingly limited resources
Patient-Centric Solutions
With long NHS wait times and backlogs, the integration of digital patient-centric solutions has the potential to reduce appointment times. Teledermatology is emerging as a game-changer, with the potential to conserve up to 75% of NHS dermatology clinicians' time, thereby amplifying NHS's service capacity. Audiology is experiencing a digital renaissance, with innovations that allow consultants to reduce appointment times by 25%
Sector Analysis: Medical Devices
Market Landscape
The UK medical device market is the third-largest in Europe and the sixth-largest worldwide. The market is predominantly import-driven, with 80% of UK medical devices being imported. The UK medical device market represents a strategically important location as it can act as a springboard for companies seeking global expansion due to the UK’s established distribution channels and historical ties
Cross-sector Collaboration
The collaboration between medical device companies and pharma and biotech companies is on the rise. This growth in collaboration is primarily due to the importance of combining drug therapies and wearable devices to offer a patient-centric solution offering convenient treatment. Some examples of this include drug-eluting stents and drug-delivery wearable devices
Digital Health Integration
Collaborative efforts also extend into the HCIT sector, where digital health technologies and medical device companies are partnering together. The growing importance of efficient patient monitoring, data analytics, and remote patient management solutions drives this trend. The merging of the HIT and medical devices sectors treats all spheres of patient care; diagnosing, treating and monitoring. This convergence leaves patients better informed about the management of their conditions and enables clinicians the option to monitor patients from the comfort of the patient’s homes
Regulatory Considerations
Since Brexit the regulatory landscape has become increasingly complicated presenting challenges to medical devices entering the UK market. Before Brexit, medical devices entering the UK market were subject to the European CE marking, which was required up until the end of June 2023, while having to be registered with the MHRA and obtain a UKCA marking (effective 1st of January 2021). Additionally, all medical devices in the UK must meet the requirements set out in the UK MDR to be legally placed on the market. A more complicated regulatory landscape is forcing companies to reassess the merits of investing in renewing the certification some of their worse performing devices and is driving the sale of some non-core products.
Sector Analysis: Care Services
Overview
The UK’s care services sector experienced a decline in M&A activity during 2023, attributed to concerns regarding inflation, rising interest rates, and a decrease in the availability of debt. As institutional private equity investors started to draw back from the market, they were replaced by trade buyers who perceived the current market conditions as an opportunity to expand with less competition for assets. Given its predominantly property-backed nature, the reduced availability and increased cost of funding from real estate investment trusts (REITs) impacted the elderly care and supported living markets, resulting in a decline in property-funded transactions
Mental Healthcare
Mental healthcare services have a history of underinvestment, pressure on bed occupancy and constrained resources. This has led to a decline in the NHS’s mental health service quality and growing backlogs and wait times. In the UK, contact with mental health services has risen by 22.1% since April 2020. Despite 16.8 million individuals screening positive for mental illnesses, only 8.4 million receive treatment1. With stigma fading and awareness growing, more individuals are likely to seek care and, as such, the mental healthcare market is piquing the interest of investors
Children’s Services
The children’s services sector continues to attract investment from PE-backed, large children’s services groups, and PE houses. Since the COVID-19 pandemic, the children’s services sector has remained resilient and is seen to produce attractive margins of c.19%2, whilst offering an opportunity for consolidation, which is attractive to investors. Most of 2023’s M&A activity was skewed towards SEN (special educational needs) groups, with aggressive organic activity from major corporate providers and heavily contested M&A processes for good quality SEN schools' groups
Specialist Care
The specialist care sector is attractive to investors due to two factors, limited bed capacity in an underserved sector and growing awareness of mental health conditions. Many of the larger specialist care groups and active acquirers in the sector are backed by PE firms or REITs. Reduced REIT funding has led to falling asset-backed deal volumes, decreasing valuations and activity in the specialist care sector, which has been historically REIT-led
UK Healthcare M&A Outlook
Whilst 2023 brought unique challenges to the UK M&A scene, with economic conditions and differing price expectations impacting activity, we expect deal volumes to pick up in the coming months. We are seeing both trade and PE buyers are more actively participating in processes, and advisors and owners who had previously held back bringing businesses to market are now looking to launch processes into a more favourable dealmaking environment.
The UK’s developed economy and favourable prices remain an attraction for international investors seeking stability and cost efficiency, and we expect foreign buyers to continue to invest in UK healthcare. The integration of AI in healthcare IT remains a huge opportunity, and whilst “digital health” has been touted by successive health ministers as the key to unlocking efficiencies, it was positive to see the Chancellor following this up with a £3.4bn funding package. As the NHS owns of one of the most valuable healthcare datasets in the world, there may be significant opportunities for businesses to get better access to NHS data to develop and train the AI tools that politicians are hoping will deliver their promised efficiencies.
Although 2023 was a year to forget for most dealmakers, the UK healthcare M&A landscape is looking more attractive, driven by resilience, innovation, and strategic initiatives
About Us:
Alpha Helix is a dedicated healthcare-focused advisory firm that provides sector-specific advisory services to exciting and fast-growing UK SMEs to mid-cap healthcare companies.