Why the UAE healthcare sector is ripe for mergers and acquisitions
September, 05th 2016
The UAE is now approaching 100 public and private hospitals, and well over 2,000 healthcare centres and clinics. And these numbers are growing exponentially due to the confidence created through historic population growth, government estimates showing the population continuing to rise, and the gradual rollout of mandatory health insurance driving new revenues into the system.
This apparently solid, and perceived to be ‘sustainable’ business model, has created a landscape whereby mergers and acquisitions have become commonplace, with a real shift of gear having started about two years ago. A report by consultancy firm EY, which analysed activity in 2014, revealed that the UAE had the most inbound mergers and acquisitions in the whole Middle East and North Africa region.
This corporate alchemy is seen as an effective strategy to give firms stronger pedigree and to drive efficiencies. Let’s now take a closer look at where this is all heading.
A need to look beneath the surface Let’s start off by saying the picture is not entirely a positive one for the industry. With around six million insured lives, low premiums, and over 50 insurance companies, the funders of the system are in fact under some real pressure. It is not unusual, for example, to see claim funds for corporate clients running at above 120 per cent, and when you add broker commissions and operating costs and see combined ratios grow to around 150 per cent, this is clearly not sustainable.
With thousands of small independent clinics, typically running at 35-50 per cent occupancy, the UAE healthcare industry has an inefficient delivery model and is in need of consolidation. Where insurance companies can have smaller, more efficient networks of clinics and hospitals to send their patients to, they can rightly ask for bigger discounts and reduce their losses. So it is fair to say that the UAE needs consolidation of clinics, hospitals and insurance companies as quickly as possible.
Combining strengths – two is better than one In the UAE, we know that the expatriate population vastly outnumbers the native Emirati population. This continued growth of a highly cosmopolitan workforce creates its own challenges. With over 60 per cent of the population being low-income against 25 per cent mid-income and 10-15 per cent high-income, you are seeking to build very different healthcare services according to a patient’s country of origin, levels of expectation and ability to pay.
Today we have an oversupplied mid and high market, and an undersupplied low-income infrastructure. The outpatient and inpatient markets in the country are projected to grow overall at an annual rate of 12.7 per cent to reach a value of Dhs71.56bn by the year 2020, according to a forecast by the investment bank Alpen Capital. This will however be heavily weighted to the lower income mass market.
The concerted efforts to build new medical facilities show no sign of slowing, and in some cases the supply is being built in areas that are sufficiently covered.
The reasons? A belief that healthcare property will be a good long-term asset in a region that likes the comfort of investments in bricks and mortar. At a high level, the fundamentals of a growing, aging society, and the increase in chronic diseases (in part driven through obesity and consanguinity), is compelling. However, a deeper understanding of the market dynamic is needed.
If Dubai is looked at in isolation, by 2021 there will be nearly 1.4 million private beds available on an annual basis. With most of these hospitals targeting the mid and upper sector, there will be extreme pressure to share a market demand of around 600,000 beds spread across all demographics and the public sector hospitals who will also be fighting for market share.
We have seen impressive developments like Dubai Healthcare City, as well as Abu Dhabi’s Cleveland Clinic. Additional factors like mandatory healthcare insurance for firms and strong governmental support are attracting new operators like King’s College London, Northwestern Memorial (Chicago), Parkway (Singapore) and many more high quality respected groups, putting further pressure on the incumbent operators.
It is true that competitive consumption-led industries – such as healthcare – will inevitably witness an uptake in mergers and acquisitions (M&A) activity in markets that are strong or, conversely, under financial pressure. Size, expertise, efficiency and resources should all be elevated by the process. The focus is on creating economies of scale, better purchasing power and, in the healthcare sector specifically, building a stronger leverage with insurers.
A good private hospital that is run well, for example, can achieve a 20 per cent net profit margin fairly quickly – maybe after three or four years of launching. However, it is never a simple cakewalk. There are many challenges along the way, including the recruitment and retention of top talent and getting the standard operating policies and procedures right, the culture and teamwork focused on excellent patient care, and making the right call on technology.
However, it is creating the brand reputation as a centre for excellence for a specific or a number of clinical disciplines that is the biggest challenge. That is where the strength and critical mass of collaboration as part of a large group can have real benefits.
Healthcare works well with an integrated network and where a group has strong primary care clinics in residential communities and they are connected to general or specialty secondary care hubs. This is where the patient flow can be generated and brand loyalty built.
In saying that, M&As are no panacea. Cracks can appear after the deal is done. As PA Consulting Group warns: Although consolidation in the healthcare market can generate big returns, large companies do need to be careful not to lose key staff or customers during the process.
This is specifically true of healthcare M&A’s.
In the 1980s many health maintenance organisations (HMOs) in America thought that by buying family clinics they could control costs and offer a differentiated service. Thousands of clinics were bought and within two years nearly all of them had been sold back to the original entrepreneurial doctors (at about 10 cents on the dollar). Insurance companies realised that managing healthcare businesses is difficult, and managing doctors is, well, an “an art” of sorts.
As with M&As in any industry, there can be problems with the blending of the different organisational structures as well as incompatible technology systems. Hospital group control over smaller practices can also go against the grain for some who may be subjected to unpalatable change management.
Whatever the problems associated with M&As, though, the financial advantages most definitely outweigh the negatives, and if done right – by creating real strength and depth – services for patients should also improve.
Creating critical mass, the might of the merger Looking at the logistics, we can see there is no one-size-fits-all solution, and indeed there are several different types of mergers. For example – there is the horizontal merger, a conglomeration, the vertical merger, the product extension merger and the market extension merger.
My definition of these would broadly be:
• Horizontal: Two companies competing in the same market with the same service – Abraaj Capital consolidation of pathology laboratories across the MENA region • Conglomeration: Two companies with unrelated products or markets join up – Anglo Arabian Healthcare’s partnership with Healthbay (lower demographic operator joins with premium demographic operator to offer a one-stop-shop to corporate employers)
• Vertical: Supplier or customer joins with company (no deal of this nature uncovered in the last few years)
• Product extension merger: Different products but the same market – NMC and Dr. Michael Fakih IVF merger (leading UAE healthcare group enters the new speciality of IVF fertility with a strategic acquisition)
• Market extension merger: Same product but different markets – Al Noor Abu Dhabi and Mediclinic Dubai merger to create UAE market leader position
The different reasons to spark and form alliances can be based on many factors, such as competitive market pressures, new healthcare reform, the high cost of doing business, creating better economies of scale or simply for diversification into other services or markets. Each merger or acquisition will have a grand strategy behind it. But, in general, it is the conditions of the marketplace that drive action.
Progressive companies see the process as a way of establishing a much larger presence while strengthening their position or substantially increasing their customer base. Case in point: In February we saw the combination of the UAE’s Al Noor Hospital Group and South African Mediclinic International Ltd. to form Mediclinic International PLC.
This created the third-largest international healthcare group outside of the United States, with 35,000 employees spread across South Africa, the UAE and Switzerland. The organisation is now an industry titan. Indeed, it is possible to imagine a future where the smaller healthcare providers just cannot compete with these new mega companies in much the same way that high-street independent grocers fail when they are up against the heavyweight supermarket chains. It is the same principle. Customers will vote with their feet and opt for the one-stop-shop with a complete range of treatments, and usually at a lower price point as well.
The pros and cons: it is not all ‘motherhood and apple pie’ for consumers But are mergers really good news for patients? Perhaps this is the biggest question mark around M&As. The process should, in theory, be a good thing. Private hospitals can suddenly link to clinical groups and healthcare systems which, of course, is a positive for the consumer in terms of choice and the quality available.
Larger organisations can without doubt implement more efficient processes, offer a wider array of interlinked services, and take advantage of the latest technology available. And we would also assume the larger organisations would act as a magnet for the best talent, whether it is physicians, technicians, executives or any good healthcare professional in the world looking for security and a decent living.
But before we get carried away with the leverage enjoyed by critical mass, it would be wise to look at the numbers and how they can warp markets with monopoly behaviour. If we take two major mergers from last year, which together involved four of the largest healthcare providers in the US, between them they had almost 80 per cent of the health insurance market in America. This sparked the attention of the Federal Trade Commission and the Department of Justice Antitrust Division. Mergers of this magnitude can crush all competition, leading to more expensive insurance premiums and reduced benefits for patients.
Show me the management So let us address the idea that a merger squeezes out a competitor or two. This can have two results: 1) due to the lack of competition the consumer will have to pay higher prices; or 2) savings can actually be passed onto the consumer as the user base expands.
If there are more resources available, this can certainly be a plus for the consumer. But what if the new management team decides to scrap unprofitable but vital services? It really does depend on the way the merger is handled and how the balance of benefits trickle down either exclusively to the company or including the customer in the windfall as well. For M&As can be unruly, cumbersome beasts, without a solid sense of direction at the new – and much larger – company.
Finding a suitable match We can safely say at this juncture that mergers are not just about better profit margins. They are a survival tactic more than anything else – not in terms of creating an organisation that is too big to fail, but in terms of finding savings, elevating the brand and crafting a healthy balance sheet.
History shows us some great examples of how to conduct mergers successfully. Think beyond healthcare for a moment and the textbook amalgamation of Disney and Pixar. Would Disney still be around today without the help of Pixar? Or consider Exxon and Mobil, now a tower of strength in the oil market.
On the other side of the coin, mergers can and do fail. With AOL and Warner, two company cultures were unable to mix well, and when the business climate changed for the worse, billions were lost. They eventually went their separate ways in 2009. A cautionary tale indeed.
The bottom line is that for M&As to work, the two sides need to be well matched. Not only must they be compatible, but there needs to be a good change management process in place where everyone involved in each company knows the direction of travel and what the new goals and work culture will comprise. Without this full buy-in, the process of morphing two organisations into one new firm can be extremely painful.
Healthcare companies with an existing stake in the UAE, or those looking for one, will no doubt continue to eye up new candidates. Subsequently, the train will keep on going. There will be many more deals in the coming years as the UAE grows in stature and population – and of course because the healthcare industry continues to be under price and regulatory pressure and scale is such an important factor in this industry.