European buyout firm Cinven’s healthcare team has had a busy 2015. January kicked off with another partial exit of London-listed Spire Healthcare Group. Following a sale in June of a 29.9 percent stake to South Africa's Mediclinic and its remaining 8.4 percent, the firm had fully exited its investment by July.
In May the firm announced it was acquiring French medical diagnostic company Labco for an enterprise value of €1.2 billion, followed by its purchase of Germany-based Synlab Group, with which Labco merged. The acquisitions mirrored Cinven’s earlier merger of Mercury Pharma and Amdipharm, both acquired in 2012, out of which the firm created pharmaceuticals platform AMCo.
The sale of AMCo to Concordia Healthcare Corporation was completed in October for an enterprise value of £2.3 billion ($3.4 billion; €3.1 billion), including cash and shares in the acquirer, netting it a 5x return, as reported by Private Equity International.
“We like pharma absolutely, med-tech absolutely, and areas of services that are not capital intensive, such as laboratories. In asset heavy healthcare services, there’s less of a focus, we spend less time,” Cinven partner and head of its healthcare team, Supraj Rajagopalan told PE.
PEI spoke to him about the year past and the one to come.
Q. What is driving activity?
A. Healthcare is a busy sector for Cinven. It’s a small sector in the European buyout space, representing about 8 percent of overall buyout activity by volume, but for Cinven it has been one of our most active sectors, representing about 30 percent of money invested over the past decade.
2014 and 2015 were good years for healthcare exits for Cinven, whether that be in the public markets or whether it be selling to strategics, including the realisations of AMCo, Sebia and Spire Healthcare. It has been a slightly tougher market to buy in given the increased interest from strategic buyers. However, over the last decade, we’ve become used to navigating that and are usually able to buy at attractive levels.
Our successes have been quite high profile and have certainly helped increase our deal pipeline. The way in which we were able to invest, successfully grow and exit Phadia and Sebia [two in-vitro diagnostics businesses exited in 2014] helped us buy Labco and Synlab.
Q. What challenges have you faced?
A. The single biggest challenge we’ve faced when acquiring has been competition from strategic buyers, including trade buyers in med-tech, certainly, and speciality pharma. They have a low cost of capital. They are paying with debt that costs them low single digits compared to the cost of capital for a PE firm and the returns we need to generate for our investors.
Q. How are new specialist healthcare firms, such as mid-market investor GHO Capital, impacting opportunities or deal flow?
A. Healthcare is a small sector. We are not the only firm but we don’t really see many new entrants. Although pharma is not for everybody.
I would take the view that new entrants are a positive. GHO is at the smaller end of the spectrum in terms of deal size. The smaller firms, like GHO, have said they plan to buy and build businesses and might sell to a strategic, but they might sell to [a firm like] us. Cinven can provide a good exit opportunity. We have the experience of growing healthcare businesses internationally and executing significant buy and build strategies with additional capital, which means we welcome firms like GHO in the market.
Q. What are the key regulatory obstacles, and how is the regulatory environment changing?
A. Reimbursement is the most difficult question, negotiating that is difficult. If we look at the market as a whole, from our side, we are happy to analyse and make investments based on our understanding of [a country’s healthcare] reimbursement system.
But it is also possible to do what they call in the US “healthcare-light” and not expose yourself to reimbursement risk. For example, we invested in Medpace which provides services to drugs companies to help plan and oversee their clinical trials. Medpace is not exposed to reimbursement risk because its services are paid for by pharma, biotech and medical device companies, for example, and not by governments or local authorities.
With AMCo we went through a detailed analysis to understand that its products were niche enough and still sufficiently low priced that they would not come under reimbursement pressure.
Q. What are the significant themes developing in healthcare investing in 2016?
A. I see a general attraction within private equity to “healthcare-light” where the company is not directly reimbursed – like Medpace – and other businesses that service the big pharma and medtech players. We are interested in them too, but we are prepared to make the case for reimbursement and still see opportunities in areas such as niche pharma, where AMCo played.
There will continue to be pressure on healthcare payors. People are living longer and the cost of healthcare as people get older is higher, putting pressure on systems. The provision of healthcare will struggle if it remains underfunded in many areas – as it is in the UK with the National Health Service. The issue is huge in Europe, but actually less than in the US where [the cost of healthcare is] even closer to what GDP can absorb.
We will continue to see a reasonably active strategic buyer universe but not on the same levels as historically. Activity will be high, but down from the peak as some drivers of activity such as tax inversions have run their course.