The diagnosis for European healthcare

The continent is growing in appeal as investing in the US becomes more of a challenge.

European healthcare is alive and kicking. CVC Capital Partners’ head of European healthcare Cathrin Petty, who was appointed to the newly created role a little over a year ago, has been charged with leading the firm’s “very active” pursuit of assets in the sector.

“We’ve seen about a fourfold increase in [healthcare] opportunities taken to the investment committee since the beginning of the year,” she says. In late September, CVC Fund VI agreed a $703 million carve-out of Teva Pharmaceutical Industries’ non-US women’s health assets, comprising more than 20 generic and branded medicine products.

As a side note, former CVC senior managing director Iñaki Cobo Bachiller is joining KKR to lead its healthcare franchise in Europe, Africa and the Middle East.

CVC does not assign sector allocation targets but expects to reach around 10 percent exposure to the space in its €16 billion 2017-vintage buyout fund, Petty says. The firm currently has no plans to raise a dedicated healthcare vehicle.

“[Our] peers are somewhere between 10-20 percent invested in healthcare. Our expectation is that in building and putting this team [together] we’ll be at the bottom of that range and hopefully by the time we go out for our next fund we’ll be slightly higher.”

Despite this renewed interest, CVC is by no means a new entrant to the healthcare space. Fund VI completed at least four acquisitions in the sector, including Spanish nursing home operator Vitalia, international pharmaceuticals company Alvogen and the Greek hospital operator Metropolitan Hospital Group.

The firm’s increase in European activity comes amid concerns over the appeal of the sector in the US. Petty cited recent controversies over pharmaceutical pricing, President Trump’s potential changes to the payment system and consolidation of wholesaler channels as having hit confidence in deals there.

In Europe, though, centralised payment and provider systems have contributed to “steady and consistent” drugs pricing over the past 20 years, Petty says. This appeal does, however, mean continental healthcare targets are not cheap.

EMEA healthcare exits generated a 12.4x average implied enterprise value/EBITDA multiple between July 2016 and August 2017, according to Standard & Poor’s EMEA Private Equity Market Snapshot. Healthcare was the second most expensive sector for M&A activity at a 13.1x multiple, behind real estate.

Nevertheless, a scarcity of assets is still driving some European firms to look across the Atlantic for deals, Martin Gouldstone, director at corporate advisory Results Healthcare, tells PEI.

“I think the US market is still stronger, but what we’re seeing is more European private equity interest in the US market and expansion into it. But it does mean that the barrier to entry is getting higher, I think, so if you are able to offer as a private equity fund a real specialisation and understanding of the space … that’s a key differentiator in the market or will be moving forward.”

But Petty and her firm are remaining cautious. “Right now you’ve got a real uncertain outlook in terms of how that market’s getting priced and reimbursed with all the co-pay changes throughout there. As a result, we’re being very thoughtful on new investments there at this time.”