Get analysis on the latest trends and deals in our Q2 2022 review. You'll also find guidance on other key developments.
The pace of this year's Q1 M&A activity has continued into Q2, with 72 deals. This is only one down on last quarter, where we saw 73.
It's clear from this activity that the sector is strong in all areas. We're still seeing investments from private equity (PE), real estate investment trusts (REITs), and commercial firms in the UK and abroad.
The elderly-care market is slowly increasing in activity and looking more attractive to investors. Specialist care, pharmaceutical services, and retail healthcare still appeal to buyers.
There's growing interest in medical technology, which should continue through 2022 due to the positive links between digital transformation in healthcare services, making work more efficient and patient journeys smoother.
38% of UK healthcare deals involving PE show that it's still an interesting market. There's been a 10% increase on the previous quarter, where we saw 28% of deals involving PE.
Q2 2022 saw continued activity in medical devices, specialist care, pharmaceutical services, and medical technology. The elderly-care market has also continued to recover from the challenges of COVID-19, and Aedifica has increased their portfolio in the UK and Ireland with acquisitions of a care home in Scotland for approximately £8.5million and one in Ireland for £11 million. Impact REIT has also been very active in the market, making two acquisitions this quarter, which will see them add six care homes to their portfolio. Rynda Healthcare has acquired five care homes from Hamberley Group and two care home developments from Reuben Brothers-owned care home provider, Avery Healthcare. There's an ongoing interest in luxury care homes following the pandemic.
In the specialist care sector Octopus made its first move into this sector with the £100 million acquisition of six assets from Patron Capital-backed care home developer and operator Hamberley Group. The assets are a mix of ready-made and new-build sites. These sites will increase the capacity of the UK’s ever-growing specialist care market. In addition to this, Keys Group and Accomplish Group, two well know specialist care providers, merged in Q2. This merger will see the combined organisation providing specialist support for more than 2000 children and adults across England and Wales.
The medical devices market saw a high level of acquisitions this quarter, with a large number in medical technology. Graphite Capital exited medical animation software provider Random42, which was acquired by US-based The Lockwood Group LLC. It was announced in June that Bordeaux UK Holdings II Ltd, an affiliate of Optum Health Solutions (UK) Ltd and subsidiary of UnitedHealth Group Inc has had its offer accepted to acquire EMIS Group PLC: a UK-based online clinical integrated healthcare data delivery, recording, sharing and usage software provider holding company, for a huge £1.2 billion. Technology in the healthcare sector is moving at pace and many companies are ambitious to make their patient records and ways of working more efficient, so activity in this market should continue to grow.
Activity in the retail healthcare sector also remains robust. CVS Group, one of the UK’s leading providers of integrated veterinary services continues to acquire, investing in Anton Vets Ltd for £6 million. NHS outsourcing is still active, with Vita Health Group acquiring Pennine MSK Partnership Ltd, and Ascenti Health acquiring Six Physio Ltd. IPRS Group was also acquired by handl Group in its biggest acquisition to date, a deal on which we advised.
The dental market has also been active, with Apposite-backed Riverdale Healthcare acquiring Prettygate Dental, their second acquisition this year. Additionally, Todays Dental Group Ltd added Simplyhealth Partnerships Ltd to their portfolio in April and were then themselves acquired by Lonsdale Capital Partners LLP in May.
Q2 2022 has seen continued activity in the pharmaceutical services market with interest and buyers from all over the world, both PE and corporate. Catalent, a listed US-based provider acquired Vaccine Manufacturing and Innovation Centre UK Limited (VMIC), in which we advised VMIC. Pfizer Inc acquired Reviral LTD, a UK-based anti-viral respiratory syncytial virus (RSV). High Growth Holdings Inc is to acquire Vitalis Remedium Ltd, a London, UK-based biopharmaceutical medical cannabis manufacturer and Alliance Pharma backed by Ampersand has acquired Drug Development Solutions (DDS), which will see LGC Limited exit.
This activity shows that the healthcare sector is strong in all areas. We're still seeing investments from private equity, REITs, and commercial firms in the UK as well as abroad.
The sector has proved to be resilient in very unpredictable times and the last six months of activity have shown that the sector is still strong. We move into Q3 with economic and political conditions creating more uncertainty. Only time will tell how this impacts the healthcare market - particularly social care, as the Conservative Party leadership vote could once again throw funding provision into question.
For more information and insight get in touch with Peter Jennings.
The nature of the sector means that private healthcare companies' services and policies should be intrinsically aligned to ESG. That's a huge advantage as the expectations of consumers, investors, and regulators continue to rise. In the next few years compliance will make or break companies. If this sounds dramatic, take a look at what's happening in the sector.
As of April 2022, all NHS commissioning and purchasing must adhere to PPN/20 – a model that evaluates the social benefits of each contract. Focus areas include (among others) climate change, inequality, and supply-chain sustainability.
Private customers are introducing similar edicts based on their own criteria or frameworks, such as the Task Force on Climate-related Financial Disclosures (TCFD).
Companies without ESG credentials are cutting themselves off from trillions of pounds of investment, both from regular lenders and a new swathe of impact funds. The latter are dedicated to investing for financial gain and social and environmental good. Active names include Bridges Fund Management, Palatine, Apax Global Impact Fund and Summa Equity (which in January 2022 raised the largest European impact fund:c.EUR 2.3 billion).
Some 52% of investors consider M&A very important when evaluating an acquisition, according to a 2022 Gartner survey. ESG due diligence is becoming the norm and companies must be prepared.
Recent headlines about failings in UK care add to the many exposés of providers putting financial gain before purpose. Strong governance is necessary to protect those in care, as well as a company’s reputation.
Resourcing is the biggest challenge facing private healthcare. Employers must differentiate themselves from competitors by demonstrating that they can offer fair pay, balanced hours, and career progression. They must also show a commitment to diversity and inclusion by ensuring gender and ethnic pay equality.
The Corporate Sustainability Reporting Directive (CSRD) will require large companies with European operations to report on sustainability policy and performance for reporting periods starting in 2024.
A sector centred around care should intrinsically have ESG values at its core. The following three examples are a case in point:
However, many private healthcare businesses are failing to realise the importance of ESG and act on it. It's often deprioritised due to pressing industry-wide challenges, such as inflation and recruitment (though ironically ESG strategy could help with both).
A second hindrance is that ESG remains a relatively new field and companies lack the knowledge to plan and measure campaigns.
There are various ways that healthcare businesses can adopt ESG strategies in their business, both looking internally at their own organisation and externally for the services that they offer customers, other organisations and society. These include:
The weighting of the E, S or G, differ depending on the company. For example, a medical-device manufacturer might want to focus on carbon reduction (environment), a pharma company might focus on reducing health inequality by lowering the cost of a drug (social), and a care home provider might focus on robust safeguarding (governance).
Companies may find that in servicing one ESG goal they must forgo another. For example, a provider with the aim of paying staff fairly might only achieve this by working with private payers (ruling out other social equality objectives achieved by working with the NHS).
There's no one size fits all approach to ESG. Completing a materiality assessment is a two-step exercise to help companies establish their unique ESG agenda.
The first stage is a market review (peer group benchmarking). The second involves engaging stakeholders (regulators, patients, employees and investors) to agree on which ESG goals are important and how to meet them. This ensures that the strategy has buy-in from all levels and an easily communicated ‘why’.
The materiality assessment creates a basis to deliver your ESG strategy alongside (or ideally intertwined with) a company’s financial goals. This includes setting a deliverable timeframe and KPIs against which to deliver.
For example, what do you need to put in place each year to achieve net zero in the next five years and how will you measure your success?
It's indeed an inconvenient truth that ESG issues can’t be solved overnight. Though it's difficult to pause for breath amid issues of inflation and resourcing, private healthcare companies need to start planning now.
We also look at how the cap on care costs will be funded and how likely it is that users will reach the limit. With the changes potentially making care homes unviable for providers and also actively disadvantaging those living in less affluent areas, is it a case of one size does not fit all?
Unlike the NHS, access to social care in the UK is means-tested. There's currently no limit on how much someone can pay for social care during their lifetime. This can result in many families facing a ‘catastrophic loss’ where all their assets are swallowed up by care home costs.
The average cost of staying in a residential care home in England in 2020-21 was £816 per week, while including nursing care took the cost to an average of £1,022 a week.
The government announced in September 2021 that no one in England – irrespective of their age or income – will pay more than £86,000 for their personal care over their lifetime, alongside a more generous means test for local authority financial support.
The changes will be funded by an increase in national insurance and a new Health and Social Care Levy to be paid by the working population.
The government says the funds raised by these tax increases will be legally ring-fenced (estimated to be £12 billion in 2022) and used to help the NHS recover from the pandemic and resolve longstanding issues around care costs across the UK. But many commentators, including health charity The King's Fund, feel that the government has massively underestimated the sums required and that the funding needed is closer to £26 billion, being the amount spent every year on publicly funded adult social care.
Anyone receiving care from October 2023, including those currently in care, will have a ‘care account’ opened with their local authority, which begins totalling up their eligible costs. The headline figure of an £86,000 cap while eye-catching is potentially misleading. Here's why...
Private residents or self-funders pay around 40% more for the same service in the same physical environment than the rates negotiated by local authorities. These higher fees paid also cross-subsidise the care of local authority residents. For some care home operators this can be the difference between a viable and unviable home.
Section 18(3) of the 2014 Care Act will allow self-funders who currently don't have any contact with their local authority to request that it commissions their care, in the same way as those who are supported by the means test. However, the amount counted towards the cap will be the amount it would have cost the local authority if it had been meeting the person’s eligible needs.
The downside for care home operators is that unless they can encourage residents to pay top-up fees, the average fee they receive could reduce significantly. In addition, from October 2023 the upper asset eligibility threshold for council support rises from £23,250 to £100,000, thereby bringing a number of private payers of modest means within the scope of council funding. This has been termed ‘payor shift’ and recent research by the Institute for Fiscal Studies shows it will have its greatest impact in less affluent demographics in northern England and the Midlands, compared with those in London and the South East.
Taken together these matters will have an impact on care homes at the lower end of the private pay market.
Care includes the nursing and other assistance such as washing and dressing, eating or managing health problems. It specifically doesn't include daily living costs (DLCs), such as accommodation, food or utility bills – commonly referred to as ‘hotel costs’ in a care home. The rationale is that someone would have to pay these irrespective of where they live: in their own home, with a family member or a care setting.
People will therefore remain responsible for paying their own DLCs throughout their care journey, including after they reach the cap. The government has said daily living costs will be set at a notional level of £200 per week (£10,400 per annum) at 2021/22 prices.
As well as introducing the £86,000 cap, the government wants to amend the Care Act 2014 so that any means-tested support doesn't count this towards people’s cap. Therefore, only the amounts people personally contribute towards their costs will count. The government's thinking is that this will prevent people reaching the cap at an artificially faster rate.
|Years of care needed||Cumulative self funder spend £||Cumulative LA spend £||Total cost||Self Funder Cap distribution|
Notes: calculated using average cost for self-funder in a residential care home of £816 a week and local authority rates of £636 a week in 2021. Source: LaingBuisson, Just Group and Grant Thornton.
The question is how likely is it for someone to spend up to 10 years requiring domiciliary or residential care, or both? Statistics from a BUPA-commissioned report suggest that the average length of stay in a single residential care home in England was around 26 months. However, this statistic doesn't include any previous stays in other homes, or the period for which an individual received domiciliary or other care services in their own home before entering a care setting.
Therefore, while some people will reach the £86,000 cap in their lifetime most people probably never will. Furthermore, even if they do they will still have to pay their own daily living costs (currently £200 per week), plus any top-up fees for additional services or a better care home room to make their life more comfortable (as per the worked example).
Overall, the recent changes to adult social care have been controversial. Sir Andrew Dilnot, who called for a cap in his major review over a decade ago, has criticised the latest proposals saying he is “very disappointed”.
The changes are to be funded by a 1.25% tax increase, which affects everyone in employment. Critics also believe the adult social care cap at £86,000, and the way in which people start to progress towards it, is less generous and more complicated than expected. It also disadvantages those with lower financial health who live in the North and Midlands, who will still be required to contribute a greater proportion of their wealth than those in the South-east.
It's unclear what proportion of people in England will ever reach the £86,000 cap. A self-funder would require around three years and nine months in a care home, although the average stay in a care home is almost half this.
For care home operators the impact is also uncertain, and many may need to change their business models. Self-funders will have the right to request their local authority commissions their care, in the same way as those who are supported by the means test. How this will impact average fee rates is unclear, although it is more likely that self-funders will demand a reduction in their fees than local authorities agree to increase the amounts they pay. It doesn't augur well.
With already precarious finances, occupancy rates continuing to remain lower than pre-pandemic levels, and increasing costs (wages, insurance, utilities and food), it suggests that care home operators will face increased challenges to balance the books. This could ultimately see an increase in homes closing their doors.