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Newsletter März 2020

ACXIT HEALTHCARE NEWSLETTER
March 2020
The world at breath
– COVID-19 –
a Corporate Finance view on the current situation
The disease caused by the novel coronavirus has infected tens of thousands of people worldwide. The unprecedented attention of the governments throughout the continents and  24/7 media coverage keep us all on alert day and night – rightly so! As social distancing and lockdowns seem to be the only solutions to slow down the highly contagious corona virus spread, people understand that the COVID-19-crisis will affect and restrict the life of all of us for months or even longer. In absence of respective vaccine and medical treatments (drugs) the key issue in case of high number of infected people (especially elderly ones) at the same time is the limited capacity of intensive care units / hospital beds in each country.
The fear is growing, and life is changing. As a result, hoarding food, toilet paper and beverages became a prerogative. However, most valuable nowadays are disinfectants and face masks that are sold old for weeks now. Governments seize the necessary medical supplies to secure primary care.
Since 21. February 2020, panic seems to have finally infected to the capital markets. Indices worldwide have tumbled and recently seen massive corrections, such as the German DAX losing over 35%, or the US indices NASDAQ and Dow Jones by 25% and respective 30% over the past three weeks.
We as ACXIT Capital are at no medical authority to assess and value which medical and political concept will be the best to contain COVID-19 – time will provide us hopefully with the answers soon. We are financial advisors for corporate finance, mergers and acquisitions as well as capital raises. As such we focus on what we are best in: providing corporate finance advise. Therefore, we want to share with your some of our views regarding the impact of COVID-19 on the healthcare sector in particular as one of our key industries. 
1) Valuation Corrections in the Healthcare Market

Let us start on a positive note: most healthcare business models and underlying macro-economic parameters remain despite or even because of the crisis intact. Nevertheless, and in line with the overall stock markets valuations in the healthcare sector have corrected strongly – some sectors more, some sectors less. While pharma wholesalers, pharmacies and suppliers of medical aids (incl. selected equipment for the hospitals) see a high increase in demand, healthcare service providers are currently facing difficult times. 
European Healthcare Indices vs. EURO STOXX 50
Source: Capital IQ
It would be unrealistic to expect that in public equity markets healthcare valuations will uncouple from the broad market parameters. Still, an outperformance seems likely as investors seek robust business models and sustainable income providers.
 
It can also be expected that the valuation correction will impact the valuations of M&A transactions. First discussions show that many strategic acquirers become uncomfortable with prevailing valuation expectations. In addition, transactions will become more complicated, as parties will look for concepts to share the risk of the future business performance of a target between buyer and seller by adopting earn-out or similar structures.
The due diligence processes might become difficult to perform due to limited travel possibilities and availability of the personnel of both buyer and target companies.
Furthermore, private equity investors will face harder times obtaining leverage for buy-out transactions as a result of lenders reduced risk appetite and more complicated approval processes. The obstacles of providing satisfactory due diligence will increase significantly as a result of travel bans, limited data availability and comparability.


Medical Supplies / Drugs

The manufacturers of hygiene and disinfection supplies as well as the medical equipment required for capacity expansions to treat corona virus in hospitals are currently experiencing increasing revenues and are fighting with their restricted production capacities in order to satisfy the increasing demand. 
The corresponding positive development of the earnings is likely to stimulate the respective M&A environment:
  • Exemplary, Schuelke & Mayr owner Air Liquide, may profit from the situation currently asking bidders for the manufacturer of hand sanitizer and industrial cleaning products to aim for bids around EUR 1bn. It is rumored that this high price is related to the assumption of increased hygiene-consciousness by customers in the future, according to Mergermarket sources.
  • Palatine has already successfully sold Verna Care business to HIG in February this year.
Ambulant Medical Care Services

On the one hand, ambulant medical care centers are currently fighting with the wave of patients that are concerned whether they are infected by the corona virus. The governments look for solutions to protect doctors and other medical personnel to insure, that the healthcare system is working properly. On the other hand, medical care centers are postponing non-urgent treatments in order to keep patients, especially elderly ones, home.
We have seen that the initiated transactions (e.g. acquisition of SpaMedica by Nordic Capital) will probably be successfully closed but expect a “wait and see” approach of buyers in respect to new transactions unless the sellers agree to accept valuation corrections.


Clinics

There are 8.4 hospital beds per 1000 inhabitants in Germany which is much higher in comparison to e.g. Italy (3.4 beds / 1000 inhabitants). In addition, there are 28.000 intensive care units in the country. Even if the numbers are promising and Germany is probably the best country to be in during the COVID-19 crisis, we still need to keep in mind that most of the existing beds are already occupied. In order to free-up existing capacities, non-urgent treatments and surgeries have been postponed, retired physicians are at stand-by modus. Temporary capacity expansions are being in discussions / preparations. We think that this COVID-19 crisis will make politicians as well as other stakeholders to re-assess the current strategy for acute hospitals in Germany.
Some of the hospitals will probably face increase in revenues to corona virus cases. On the other hand, private pay clinics are likely to lose earnings as non-urgent surgeries will be postponed.
These developments will have a direct impact on the M&A activities, i.e. Elsan Group, owned by CVC, has launched the sale process in February. The process will be postponed according to the market intelligence.


Nursing Care

Nursing care home operators are especially endangered due to high fatality rates of the high-risk group of elderly residents. On 4 March 2020, the first nursing home in Germany in Bad Rappenau (Heilbronn area) went under quarantine due to an infection of two care worker and a resident. The number has increased to 100 as of 12 March 2020. Korian, Germanys largest nursing care operator, announced its “Epidemic Vigilance Plan” as of 25 February 2020 for all European facilities to reduce risk of acute respiratory infections. Due to the recent developments, Bavaria decided to enforce a visitor ban for all nursing care facilities. Each and every nursing home is doing everything to keep corona virus outside the facilities. Additionally, the care home operators are fighting with a stressed personnel situation. Due to closure of kindergartens and schools many parents need to stay home. Consequently, discussions are currently ongoing with local governments regarding emergency care facilities for children.
However, the valuations of key public players in the industry have already corrected by more than 30%. Also, sales processes like IK Investment’s envisaged sale of the French Groupe Colisée has slowed and might be abandoned for the time being. Given that the underlying strong business model of most elderly care providers will not be affected by the crisis, we believe that the correction will be followed by an upward correction in the midterm. Therefore, the current set back in valuation provides a good opportunity for strategic acquisitions.
2) Availability of Debt Financing

As per today, we expect a short-term contraction of the financing markets as a result of the COVID-19 induced uncertainties. However, monetary easing (low interest rates, state supported credit programs etc.) is expected to be effective after short pause. Thus, we do not see a significant credit crunch for healthcare operators.
Germany pledged unlimited cash to business hit by the crisis – and this is only one of the series of measures taken by governments and regulators across the globe in order to stabilize the markets. Additionally, EU offers government guarantees to support lenders during the economic fallout of their customers. Nevertheless, we expect the underlying lending decisions to be more time consuming and lending terms to be impacted be recent developments (i.e. lower leverage, strict covenant regimes).
3) Digitalization

It is not easy to give a credit to Chinese policy makers: but it can not be neglected that they relied successfully on online support in fighting the crisis: telemedicine, online provision of drugs, online food ordering, use of big data, etc. have been key instruments to contain the virus. Therefore, it is safe to assume that Europeans will follow to a certain extent and accelerate the introduction of digital healthcare solutions (e.g. patient information management and analysis, appointment management, telemedicine, etc.)
 
We expect the following developments in Germany and Europe:
  • Telemedicine for medical and care treatments enabling to optimize management of physical patient flows and reducing the risk to get infected. Providers as Deutsche Arzt AG, teleclinic, CGM, Jameda, Arztkonsultation.de or Gemedo currently promote and offer their service for free.
  • Also, e-commerce / online pharmacies like Zur Rose/Doc Morris and Shop Apotheke are likely to benefit from the current crisis. In Germany, an accelerated introduction of e-prescription (E-Rezept) is expected to fuel the top line growth of the companies. Similar developments can be expected in other European countries.
We expect digitalization to become even more strategic important for healthcare companies than it was prior to the crisis. Administration and provision of medical services will become increasingly digital, in particular if supervising authorities and payors start to reward the benefits. As a we are optimistic for the valuations of the players in this field.
 
“In some ways, business mirrors biology. As Darwin surmised, those who survive ‘are not the strongest or the most intelligent, but the most adaptable to change.” 
Conluding Note

In this time period of high uncertainty and unprecedented developments it is important to hold together. We are strongly committed to support our employees, business partners and our clients especially during this historical crisis. Please feel free to reach out to our team at any time for any help you may need regarding strategic as well as corporate finance activities.
 
Stay safe and healthy, 
ACXIT Capital Healthcare team 
ACXIT HEALTHCARE CONTACTS
THOMAS KLACK
Managing Partner
thomas.klack@acxit.com
+49 69 247 414 120
RUTA HILDEBRAND
Managing Director
ruta.hildebrand@acxit.com
+49 69 247 414 170
ACXIT CAPITAL PARTNERS
About us

ACXIT Capital Partners is a leading international corporate finance and investment advisory firm for mid-market clients and entrepreneurs in Europe and beyond. As an independent, privately owned firm, we maintain offices in Frankfurt, Berlin, Munich, Zurich, Hong Kong and New York as well as strong alliances in Great Britain, France and India. Our clients are corporations, family-owned businesses, entrepreneurs, financial sponsors and family offices.

Our Services

Since 1998, we offer our clients comprehensive corporate finance advisory services including M&A and capital markets advisory as well as restructuring, debt and strategic advisory. To date, we have completed 400 transactions with a total deal/financing volume of approx. EUR 20bn. While our home market is in the German speaking region, most clients are international and transactions cross-border.

Our Industries

Our advisory expertise is founded on an in-depth understanding of the key industries served by the company, covering the industrial and technology sectors as well as the real estate sector. We have successfully advised clients in their key sectors: Internet & Media, Software & IT, Next-Gen Mobility, Mobile & Telecom, Healthcare & Pharma, Retail & Consumer Goods, General Industries and Real Estate.
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