Interview

Doctor-led Practices are Offering Opportunities For Consolidation and Value Optimisation

The healthcare and pharma sectors have predominantly demonstrated resilience to macroeconomic  headwinds, backed by a credible track record of successful PE exits with superior returns. Mihir Kapadia,  Associate Director – Transaction Advisory & Consultancy Services at Wodehouse Capital Advisors, reveals  more about the factors that is driving M&A activities in the pharma and healthcare sector

What are the recent trends in M&A transactions in India’s healthcare/ pharma sector?

Overall, the healthcare and pharma sectors have predominantly demonstrated resilience to macroeconomic headwinds backed by a credible track record of successful PE exits with superior returns. The Indian healthcare sector, especially healthcare services is largely fragmented, locally owned and operated. These factors have led to consolidation, which has been a contributing factor to the surge in M&A activity. We are also increasingly seeing an increase in deal size and preference for established assets with some level of governance.

Doctor-led practices are offering opportunities for consolidation and value optimisation. A wide prevalence of standalone hospital assets has led to significant opportunities for consolidation with larger strategic investors.  Apart from just M&A, the Capital Markets have been active too, with four multi-speciality IPOs in 2023 (Jupiter, Yatharth, Asarfi, KK Shah) and we expect this to continue with strong capital markets and significant  investor-backed assets.

Which segments within healthcare/pharma are seeing higher M&A activities?
Most segments across healthcare and pharma have witnessed strong M&A activities. 2023 alone witnessed over 40 M&A transactions. Pharma and API had witnessed significant activity during 2022 with over 25 transactions but have  witnessed a bit of a slow-down in 2023 with close to 15 transactions. Similarly,
healthcare services also witnessed over 15 transactions in the last 12 months, followed by medical devices/consumables and health tech with close to eight transactions.

Tell us about the challenges while going on for M&A transactions.
M&A transactions are like wedlock and similarly, the most challenging part is to identify the right partner. M&A transactions are primarily driven by synergies drawn between two partnering firms and therefore narrowing on the right investor is extremely critical.

The second challenging part is to ensure that the mindset of the two promoters is similar as far as the transaction expectations are concerned. This takes time to firm up as  trust is built gradually during the process. Until then as a banker, irrespective of the side one is representing, it is important to manage the expectations and emotions of both, the seller as well as the investor which at times becomes challenging.
Lastly, collating and presenting the data in the right form is extremely critical and challenging, especially with small and  medium privately held firms. Bankers need to work closely with the promoters as it can
affect the overall transaction contours.

What will be your expectations in M&As for 2024?
There are enhanced CAPEX and expansion plans across various sub-segments such as multi and single-speciality hospitals, domestic formulation plants, API plants etc. This will continue over the next three to
five years thereby attracting active investor interest. However, investors are expected to be cautious with the overall transaction multiples as there is also an overhang/risk of excess capacity and quality assets which
are yet bankable. A large part of the M&A activity would stem from consolidation  efforts across regionally strong assets. We also expect significant momentum through “roll-up” transactions across various private equity-backed companies to create industry-leading assets. Assets with necessary approvals and supply to
internationally regulated markets are also expected to witness strong investor interest.

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