Medical technology: Healthcare's third way

The UK's medical technology sector saw its last major deal in November 2007 when Dubai International Capital bought Alliance Medical from Bridgepoint in a £600m tertiary buyout. The West Midlands-based company, a provider of diagnostic imaging services to private and publicly-owned hospitals, rewarded Bridgepoint with a 4x money multiple following its six-year growth phase, which saw the company acquire 16 businesses across Europe.

The market since then has been rather sedate. Apart from two buyouts, Verna Group in February 2008, which was sold to Bank of Scotland Integrated Finance for an estimated £100-250m, and The Binding Site, which was bought by Nordic Capital for an estimated £50-100m in April 2011, all transactions since Alliance Medical were under £50m EV and most were early-stage investments.

"The market overall is quite big but when you look at companies we can invest in there aren't very many at all. A lot of the market is served by large US companies or large European companies," says Philipp Schwalber, head of the healthcare team at HgCapital, a private equity firm that invests in companies with an enterprise value of £100-500m. Indeed, the last big company to be sold for £1.5bn was German. BSN Medical was sold to EQT by Montagu Private Equity in June 2012. The company had previously belonged to German medical business Beierdorf and UK medical company Smith & Nephew, one of the only large medical supplies businesses in the UK at the moment, posting annual sales of $4.3bn.

The later-stage healthcare sector as such is tricky, explains Schwalber: "There are some very interesting subsectors but you need to think very hard about where the growth is, who your customers are, who is paying and where there is a possibility for private co-paying." He adds: "With these businesses you typically go to hospitals, however they are increasingly tough customers because they haven't got a lot of money themselves. You want a product that's not too expensive, where the hospital doesn't delay expenditure and something that is necessary so that nobody can cut you."

The degree of complexity in early-stage healthcare is similar, explains Albion Ventures investment manager Christoph Ruedig: "In healthcare there are a lot of stakeholders in each market. It's a highly regulated environment and regulation is changing all the time. And you've got a payer that is different from the provider - it's a fairly complex market, which is why you need to understand it very well."

Focusing on the early-stage med-tech market, Ruedig adds: "In in-vitro diagnostics, you have to be very specific about sectors you are looking at. Clinical chemistry for instance is a very difficult space and certainly not something most private equity or VC houses or LPs would be interested in. It's a very competitive space, it's very mature, margins are low, there's very little growth. On the other hand there are certain niche areas in in-vitro diagnostics which are growing very strongly and offer great margins. For instance, cancer diagnostics and bio markers are areas where there's a lot of investment."

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• UK / Ireland
• Healthcare
• United Kingdom
• Albion Ventures
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