Concerning prognoses for German healthcare

A recent bill and its progress through the German parliament may have caused a slowdown in activity in the healthcare sector, particularly in outpatient care. The bill, Terminservice- und Versorgungsgesetz, was passed on 14 March, and will restrict how medical care centres can be structured.

One draft of the bill limited the ability of a hospital to establish medical care centres outside its geographical area and in different areas of medical specialisation. This could complicate buy-and-build strategies, and make investments in medical care centres more costly and difficult.

Carsten Rahlfs, managing partner at buy-and-build investor Waterland, says: "I'm quite sure some transactions have been shelved because of the uncertainty about the outcome of the legislation process and its consequences for outpatient care." Indeed, deal volume across early-stage, expansion and buyout transactions dropped from 64 deals in 2017 to 49 in 2018.

Says Carolin Kemmner, senior associate in the corporate healthcare team at Clifford Chance: "The proposal was not pursued further in the legislative procedure because it was considered to probably threaten the supply of outpatient care services to the general public." Dental medical care centres will be the only sub-sector to be affected by the revised bill. Groups such as the Free Association of German Dentists called for the restrictions and, as a result, a limitation on investors' ability to grow chains of dental practices was included in the bill.

The law will limit the speed of growth for what could have been a highly attractive industry in Germany. Philipp von Hammerstein, a partner at Gimv in Munich, says: "In Germany, the market is huge and massively fragmented. There's a good balance of income that comes from private payers and through reimbursements from insurance companies, so you have the flexibility and the regularity of the two different types of income respectively. Dentists are also generally more commercially minded than doctors, which makes for good interactions for investors."

Under the microscope
Another healthcare sub-sector showing signs of labouring growth is biotechnology, although it is unaffected by the bill. Deal volume dropped to its lowest level since 2005 with 17 deals in 2018. Volume has generally been decreasing since a high of 38 deals in 2008. However, 2019 has already seen eight deals in comparison to the three that occurred between January and March in 2018. "There is a significant appetite in the market to acquire those assets at healthy valuations, although year-on-year you have more volatility. One deal could define a year in terms of value. It's also not necessarily valid to look at biotechnology on a country-by-country basis. It's an international sector driven by scientific excellence," say von Hammerstein.

While there are causes for concern, including regulatory change and dips in dealflow, market participants are bullish about most sub-sectors. Martin Kühner, managing director at corporate finance firm GCA Altium, says: "We don't expect a slowdown in hospitals, rehabilitation, medtech, life sciences or pharmaceuticals."

André Zimmermann, a partner at SHS, thinks the medical devices sector has an especially strong future, partly due to the international nature of the industry: "LPs see medical devices as a very attractive sector with an ageing population in a lot of industrialised countries, and increased spending in India and China. In Asia, there is a broader part of the population that is able to spend more money on healthcare, so that's where a part of the growth potential is."

Zimmermann highlights the sector's resistance to normal macroeconomic trends: "Even when there was a global crisis in the past, there was a rather quick recovery compared with other sectors." Germany spent €374bn on healthcare in 2017 and with an ageing population and mandatory health insurance coverage for a population of almost 83 million, investors see potential. Valuations reflect this. Tobias Levedag, a director at GCA Altium, says typical healthcare services valuations he has seen over the last two years are between 12-14x EBITDA, and he does not expect them to fall. 

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