2015 Global Private Equity in Healthcare Report: MedTech and Related Services Emerge as Top Investment Focus

In April this year, Bain & Company and the Healthcare Private Equity Association (HCPEA) jointly released a research report on their survey of the healthcare private equity market in 2014. (Note: Bain & Company is a leading global management consulting firm that provides professional advisory services in strategy, operations, technology, organization, and mergers and acquisitions, guided by the principle of “delivering results, not just reports.” HCPEA is a non-profit trade association whose members are committed to the long-term development of the healthcare industry. Its membership comprises more than 50 of the most prominent and highly regarded private equity firms, employing over 300 investment professionals across the United States and Canada. These firms manage more than $400 billion in capital, invested exclusively in healthcare-related sectors, including services, products, diagnostics, pharmaceuticals, and IT.)

Review of the Private Equity Market in the Healthcare Industry in 2014

Highlights:
1. Transaction value hit a three-year high, but the number of deals declined, and the asset scale was insufficient to meet investor demand
2. Europe’s Investment and Entrepreneurship Enthusiasm Continues to Heat Up, Thanks to Four Major Deals
3. Transaction values in the medtech sector surge due to spin-off listings of several major enterprises
4. Investors maintain their previous investment strategies unchanged

The healthcare industry is undergoing a period of transformation. Globally, there is a widespread effort to curb healthcare costs, marking a departure from the sector’s historical trend of sustained high growth. Currently, the industry is witnessing unprecedented levels of mergers and acquisitions (M&A) among companies, with strategic M&A transactions reaching a record high of nearly $380 billion.

For companies interested in private equity investment in the healthcare sector, 2014 presented a complex landscape. Globally, the total value of new healthcare acquisitions reached a three-year high of $29.6 billion, nearly double the 2013 figure, while the number of transactions declined by 10% to 188 (Figure 1). The overall transaction value was driven up by two mega-deals exceeding $4 billion each and a rise in mid-sized deals (valued between $500 million and $1 billion). However, similar to 2013, only five transactions surpassed the $1 billion mark, making 2014 a challenging year for investors seeking large-scale deployments (Figure 2). Furthermore, a robust public equity market and eager strategic buyers continued to drive up valuations, dampening purchase enthusiasm among some investors. In some cases, acquisitions fell through because sellers’ high valuation expectations were not met. On a positive note, this trend fostered a favorable capital exit environment, with 2014 levels comparable to those of 2013.

Figure 1

Figure 2

Regionally, the European market was active, ranking fourth globally in 2014, yet it lacked large-scale asset transactions, with only three deals exceeding $1 billion. Similarly, while North America saw substantial transaction volumes, it is noteworthy that the region has long suffered from a scarcity of large-scale, reasonably priced assets for investment. In the Asia-Pacific region, activity levels varied; China emerged as a highlight due to the introduction of regulations favorable to foreign investors, whereas India’s private equity market cooled compared to 2013.

By sector, medical technology and related services attracted the most attention, with large corporate spin-offs and IPOs significantly boosting transaction volumes to nearly five times the 2013 total. Diagnostics remained the most favored segment, drawing substantial interest in both China and developed markets. In the biopharmaceuticals and related services sector, both transaction value and volume declined year-on-year compared with 2013; the most notable sub-sectors were contract research/manufacturing organizations (CXOs), over-the-counter (OTC) drug manufacturers, and generic drug manufacturers. Healthcare providers and related services also performed well, while capital showed strong interest in diversified product suppliers and emerging markets.

In 2014, many investment strategies persisted, with investors favoring products and services characterized by “heavy healthcare” and “light wellness.” Some funds pursued “gem-grade” assets with sufficient safety margins or those holding absolute leadership in their core markets. Although trading valuations were at steep highs, investors believed such assets could accelerate fund turnover. Due to a lack of large-scale deals, some funds shifted downstream, investing in early-stage or even venture capital-phase projects. Finally, buy-and-build strategies remained mainstream in 2014; some companies continued to optimize previously acquired assets, while others merged with or acquired new platforms.

Private Equity Activity in the Healthcare Industry Across Different Regions
I. Overview

Highlights:
1. In terms of transaction volume, medical service supply remains the most popular across all regions.
2. Transaction value increased across all regions, while transaction volume declined
3. The largest transaction volumes are concentrated in Europe and North America, while Brazil records the highest transaction value.
4. The Asia-Pacific region is highly active in both developing and developed country markets

As in the previous year, a significant influx of private equity capital flowed into North America and Europe, with South America also featuring prominently. This was primarily driven by Bain Capital’s nearly $860 million acquisition of Intermédica Sistema de Saúde, a health insurer and healthcare provider. In fact, the undervaluation of Brazilian assets has attracted many private equity firms back to Brazil. Meanwhile, markets in Asia and the Asia-Pacific region remained stable and robust, similar to the situation in 2013. The number of M&A transactions declined across all regions, while transaction values increased (Figure 3), consistent with historical trends, as the healthcare services sector revitalized much of the global market. A notable shift in 2014 was the rise in both the value and volume of medical technology deals in Europe and North America, accompanied by a cooling off in the biopharmaceutical sector (Figure 4). The popularity of medical technology in China is largely attributable to changes in regulatory policies.

Figure 3

Figure 4

II. North America

Highlights:
1. Reforms catalyze new service and payment models, stimulating the investment market
2. Two Large Transactions Boosted Total Investment, Yet Attractive Large-Scale Assets Remain Scarce
3. Significant capital exits; the healthcare sector accounts for 40% of newly listed companies
4. Similar to previous years, the investment landscape has remained largely unchanged

Investment Environment:
As in previous years, the United States continued to dominate in 2014, remaining a favorite among private equity investors. The Affordable Care Act spurred active investment, particularly in areas such as healthcare information technology (HCIT), new payment models, and population health management. These trends, driven by healthcare reform, also accelerated merger and acquisition activity.

Six Key Hotspots:
1. Continuously focus on cost control
2. Integrated Nursing Care Service Model: Prioritizing Outcomes Over Scale
3 Emerging Payment Methods
4. Shift in Focus Toward Enterprises and Models with Lower Medical Costs
5. Higher Consumer Spending Power, Increased Participation and Expectations
6 Focus on Health and Disease Prevention

These trends will create opportunities in the data and analytics sector. In 2014, healthcare acquisition deals in North America totaled $15.6 billion across 80 transactions, compared with 90 transactions totaling $9.8 billion in 2013. Most of this growth was driven by two deals: the $4.4 billion acquisition of MultiPlan by Starr Investment Holdings and Partners Group, and Carlyle Group’s approximately $4.0 billion acquisition of Johnson & Johnson’s Ortho-Clinical Diagnostics (OCD) business. These were also the only two transactions in North America with values exceeding $1 billion.

Who Is Investing?
As in previous years, the largest firms—including Carlyle, General Atlantic, CD&R, TPG, and Canadian investors OMERS and CPPIB—have remained active in the healthcare sector.

III. Europe:

Highlights:
1. Transaction volume grew strongly in 2013, but overall capital remained excessive.
2. Deal volume in investments in healthcare service providers remains stable but shows no growth
3. Strong focus on branded biopharmaceutical companies, but actual transactions are rare due to complexity
4. Continue to invest in value-creating portfolios, including additional acquisitions and restructuring upon completion

Investment Environment:
Healthcare reform has been placed on the agenda across Europe, becoming a hotly debated topic that includes the ongoing discussions surrounding the Medical Devices Regulation. Furthermore, the European Commission has put forward specific and varied healthcare reform recommendations for 15 member states, focusing on optimizing the hospital sector, strengthening primary care, and rationalizing pharmaceutical expenditures. However, reality presents significant challenges, and genuine change will take time. Cost containment remains a critical theme, with drug pricing and reimbursement rates being key targets for reform. For instance, Italy has significantly reduced drug prices in recent years; in January 2014, France introduced a cost-containment framework to complement its existing health technology assessment methods. Across Europe, tendering processes are gradually expanding in both breadth and depth, covering a wide range of procurement categories and becoming increasingly complex in form.

From a financial perspective, 2014 was characterized by a weak euro, a trend that may persist into 2015 and beyond. This situation poses risks to international companies whose primary revenue is denominated in euros. Companies in the Eurozone may face bankruptcy or partial insolvency, a factor that investors must take into account when assessing assets. In 2014, overall trading activity remained high due to the availability of cheap capital; however, trading volumes failed to meet investor demand. The investment market urgently seeks standout opportunities, with innovative trading models being considered as a means to overcome the current crisis.

Who Is Investing?
In the investment transaction leaderboard, Montagu ranked first with four large-scale investments across various sectors. Other active players included EQT, which completed transactions related to Siemens hearing aids and animal hospitals; CVC; and Nordic Capital (which acquired GHD Home Care and veterinary company AniCura). HgCapital’s portfolio still includes healthcare assets, but its focus has shifted. European funds have made investments in both the Middle East and Africa.

IV. Asia-Pacific Region:

Highlights:
1 2014 was a record-breaking year, with the focus shifting to Asian markets (China and India), as opposed to previous years when the emphasis was mainly on developed Asian countries.
2. In particular, China has seen an increasingly favorable regulatory environment, which accelerated the development of the medical technology sector in 2014.
3. The hybrid domestic and international capital markets are active, with variations across different countries

Investment Environment:
Following the record-breaking performance of 2013, private equity investment in the healthcare sector across the Asia-Pacific region continued to grow in 2014: there were 45 deals totaling $3.5 billion in 2014, compared with 50 deals totaling $3.2 billion in 2013. Private capital investments contributed $575 million, and the trend toward smaller-ticket investments remained pronounced. Notably, emerging markets—particularly China and India—accounted for the majority of transaction value in 2014, marking a shift from previous years when developed countries (Japan, Australia, and South Korea) dominated the landscape.

In 2014, the largest transaction volumes remained in developed markets, although no single deal exceeded $1 billion, a decline from 2013. Barings Asia acquired Bushu Pharmaceuticals, one of Japan’s leading contract manufacturing organizations (CMOs) for pharmaceuticals, from Tokio Marine Asset Management for $650 million. Regulatory reforms in 2005 opened up Japan’s CMO market; however, it remains small compared with other countries, prompting investors to recognize its growth potential. In Australia, a consortium comprising EQT, Caisse de dépôt et placement du Québec, and GIC invested nearly $500 million in I-MED Network, Australia’s largest radiology clinic network. This investment is poised to benefit from trends such as population aging, the rising prevalence of chronic diseases, and broader adoption of preventive medicine—including diagnostic imaging—which helps reduce healthcare costs and improve patient outcomes.

In China, an emerging market, government regulations have encouraged private sector participation, driving significant advancements in healthcare among service providers and in the medical technology field. Although the Indian market remains highly active in the region, deal activity has slowed compared to 2013, primarily due to high valuations, inflation, election-related uncertainty, and challenges related to patent protection and manufacturing quality. Overall, while private equity activity has declined, strategic investors remain active, demonstrating sustained enthusiasm for India’s healthcare sector.

In certain cases, strategic investments in the Asia-Pacific region have significantly hindered private capital investment, as target companies were overvalued. In recent years, strategic investors have been more willing to pay premiums for assets in emerging markets, partly driven by the desire to reinvest overseas profits back into the region rather than repatriating them and incurring domestic tax liabilities.

To compensate for the risks associated with private equity investments, investors seek profitable exits. The most prominent example in 2014 was the initial public offering of iKang Healthcare Group, China’s largest operator of health check-up centers and disease screening services, which raised $150 million on the NASDAQ, enabling partial exits for investors NewQuest Capital Partners and GIC.

Investment Areas:
Healthcare Providers——
The service sector in this region is currently experiencing a surge, with total M&A volume reaching $1.5 billion across 24 transactions, primarily concentrated in Japan, Australia, China, and India. In Japan and Australia, activity focuses on medical diagnostics (including radiology and cancer treatment) and elderly care services (such as senior living communities and hospice care). In contrast, China and India see heightened activity mainly within the healthcare delivery spectrum, ranging from primary-care hospitals to tertiary hospitals.
In China, the government has further opened up the healthcare services sector, allowing 100% foreign investment in seven provinces and municipalities, including Beijing, Tianjin, and Shanghai. The government also encourages a tiered diagnosis and treatment system and multi-site practice for physicians, enabling private service providers to access medical experts within the public healthcare system.
In 2014, financial investors began to make their move. In April, Fosun Pharma and TPG partnered to acquire China United International Health Services Co., Ltd., which provides healthcare hospital and clinic services to American families in China, in a deal valued at $450 million. In October, Hony Capital invested in Shanghai Yangsi Hospital, signaling its interest in further hospital acquisitions. Major global hospital groups and financial investors have shown significant interest in China’s hospital market and are seeking to establish partnerships. For example, Hillhouse Capital Group and the Mayo Clinic in the United States formed a joint venture primarily focused on hospital investments in China.
The mobile health sector has also attracted the favor of internet giants such as Alibaba and Baidu. In 2014, prominent investment firms, including Temasek, invested in successful mobile app developers, acquiring minority equity stakes.

Medical Technology——
In 2014, the deal value in this sector in the Asia-Pacific region declined compared to 2013. The largest widely recognized transaction in 2013 was KKR’s investment in Panasonic Healthcare. In 2014, the Chinese market was highly active, with several major medical technology deals totaling $100 million. This surge was driven by multiple factors, including the Chinese government’s introduction of a special approval pathway for innovative medical devices, which standardized the procedures for foreign manufacturers entering the Chinese market.
For example, FountainVest Partners invested approximately $260 million to acquire a stake in Shanghai Kehua Bio-Engineering, an in vitro diagnostics company; a consortium comprising Hony Capital, Goldman Sachs Capital, and the Canada Pension Plan Investment Board (CPPIB) invested around $180 million in Neusoft Medical Systems, a medical imaging company; another consortium, including The Carlyle Group, acquired a stake in Haier Biomedical, a manufacturer of laboratory equipment.
In 2014, market performance in regions outside China was mediocre.

Biopharmaceuticals——
In 2014, the biopharmaceutical sector maintained steady momentum. Investors adopted a wait-and-see approach toward the Chinese market, awaiting shifts in business models following the exposure of corruption scandals. Similarly, investor interest in India remained lukewarm, primarily due to concerns over substandard manufacturing quality and inadequate patent protection laws. In the contract x organization (CXO) sector, Bushu Pharmaceuticals facilitated the largest deal to date. Other CXO transactions in the Asia-Pacific region included Warburg Pincus’s investment in CMO Laurus Labs and IVFA Equity’s investment in CRO Syngene International. Representative pharmaceutical company investment deals during the year included Hillhouse Capital and CITIC Capital’s joint investment in BeiGene (which develops anticancer drugs), and JD.com’s investment in Baoding Traditional Chinese Medicine, a manufacturer of traditional Chinese medicine products.

Future:
Looking ahead, we expect sustained momentum in the healthcare provider and health technology sectors, with continuous fulfillment of investment needs that will significantly boost local medical development. This growth is driven by multiple factors, including population aging, the rising prevalence of chronic diseases, improved affordability of healthcare, and policy incentives encouraging private-sector participation. In India, we anticipate continued vitality in health technology as the government permits 100% foreign direct investment.

In China, due to a weak foundation in electronics and industrial technology, medical technology may still require some time to develop. We also anticipate more strategic investments from cooperative investors. Activity in the pharmaceutical sector will remain stable at its current level, with any uptick likely to occur only after surrounding uncertainties are mitigated.

Who Is Investing?
In China, domestic funds drive the majority of transactions. Foreign funds adopt a selective investment approach, typically co-investing with domestic capital. In India, while domestic capital remains dominant, co-investment with foreign capital has declined significantly compared to previous years due to numerous instability factors across various sectors. Overall, large-scale global capital and sovereign wealth funds in the Asia-Pacific region will continue to invest actively and maintain their market presence.