9 Apr, 2021
PE funding for APAC healthcare companies set to grow after record-breaking 2020
By Jiayue Huang
Private equity funding across healthcare companies in Asia-Pacific is set to increase after a record-breaking 2020, experts have predicted.
Asia-Pacific accounted for about 41% of global healthcare private equity deals in 2020, with $16.9 billion invested across 156 deals, according to a March 17 report by consultancy Bain & Co. This compared to $3.1 billion over 20 deals in 2010.
Experts believe the momentum will continue due to the growth of the industry in the region and private equity funds' appetite for bigger deals and broader investment opportunities in Asia-Pacific, which are mainly concentrated in China and the biopharma sector.
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"It is a long-term trend that will continue. The average size of the deals has been bigger. I think on a multiyear basis, we will continue to see Asia break its own records," Vikram Kapur, head of Bain's Asia-Pacific healthcare practice, told S&P Global Market Intelligence.
Kapur cited government support, such as China's faster approval for drugs, as well as the growth of innovation in the region as the key drivers of investments.
"With COVID-19, healthcare is viewed as a new national defense for many countries. Another big theme is innovation; [we saw] a lot of investments behind cell therapy companies and vaccines," said Kapur, who is also one of the report's authors.
Large deals
While the combined value of healthcare investment in Asia Pacific is growing, it is still lagging behind when it comes to notching large deals.
Of the top 10 private equity healthcare deals in 2020, which all exceeded $1 billion in value,
"We will certainly see more large private equity deals in healthcare in Asia and this is a continuation of a trend we have been observing for several years, driven by the continued growth and maturing of Asian economies," said Sebastian Hoffmann, Hong Kong-based head of Asia-Pacific healthcare at private equity fund Permira Advisers.
China "will be the engine of the trend" with its fast-growing biopharma and health technology businesses, such as online medical consultations, Hoffmann said.
According to the Bain report, 98 of the 156 private equity healthcare deals in Asia last year went to China. Of the 24 biopharma deals in Asia that exceeded $100 million, 16 were Chinese targets.
The world's second-largest pharmaceutical market also saw a spike in demand and interest in online medical consulting amid the pandemic.
JD Health International Inc., the healthcare arm of the Chinese e-commerce company JD.com Inc., for instance, received $830 million in pre-IPO investment from Hillhouse. DXY, a Chinese digital health platform that provides services including online medical consultations, received a $500 million investment from Hillhouse, Trustbridge Partners and other investors, according to the Bain report.
"Attractive growth equity investment opportunities certainly exist as the industry shifts to a 'new way' in drug development and healthcare services delivery. This is particularly apparent in biopharma and healthtech," said Hoffmann.
Outside China
Kapur agreed the region will see larger deals and namechecked South East Asia as one to watch.
"I think you will see a continuous growth in South East Asia, which also happens to have several medical tourism-focused businesses. There were several assets that did not trade [last year] because of the pandemic," Kapur added.
Some medical tourism companies, for example, have seen business hampered due to travel restrictions and investors decided to push the process back, according to Kapur.
India is another market where the Bain & Co. partner said investors will be hunting for investment opportunities.
"A lot of companies globally are diversifying their supply chains. The majority of the active pharmaceutical ingredients in the world came from China, and now many global pharma companies say they need a critical second source. So there was capital that went behind some Indian companies," he told S&P Global Market Intelligence.
The Bain report cited the example of KKR & Co. Inc., who in 2020 bought a controlling stake in India's pharmaceutical formulations manufacturer J. B. Chemicals & Pharmaceuticals Ltd. for roughly $410 million.
Higher valuations
The growing appetite from investors also boosted the valuations of healthcare companies in Asia, according to the Bain report.
"Investors have realized that valuations are high. But that does not mean you don't participate. You need to get more creative and think about what you can do to add more value to the business," Kapur said.
He added that one of the ways to do this is to help the target company expand its footprint.
Permira, for example, said it will help I-Med, a diagnostic imaging clinic group that it acquired in 2018, to "pursue a successful merger and acquisition strategy and exploring outside of its Australian home market."
"The winners in healthcare private equity will be those that can identify the future implications of COVID-19, riding the momentum of healthcare as national defense. They will spot analogies from other industries and regions that can be incorporated into their own assets," the Bain report said.
Private equity funds can also hunt for companies that are at an early stage of development, which can have lower valuations, more room for growth but higher risks, said Wendy Pan, head of law firm Goodwin's life sciences practice in Asia.
"Private equity funds are transforming. They are not waiting for companies to grow until a relatively mature stage [to invest], they go early. You saw some well-known private equity funds invested in very early-stage companies, even seed round," Pan added.