Trend Report - M&A in the Hospital Market 2020 - Industry trends in Germany - Oberender ...
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Trend Report – M&A in the Hospital Market 2020 Industry trends in Germany
The M&A trend report provides a sound overview of transactions in
the hospital market
Background
• The German hospital market is an attractive and challenging environment for M&A activities
• The trend report is addressed to:
• hospital owners,
• strategically working managers in hospitals and
• investors who see a strategic option in the hospital market to (further) engage.
• The trend analysis
• provides an overview of M&A activities in the hospital market,
• shows and evaluates developments and
• provides solution-oriented options for action for different market participants.
• The observation of the transaction market includes both a quantitative analysis of market movements and qualitative
assessments of what is happening. In addition to the number of transactions, the focus is also on clustering and patterns.
• The M&A database of Oberender AG provides the basis of the quantitative analyses. Transactions from 2012 to 2019 on the
German hospital market are recorded. The database is based on own research and is regularly updated and maintained through
market screenings.
• The analyses of the hospital market and M&A activities are supported by the comprehensive databases of the Oberender
Research Institute and our subsidiary BinDoc GmbH.
Slide 2
Due to numerous federal political activities the transaction market
remains on the move
Management summary
• Numerous legislative changes are increasingly restricting entrepreneurial activity and putting growing pressure on
hospitals.
• This situation requires new business models as well as a strong focus on employer attractiveness. Further market
consolidation is expected. The concentration process in the hospital landscape intensified again in the first quarter of
2020.
• Among other things, artificial intelligence and the evaluation of big data opportunities open up new fields for M&A
activities.
• The role of private investors is still viewed critically in politics and the media and could result in increased
transparency requirements.
• With regard to merger control in the hospital sector, the 10th amendment to the ARC1 could result in slight changes.
• Comparatively high EBITDA multiples are applied in the healthcare sectors.
• Since 2016 a relatively high transaction volume can be observed with a peak in 2018. In recent years, the market has
§ been dominated by transactions involving the same carrier. North Rhine-Westphalia, in particular, was the focus of
transaction activity.
• Sold hospitals can be characterised by a number of key features such as bed size, ownership (legal entity), EBITDA
margin or debt ratio. The distribution of hospitals corresponds to the transaction volume of the past years and is
concentrated on the western states.
• Oberender expert opinion: The COVID 19 pandemic is increasing uncertainty in the system. For 2020 and 2021, we
therefore expect increased transaction activity in the hospital market.
1) Act against Restraints of Competition
Slide 3
Numerous legal changes further restrict entrepreneurial activity
Developments in the hospital market
Challenges Consequences
• In recent years, laws have been introduced with a high • Hospitals are under immense pressure to implement
frequency - many measures were immature and require new laws quickly and are often unable to assess the
corrections. consequences.
• Further major legislative changes with serious effects • The rising deficits, the new challenges posed by
on the hospital market have been announced. legislation and the growing shortage of skilled workers
will increase the pressure for consolidation for all types
• Additional stricter regulations in the area of minimum
of ownership.
quantities1 and lower personnel limits are to be
expected. • Hospitals with outdated IT structures and data protection
mechanisms expect high costs for unavoidable
• The legislator is placing greater importance on the
investment needs.
expansion of digital structures.
• The digitisation of workflows and structures in hospitals
• The search for qualified personnel, also in the
offers efficiency potentials.
administration, is becoming more and more complex,
although there are differences between regions and • The battle for qualified workers will increasingly lead to
professional groups. individual employment contracts regulations and
higher wages.
• The demand for fundamentally new care structures
is growing, as many patients are treated in the wrong • Hospitals have to increasingly adapt their service
place in the healthcare system. portfolio.
• The medium and long-term effects of the COVID 19 • The interaction of the different challenges will force
pandemic on the hospital sector are not yet fully hospital owners to make serious cuts and fundamental
predictable. decisions on future strategy.
• The COVID 19 pandemic is likely to worsen the
economic situation of many institutions.
1) Applies to selected elective inpatient services, where the quality of the treatment outcome depends on the quantity of services provided
Source : Oberender AG Slide 4
Hospitals are under strong pressure due to intensive legislative
activity
Development of legislative activities §
Law for more security Expansion of the Lower limits for
Staged system of Nursing Staff Draft on the reform nursing staff for other
in pharmaceutical care-sensitive areas
emergency Strengthening Act of emergency care care-sensitive areas
provision (GSAV) (PpUGV)
structures (PpSG)
2018 2019 2020 2021
Law for faster Regulation on the MDK1- Digital Service Law for the Patients‘ Data
appointments and setting of lower limits Reform Act Supply Act establishment of an Protection-
better care (TSVG) for nursing staff (DVG) implant Act
(PpUGV) register(EIRD)
Impact
• The German government is exerting massive influence on the structure of the health care system. Accelerated digitisation poses
challenges for many institutions.
• The new laws apply various levers, ranging from personnel requirements and the restructuring of emergency care to impactful
changes in the remuneration system.
• The measures appear to have initial effects on the hospital landscape. Increasingly, not only the closure of departments but also
of sites and entire hospitals can be observed.
1) Medical Service of the Healtcare Funds/Insurers
Source : Joint Federal Committee (G-BA, 2020); Oberender AG Slide 5
The situation requires new business models and a strong focus on
employer attractiveness
Trends in the German hospital market (1/2)
Business models
Hospitals will adapt their business models to the individual requirements of the regions and expand intersectoral care offerings.
• Through the remuneration system, the legislator is also forcing ever more extensive outpatient treatment services that can no
longer be provided profitably in inpatient care (e.g. reform of § 115b SGB V).
• Since appropriate outpatient structures are often lacking, hospitals themselves must take action to fill these gaps, whether
through networks or their own facilities for outpatient surgery, medical care centres or intersectoral health centres.
• The services remaining in hospitals are becoming increasingly complex and require the bundling of specialist expertise in
highly specialised centres as well as the formation of digitally networked partnerships to ensure medical excellence.
Professionals
Hospitals must take a closer look at their image as employers.
• Due to the rapidly ageing population, the shortage of skilled workers will continue to worsen dramatically in the coming years
despite a gradual increase in the retirement age.
• Hospitals, especially those in public ownership, must become more active, flexible and creative in order to attract and retain
qualified staff.
• Novel business models in different sectoral settings also offer opportunities for further education and training and for increasing
the attractiveness of employers.
Source : Oberender AG Slide 6
Health policy increasingly relies on artificial intelligence and the
evaluation of Big Data
Trends in the German hospital market (2/2)
Digitisation
Digitisation in the German healthcare system is being promoted by initiatives on the part of the Federal Government:
• For a long time, the digitisation of the health care system in Germany was neglected. The Federal Government increasingly sees
the benefits of artificial intelligence in the diagnosis and treatment of patients. The BMBF1-funded "Cancer Scout" project, a
pre-screening of tumour cells using AI, is one example.
• The Digital Service Act is intended to improve digitisation and innovation in the health care system, among other things by
increasingly integrating digital health applications into the treatment processes.
• Due to increasing digital networking, topics such as IT security and data protection are moving into focus, especially since
mistakes can result in serious costs, loss of reputation or penalties.
Big Data und „personalised “ medicine
Due to the growing possibilities in modern diagnostics and the evaluation of Big Data, more and more drugs and therapies are
being further individualised:
• Data evaluation is becoming cheaper and larger data sets can be evaluated.
• The field of genomics in particular is becoming more important. An increasing number of people are having their genome
analysed to identify potential health risks.
• Due to the growing promotion, also by the Federal Government, and the rising representation in the remuneration system (e.g.
Liquid Biopsy), Germany is a good location for AI in medicine.
• Service providers can only serve this market if they have the appropriate know-how, since the demands on implementation and
the associated logistics are also increasing.
1) BMBF = Federal Ministry for Education and Research
Source: Deloitte (Forces of change: Future of health, 2019); Federal Ministry for Education and Research (press release: Slide 7
027/2020); Oberender AG
The economic and regulatory framework forces the hospital market
to further consolidate
General conditions
• Shortage of doctors and nurses • Inadequate funding
• Insufficient interdisciplinary care • Overcapacity (beds and hospitals)
#
Beds Bed Ø length
hospitals Utilisation • The decreasing number of hospitals
(thousand) reduction of stay
in GER
according to official statistics is not the same
2000 2,242 559.7 81.9% 9.7 as the closure of hospital sites.
2005 2,139 523.8 -6.4% 74.9% 8.7 • The bed reduction indicator is more
meaningful.
2010 2,064 502.7 -4.0% 77.4% 7.9
• Hospital occupancy rates have been stable
2015 1,956 499.3 -0.6% 77.5% 7.3 since 2010.
• Competition is increasing between the
2016 1,951 498.7 -0.1% 77.9% 7.3
remaining hospital operators.
2017 1,942 498.2 -0.3% 77.8% 7.3
Efficiency pressure despite consolidation
• Services must be provided more economically as expectations increase.
• Process optimisation in many facilities still offers potential for greater efficiency.
• A further problem in many hospitals is the lack of management competence and capacity at first and second management
levels.
Source : German Federal Statistical Office (Fachserie 12, 2018); Oberender AG Slide 8Healthcare multiples have increased in all sectors worldwide
compared to the previous year
Average EBITDA multiples in healthcare - worldwide
19.9
Healthcare information technology
24.8
17.7
Healthcare products
21.4
13.4
Pharmaceuticals (biotechnology)
16.0
12.9
Drugs
14.5
10.9
Hospitals and healthcare facilities
12.0
10.3 Jan 2019
Health care support services
11.6 Jan 2020
• In January 2020, the multiples are between 11.6 and 24.8.
• Compared to other industries, higher multipliers are sometimes applied in the health care sector.
• Within the health sector, the level of the multiplier varies according to the sector. The highest Ø valuation multiple is in the
healthcare information technology sector with 24.8.
Source: Statista (Average EV/EBITDA multiples in the health & pharmaceuticals sector worldwide in 2019 and 2020,
Slide 9
by industry, 2020); Oberender AGThe worldwide trend of rising multiples can also be observed in the
average EBITDA multiples in Western Europe
Average EBITDA multiples in healthcare – Western Europe
15.1
Healthcare information technology
19.0
15.8
Healthcare products
20.0
12.8
Pharmaceuticals (biotechnology
22.7
12.3
Drugs
13.9
12.4
Hospitals and healthcare facilities
13.6
7.7 Jan 2019
Health care support services
10.2 Jan 2020
• In January 2020, the multiples are between 10.2 and 22.7.
• Within the health care system, the level of the multiplier also varies in Western European countries, depending on the sector.
• Contrary to the global distribution, the highest Ø valuation multiple is recorded in the pharmaceutical sector (biotechnology) with
22.7. The change in this sector is also above average, whereby individual transactions can also influence the values, in some
cases considerably.
Source: Statista (Average EV/EBITDA multiples in the health & pharmaceuticals sector Western Europe in 2019 and
Slide 10
2020, by industry, 2020); Oberender AGTransaction activity in the outpatient and inpatient sector will
further change the market structure in Germany
Market structure
In 2018 there was a peak (n=31) in transaction volume with a slight downward trend in 2019.
Furthermore, transactions between hospitals with the same ownership/legal entity (e.g. public, private)
Acute inpatient are particularly conspicuous in the area of non-profit organizations and associations. Due to the market
market structures, market consolidation is concentrated on the federal states of western Germany.
In comparison, there were more mergers in the public sector in 2019. More mergers are
expected due to federal policy requirements.
The outpatient market continues to be characterised by a high transaction volume, a certain lack of
transparency and a high market attractiveness. The focus of transaction activities in recent years has
been on some sub-sectors such as radiology and dentistry.
Outpatient market The impact of the COVID 19 pandemic cannot be fully assessed. However, a decrease in the number
of patients specific to the various specialist groups is to be expected here as well.
Note: With the TSVG, the legislator has imposed restrictions, especially for the establishment of
dialysis and dental MVZs (Medical Service Centres). Effects are rather marginal.
Source: Oberender AG, PWC Transaction Monitor Healthcare (2020) Slide 11Since 2016, a comparatively high transaction volume can be
observed with a peak in 2018
Number of transactions over time1
31
27 28 28
7
4 6
22 21 9
17 5 1
16
1
2
24 24 22
20 18
16 17
14
2012 2013 2014 2015 2016 2017 2018 2019
Merger Sale/Buy
Comment
• In 2019, transaction volumes declined slightly and were at the same level as in 2016.
• The year 2018 was marked by some large transactions such as the sale of Paracelsus, while in 2019 the focus was more
on the sale of individual hospital sites.
• The decisive factor for transactions is the attractiveness of the overall offer, including the objective of the transaction;
hospitals in a slightly worse economic position are also of interest if the hospital is only needed as a vehicle for setting up
an MVZ.
• Private providers are backing off and no longer taking over every hospital offered on the market.
1) Minority interests were not taken into account.
Quelle: Oberender AG (M&A Datenbank 2020) Slide 12From 2012 to 2019, homogeneous transactions dominate
Ownership after the transaction
Non profit Public Private Total
Non profit 56 12 20 89
Public 3 18 11 33
Ownership
before the Private 0 2 63 64
transaction
Non profit/ Public1 1 4 0 5
Total 61 37 92 190
Comment
• The greatest activity in the area of consolidation is generated by hospitals that were in non-profit ownership prior to the
transaction, particularly due to the transaction activity in North Rhine-Westphalia. The year 2018 is an exception: Here,
consolidation activity was highest among private operators, although only slightly higher than among non-profit operators.
• The hospitals under public ownership have a comparatively low transaction volume. From various publications it can be seen
that a medium number of public / municipal hospitals are at risk of insolvency.
• The number of mergers of municipal basic and regular care providers, as well as the number of key utilities, is expected to
increase across all regions.
1) Mergers of different institutions; mergers of the same institutions are not listed separately; minority interests were not taken into account.
Source: Oberender AG (M&A Database 2020) Slide 13Hospitals with up to 200 beds were particularly affected by
transactions in 2019
Transactions by bed cluster for the years 2012-20191)
• When looking at sales over the years, the high
Sale/ Buy by bed cluster number of transactions by hospitals with less
than 100 beds (n=58, 38%) is particularly
striking. These are primarily basic and
2012-2019 58 43 29 23 153 regular care providers as well as specialist
clinics.
• In 2019 a comparatively high number of
hospitals with more than 500 beds were sold.
2019 8 7 1 6 22
• The mergers tend to take place in the area of
large hospitals. In 2019, hospitals were
equally divided between public and non-profit
hospitals.
Merger by bed cluster • In mergers, each transaction partner was
included individually.2
• Two transactions are excluded from the
2012-2019 2 11 32 28 73 calculation, as it was not possible to identify
the beds clearly, but due to their structure they
would have to be allocated to bed custer 1 to
49 beds.
2019 1 0 3 8 12
Key
01 – 99 beds 100 – 199 beds 200 – 499 beds 500 and more
1) Minority interests were not taken into account.
2) Therefore, the total number of transactions (total) is not comparable with the total number on slide 12.
Source: Oberender AG (M&A Databasis 2020) Slide 14In 2019, the proportion of investors among buyers will have fallen
sharply compared with previous years
Transactions by parties involved
32 Distribution over the years
27 28 28
12 4 22%
22 6 7
21
3
16 17
7
1 2
24
19 21 21 20 78%
15 15 14
Investors Hospital operator
2012 2013 2014 2015 2016 2017 2018 2019
• The majority of the investors come from Germany or have had a connection to the German market for some time.
• Investors are more interested in smaller facilities (mainly under 100 beds) that are profitable or whose turnaround can be
achieved quickly.
• The acquisition of a small licensed hospital (planned beds) serves investors as a means of entry to the MVZ market.
• The consequences of the COVID 19 pandemic could increase the number of targets for sale which are more interesting for
investors than the current offer of clinics, some of which have been for sale for quite a while.
1) Minority interests were not taken into account.
Source: Oberender AG (M&A Databasis 2020) Slide 15Sold hospitals can be characterised by some central features
Methodology for market structuring
• Due to the large number of documented
transactions in the inpatient sector, various
similarities can be identified for sold hospitals.
• Four central dimensions can be identified
which can be used to characterise hospitals
sold in the M&A context:
✓ Amount of beds
✓ Ownership
✓ EBITDA-Margin
✓ Debt ratio
• Based on the M&A activities from 2010 to
2019, typical characteristics are identified and
defined as M&A indicators for each of the
dimensions.
• These are applied to the BinDoc database
with structural and financial data on more than
700 hospitals to screen potential
candidates.
• The hospitals identified from the screening
process also correspond in essence to the
characteristics of the hospitals acquired in
2019 and could therefore be targets in future
M&A activities.
Source: Oberender AG (M&A Databasis 2020); BinDoc GmbH Slide 16The distribution of hospitals corresponds to the transaction volume
of the past years
Regional perspective M&A indicators
Hospitals with a bed size
between 100 - 199
In public or non-profit ownership
1
EBITDA-Margin < 2%
Debt ratio > 200%
Comment
• Of the more than 700 hospitals in the
database, 33 meet all four of the M&A
indicators with the limits defined
above.
• The highest number is in Baden-
Note: Württemberg.
Number of identified hospitals per federal state
Source: BinDoc GmbH (Webtool: Hospital Balance Sheet Rating) Slide 17The concentration process in the hospital landscape increased
again in the first quarter of 2020
Usual closure process
Only for locations without
strategic importance
I II III IV
Transfer of a hospital Investments & restructuring Research for Closure
to a larger group through new group a buyer
Better management and
In case of failure
financial resources
• Real closures have been rare in the past. A large part of the declining number of hospitals is due to mergers, acquisitions,
merging of institutional identifiers of hospitals.
• More than 100 actual hospital closures since 2003 can be assumed. The number of hospital closures has been volatile over the
years, suggesting the hypothesis that hospital closures are strongly influenced by political and legal conditions.
• Long-term occupancy and capacity utilisation problems combined with high fixed costs put hospitals in an economic imbalance.
In a first step, an attempt is made to find a feasible solution through specialisation and/or transfer to a larger group. If this does not
lead to the desired success, this ultimately leads to closure.
• In order to ensure high-quality, area-wide coverage, a structured reduction in resources would be sensible since various factors -
such as regional conditions or rescue transport times - should be taken into account in any reduction.
• Due to the numerous federal regulations in recent years, increasing financing problems and long-term effects of the COVID-19
pandemic, a comparatively high number of market exits can be expected in the coming year.
Source: Preusker, Müschenich, Preusker (Description and typology of market exits of hospitals in Germany 2003 – 2013,
Slide 18
2014); Oberender AGFor investors, our services as consultants focus on strategy
development, implementation and integration
Strategy development Strategy implementation Integration
• Comprehensive market & competitor • Comprehensive transaction support • Post-merger integration
analysis + market trends
• Plausibility check of business plans • Restructuring
• Commercial Due Diligence
• Company valuation • Reorganisation management
• Human Resources Due Diligence
• Portfolio analysis / development / • Interims management
• Approaches of Financial Due improvement
• Executive management
Diligence
• Identification of targets
• Research and inclusion of key
• Presentation of the company
opinion leaders from the network
• Action scenarios
• Analysis for service development/
improvement
• Business field analysis
Example case
Examination of market entry into the MVZ market with acquisition of a hospital
Transaction: Potential analysis for market entry, identification of hospitals targets, support in the acquisition of MVZ
Parties involved: International financial investor
Oberender: Market and potential analysis, identification of targets, commercial & operational due diligence
Slide 19The M&A competence team of Oberender AG
Dr. Thomas Rudolf Judith Holtmann PD Dr. Andreas Schmid
Member of the board Senior Manager Manager
Catharina Harms Irina Quandt Maximilian Schmid
Consultant Consultant Consultant
… because M&A is teamwork
Slide 20Friedrichstr. 20 Elsenheimerstr. 59
95444 Bayreuth 80687 Munich
e transaktionsberatung@oberender.com
Germany Germany
h www.oberender.com
t +49 921 745443-0 t +49 89 8207516-0You can also read
