April 26, 2017 / 2:13 PM / 4 months ago

Fitch: Europe HY Healthcare M&A Trends Diverge, Cost Focus Grows

(The following statement was released by the rating agency) LONDON, April 26 (Fitch) Rising pricing pressure and long-term growth prospects will further accelerate M&A activity in areas of the European high-yield healthcare sector where economies of scale are crucial, including pharmaceuticals and lab testing, Fitch Ratings says. Consolidation in the UK care-home segment will stagnate due to political uncertainty over future funding. Underlying secular trends, including a growing and ageing population and the rising prevalence of chronic diseases, support the growth prospects for European healthcare. But they are also helping drive an increased focus on pricing and value among regulators and the authorities that have to pay for healthcare services. We believe these trends will drive further consolidation in many segments. For example, generic drug penetration in Europe remains below that in the US and we expect European authorities to push for increased generics use in order to manage national drug budgets. This is probably contributing to rising risk appetite among private-equity firms, which expect volume growth to counter a deflationary price environment, with profitability benefiting from economies of scale. Private-equity involvement is also driving consolidation in the fragmented laboratory testing segment. This market benefits from the same secular trends as other segments, including an ageing population, and is also likely to experience growth from a focus on early diagnosis and increased frequency as payers shift to targeting prevention over treatment. Deals are likely to be much scarcer in the UK care-home sector, where a real-terms reduction in local authorities' fee rates has coincided with rising costs due to the increase in the national living wage. This is threatening the underlying business model of operators and making leveraged capital structures increasingly unsustainable. The sector's long-term funding issues have gained more prominence on the political agenda. We are sceptical, however, that there is the will or ability to address them soon, given the political priorities relating to Brexit and the uncertainty it creates over the long-term planning of public finances. We believe the political uncertainty and lack of visibility over funding will delay further consolidation. For more information on these trends and other key issues frequently raised by investors, see the report "What Investors Want to Know: European High-Yield Healthcare" published today and available at www.fitchratings.com or by clicking the link above. Contact: Frank Orthbandt Director Corporates +44 20 3530 1037 Fitch Ratings Limited 30 North Colonnade London E14 5GN Paul-Antoine Conti Senior Director Leveraged Finance +44 20 3530 1292 Simon Kennedy Senior Analyst Fitch Wire +44 20 3530 1387 The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com Related Research What Investors Want to Know - European High-Yield Healthcare here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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