Why Sub Saharan Africa is ripe for healthcare investment?

Continent’s development profile drives demand for healthcare

The global economic downturn has triggered consolidation in a number of sectors as companies look to retain scale and pool resources to survive. The healthcare sector has not been immune to this trend and the consolidation in the sector continues to drive investment activity.

Valter Adão, the healthcare and life sciences industry leader at professional services firm and consultancy Deloitte, says outlook for investments in the healthcare sector remains relatively robust compared to other sectors. Adão says that South Africa, with its sophisticated private healthcare market and regulatory framework, remains an attractive destination for global healthcare companies to domicile their Sub Saharan operations,. Adão says healthcare investments in Sub-Saharan Africa are driven by financial pressures and uncertainty faced by industry players in developed economies together with a developing market in Africa on both ends of the economic spectrum.

Although global mergers and acquisition trends remain subdued due to the economic environment with a move towards smaller deal sizes, the healthcare sector bucked the trend somewhat in the second half of 2012 with a 4% increase in deal value despite n 11% drop in number of deals, according to Dealogic.

“The healthcare sector appears to be well placed to take advantage of both the expected growth on the African continent and the relatively high proportion of global disease in Africa.” says Fredré Meiring, an associate director in the corporate finance division of Deloitte. The International Monetary Fund stated that most of sub-Saharan Africa would grow at an average of 5.4% in 2012 whereas the global economic growth is forecast at less than 3.5%
Adão argues that despite the challenges around availability of world class infrastructure and availability of specialized skills, Africa remains a key focus for investments in healthcare, in particular sub-Saharan Africa. This is because according to the World Health Organisation (WHO), the region accounts for 11% of the world’s population, yet bears 24% of the global disease burden. “The improving economic performance in this region means a continual growing market demand for better healthcare.” says Adão
In addition, a number of factors make the region a favourable investment destination for healthcare and pharmaceutical products and services. Key among these is active government support, which in recent years means a continued focus on healthcare expansion. This in turn leads to an increased need for the supply of hospital equipment, instrumentation, machinery and other products and Services. In 2011, South Africa’s total spend on health was in the region of R270 billion or around 8.5% of GDP, above the 5% recommended by the WHO. The public and private sector each contribute approximately 50% of this total spend.
Adão also notes that imports are a major part of the region's trading activity, thus demand for world class drugs and the latest medical equipment and technology. He adds that there is a growing trend of healthcare consumerism in which the price-sensitive consumers of health proactively seek out cost effective means to managed their health and budgets. This trend will gain momentum in Africa too as its population becomes empowered through the availability and ease of access to information. This will hopefully open the markets to informed and aspirational consumption which in turn will increase the attractiveness of the local markets to outside investors.

The deals announced in the past year, as well as declared intentions by healthcare companies bear testimony to this positive outlook for both incoming and outgoing investments, says Meiring. In February this year, Litha Healthcare Group acquired Pharmaplan from Canadian company Paladin Labs for R 590 million, while in August, two significant deals were announced.
First, Mérieux NutriSciences, a global food safety, quality and nutrition company bought a majority stake in Swift Micro Laboratories, with a view to expanding its African operations. Swift Micro Laboratories - which will become Swift Silliker - is the largest privately owned commercial food and product safety company in South Africa, with an annual turnover of R65m.

At around the same time, Ascendis Health announced the acquisition of Chempure for an undisclosed sum. This deal affirms Ascendis intention of being a vertically integrated player in the South African healthcare value chain. On the international front, Life Healthcare group acquired a 26% stake in Max Healthcare Institute of India in January this year while Mediclinic purchased a 44.39% stake in Emirates Healthcare Holdings.

The deal pipeline looks equally robust. Aspen Pharmacare Holdings Limited is planning to invest more than R1bn to advance technology in its South African manufacturing plants and is also looking for new partnerships in Africa while Adcock Ingram, as well as Litha continue to look for acquisition opportunities.

Meiring then points to other key drivers of opportunity. The biggest of these is the drive by the Department of Trade and Industry to earmark the pharmaceutical sector as one of the key sectors in the Industrial policy Action Plan. This is to get the sector to move towards the manufacture of active pharmaceutical ingredients.

This has led to setting up the R 1 billion pharmaceutical manufacturing plant under a joint venture known as Ketlaphela (I will live) between Swiss company Lonza, the Industrial Development Corporation and state owned pharmaceutical company Petchem.

Also in May this year, the Gauteng Economic Development Agency announced a tender to help develop a Pharma park in Gauteng, which will house some manufacturing.

The last area that Meiring points to is that of Public Private Partnerships. Apart from road management, healthcare is another area where PPPs have fared reasonably well. Hospitals in Limpopo and the Groote Schuur in the Western Cape have successfully hosted and benefited from such partnerships.

As both public and private sector players explore such partnerships, this is likely to lead to more investment opportunities. “This activity shows that the African continent is ripe for acquisitions and investments in healthcare,” says Meiring, expressing continued confidence in the prospects of the healthcare sector.