Asia-Pacific investing: Riding a wave of domestic innovation

Vikram Kapur, partner and APAC head of healthcare at Bain & Co, looks at PE investing in Asia-Pacific over Covid and highlights the themes in place for the future

Private equity, like the broader economy, faced acute challenges in 2020 brought on by the global pandemic. Yet buyers and sellers still managed to complete deals at a brisk pace, and healthcare showed remarkable resilience given the extent of the disruption and the lockdowns imposed in most countries. Although total healthcare private equity deal value dropped by 17% in 2020 from a banner 2019 to US$66bn, deal volume increased by 21% to a total of 380 deals, compared with 313 the year earlier.

For the first time, Asia-Pacific logged the most buyouts — 41% of global deals — and it was also a record year for deal value of US$16.9bn, up from US$11bn in 2019.

Four themes summarize healthcare private equity investing in Asia-Pacific

• Macro trends and favourable government policies again lifted healthcare activity in the region, which saw a surge in buyouts to a record high 156 deals during 2020, up from 68 in 2019
• Biopharma fuelled much of the rise as the most active sector, accounting for over half of the region’s deals
• Asia-Pacific healthcare investors increasingly focused on domestic innovation in biopharma and MedTech, especially in China where the government has supported development of local companies through various incentives
• Healthcare IT buyouts, including health tech, through sponsor investments and initial public offerings were also active

We’ve kept an eye on small venture healthcare assets in Asia-Pacific for years, and 2020 demonstrated that these are evolving into growth equity opportunities for investors. While other regions experienced declines in volume and disclosed value, the number of buyouts in Asia-Pacific during 2020 rose sharply. Strong growth was seen in biopharma, with 86 deals in 2020 versus just 28 in 2019. Healthcare provider deals, historically the most active sector, saw a more modest increase to 39 for the year, up from 29. China led the way in overall activity, accounting for just over 60% of deals in the region, up from 41% in 2019.

Asia-Pacific investors have focused their sights on healthcare in the hope that their knowledge of the local landscape will give them an advantage. Increased appetite in capital markets for healthcare companies in the region has pushed valuations higher.

Additionally, private equity sponsors have also become more willing to invest in early-stage assets alongside venture partners given misalignments in supply and demand for attractive, mature healthcare targets.

Regional trends and government policies lift domestic companies

Underlying the region’s growth are several powerful macro trends: an aging population, increasingly affordable care, and a shift to universal healthcare coverage in markets such as India, Indonesia, and the Philippines.

In the policy arena, many governments are offering incentives for local manufacturing and development of healthcare products, such as China’s expanded reimbursement for innovative drugs. In parallel, governments are pressuring local and multinational incumbents through centralized volume-based drug and MedTech procurement policies. These interventions should help level the playing field and fuel further local innovation, particularly in biopharma and MedTech.

Besides these macro trends and government interventions, Asia-Pacific’s adoption of digital health solutions is quickly outpacing other regions, skipping some of the stages more mature economies passed through and going straight to next-generation solutions.

Healthcare providers

Hospital deals in emerging markets, non-hospital deals in established markets
Buyouts bumped up to 39 deals, compared with 29 in 2019, with a different emphasis in emerging and established markets.

In emerging markets with less developed provider infrastructure, investors tended to focus on hospital targets such as acute care centres providing multidisciplinary or general care.

For example, GIC, the Singaporean sovereign wealth fund, in partnership with Vingroup, invested in the Vietnamese private hospital operator Vinmec for US$203m. A similar health centre deal was made by TPG Growth, which purchased Apollo Hospitals Dhaka. Finally, KKR bought Saket City Hospitals as part of the Max Healthcare platform, its buy-and-build platform in India that went public in 2020.

In more developed markets, by contrast, non-hospital provider deals involving alternative sites or specialized care garnered more investor interest. Nichii Gaakan, a Japanese provider of senior care, was acquired by Bain Capital for US$1.6bn, the region’s largest provider deal for the year. Similarly, Juvis, a South Korean obesity treatment and management provider, was purchased by STIC Investments.

In Australia, interest in primary care providers jumped in 2020, highlighting the segment’s importance in the face of Covid. Private equity funds finally began to focus on scale platforms of general practice providers in the region.

For instance, Healius, which operates medical centres across Australia, was acquired by BGH Capital for US$343m. Later in the year, Livingbridge invested in Better Medical and Smart Clinics, and intends to combine the two general practice groups to form the fifth-largest practice platform in the country.

Biopharma


A surge of activity
Activity exploded during the year with a marked increase in deals to 86, up from 28 in 2019. Several investment themes led the way.

First, investors continued to promote promising cell and gene therapies in developed markets. For instance, CARsgen Therapeutics, a clinical stage immuno-oncology firm focused on CAR T-cell therapies in China, received a US$186m investment from Loyal Valley Capital. Curocell, a South Korean developer of CAR T-cell therapies for cancer, also received a consortium investment.

Second, investors demonstrated greater willingness to take on molecule-specific risk in early-stage investments in China, where the government has invested to bring drug innovation onshore through various incentives. Of the 86 biopharma deals in the region, 58 were Chinese. Further, Chinese targets accounted for 16 of the 24 deals exceeding US$100m in disclosed value. For example, Hualan Biological Engineering, a China-based company engaged in the R&D of bacterial vaccines, viral vaccines, and plasma products, received a US$290m investment from Hillhouse.

The third theme concerns interest in Indian biopharma supply chain assets as the sector continues to diversify beyond China. JB Chemicals and Pharmaceuticals, a manufacturer for pharmaceutical formulations, received a roughly US$410m controlling stake investment from KKR, and Carlyle acquired a controlling stake in SeQuent, an animal health-focused pharmaceutical company, for US$215m.

MedTech

Developing local companies
MedTech experienced a surge in activity, reaching 30 deals for the year compared with ten in 2019. Fully 25 of those 30 deals were with Chinese companies.

In China, the government has encouraged development of local MedTech ecosystems and has instituted a volume-based procurement program to help local firms, with the government acting as a negotiator for all hospitals in the country. This has spurred investment interest in newly growing innovative local assets, especially for high-value consumables.

For example, Shanghai MicroPort CardioFlow MedTech, a producer of cardiac valve intervention devices, received investment from a consortium of buyers led by Hillhouse Capital for US$130m. Hillhouse also led a 2019 pre-IPO investment in Peijia Medical, a MedTech developer focused on heart valve disease, and the company raised US$348m through an IPO in 2020.

Healthcare IT

Sponsor investments and IPOs
Healthcare IT, including health tech, logged only five deals, though sponsor investments and IPOs remained active channels for moving these assets. Trustbridge Partners, as well as Hillhouse Capital and Tencent Investment, led a US$500m investment in DXY, a leading Chinese digital health platform. And JD Health, the digital-health arm of the Chinese e-commerce company JD.com, received US$830m in pre-IPO investment from Hillhouse, then raised US$3.5bn through its IPO.

Searching for assets that show early signs of a rebound
Given the growth trajectory that Asia-Pacific has shown, we expect investors to continue showing keen interest in the region, especially considering the sharp growth of local innovation from high-tech biopharma and MedTech targets and the strong demand for high-quality care in emerging Asia-Pacific. As private equity funds look for ways to put their capital to work, we expect fast transactions for those assets that can show early signs of returning to past performance levels. A few themes should continue to play front and centre in the region:

• Diversification of supply chains for MedTech and biopharma, to reduce risk to drug and device developers
• A growing need for healthcare IT and digital solutions that fit within the region’s provider models
• Provider growth fueled by the reopening of medical tourism markets after the pandemic abates