The healthcare landscape in the UAE and the wider GCC region has changed drastically compared to a few years ago, not only on the back of COVID-19, but on account of the evolving maturity stage in the segment. While healthcare has grown in importance and been an attractive space for various investors and conglomerates to venture into, its importance and defensiveness have only been underscored by the pandemic.
In an interview with Omnia Health Magazine, Karim Amer, Head of Healthcare and Education, Corporate and Investment Banking Group, Mashreq Bank, discusses investment trends in healthcare in the GCC region. Excerpts:
What kinds of opportunities should one look at when investing in the healthcare sector?
COVID-19 has highlighted several areas of opportunity and catalysed multiple trends, which have been highlighted in detail in our whitepaper, published in May 2020. To name a few, these include:
The need for investment and further development of digital infrastructure and telehealth solutions, to facilitate the shift of primary care delivery away from hospitals.
A greater reliance on domestic manufacturing in equipment and pharmaceuticals space. Till date, roughly only 20-30 per cent of all pharma product consumption in the GCC is manufactured locally. This is expected to grow by a minimum of 10 per cent over the next five years.
Investment in general hospitals have been slowing down and is expected to continue to reduce as a component of healthcare expenditure with the focus shifting to speciality hospitals and establishing centres of excellence for non-communicable diseases and long-term care.
A growing number of M&A transactions that are expected to materialise over the next 12 months, as larger players look to consolidate their positions at possibly more favourable valuation multiples, and smaller players who are still profitable look to monetise and de-risk.
How do healthcare providers create profitable, sustainable financing structures for better access to financing?
Paramount importance and focus should be placed on corporate governance and transparency. In multiple sectors over the past two to three years, serious lapses in Corporate Governance and lack of transparency as well as misrepresentation, have led to some very high-profile cases for major organisations, not only in the UAE and not only in healthcare, but in Europe and South East Asia as well.
This would have a significant adverse effect on both lender and investment appetites, as well as willingness to deploy liquidity into sectors or geographies who have recently shown an overall poor track-record and performance in terms of Corporate Governance and Transparency. Especially now, in today’s unprecedented conditions, the importance of strong corporate governance and transparency simply cannot be overstated.
The healthcare ecosystem is a very complex one with multiple equally important stakeholders including providers, insurers, regulators and of course the patient, not to mention lenders and financiers. Collaboration between the first three stakeholders is crucial to ensure proper, fair and sustainable financing structures can be put in place by lenders, which will in turn help boost investor confidence in the sector and create more avenues to diversify the sources of funding through the debt capital markets and equity capital markets.
It is, of course, key to note that decently leveraged companies who have historically not relied excessively on bank debt alone, but rather on multiple sources of funding and their own decently capitalised balance sheet, have retained access to a cushion of liquidity through standby working capital facilities or revolving committed facilities.
What are the key growth opportunities in the hospital industry in the GCC region?
If we look at the number of hospitals, it has almost doubled across all GCC countries in the last 10 years. In the UAE specifically, there has been a material growth in the number of hospitals to upwards of 150 hospitals today (up from 107 in 2013). However, there remains to be significant gaps in supply though when it comes to speciality and centres of excellence, long term care and rehabilitation. If you look at the statistics, they still show that an average of 70 per cent of total deaths in the GCC are attributed to non-communicable diseases such as diabetes, cardiovascular disease and cancer, thus highlighting the need to shift investments to specialised care and building centres of excellence in non-communicable diseases (cardiovascular diseases, diabetes, oncology). To give that some more perspective, 17 -25 per cent of GCC populations suffer from diabetes.
Based on the above, providers, investors and regulators are all looking towards specialisation and centres of excellence in areas such as cardiology, oncology, diabetes, IVF and long-term care. The key challenge for the GCC region on that front remains the difficulty of attracting and retaining skilled and highly qualified healthcare professionals, which in turn would tempt patients to pay a premium for specialised facilities within the GCC rather than treatment abroad.
Investment in speciality hospitals is expected to show double-digit growth over the next few years and around 45 per cent of the total GCC healthcare expenditure is expected to be realigned to non-hospital delivery models, particularly for primary and long-term care.
COVID-19 has been a disruptive catalyst across every industry. What are some of the key challenges faced by the healthcare industry?
The healthcare sector, in particular, had to face macroeconomic and operational challenges while continuing to operate under extraordinary and unprecedented conditions fighting the outbreak itself. Revenues and cash flows of healthcare providers had especially suffered a material blow over three months, from March to May, with the national sanitisation campaign and halt of elective procedures.
While both moves were instrumental in fighting the pandemic, they reduced both outpatient and inpatient volumes, albeit there has been material recovery from the months of June onwards. Another key challenge was the supply chain disruption earlier on during the COVID-19 outbreak. The reduced inflow of cash, coupled with the legacy challenge of receivable collection and minimising insurance claim rejections combined, posed a challenge on overall liquidity management for some players, particularly the smaller or less established ones.
One of the key challenges going forward will be driving cost efficiencies as providers seek to preserve healthy margins and liquidity and investment in digital infrastructure and process outsourcing will be a major part in overcoming that.
COVID-19 has accelerated the shift towards digitisation across different sectors. What sort of changes are we likely to see in the healthcare industry going forward?
With COVID-19, virtual care has been possibly one of the most talked-about and important topics of all. The medtech industry lags behind its larger healthcare peer, the pharmaceutical industry, and has a lot of room to incorporate digital solutions. The four pillars of digital transformation in the medical technologies industry included manufacturing, care delivery digitisation, connected devices, and connected patients. The market for those is expected to be worth US$178.35 billion in 2021 and grow to US$241.81 billion globally by 2024.
In May 2020, we held a webinar with industry experts titled “Healthcare: What is in store beyond COVID-19”, which examined the state of healthcare across GCC – and found that the subject of telehealth has taken the forefront of the discussion, as providers are now looking to offer safe and convenient solutions for patients, at least for primary consultation while at the same time materially improving their own efficiency, as doctors are able to deal with more patients.
In our whitepaper published in the same month, we predicted investments in digital infrastructure in the GCC to double from US$500 million to upwards of US$1 billion and virtual visits to grow four folds by Q4 2020. Studies show that roughly two-thirds of patients in the region would be ready to engage in AI-enabled solutions – a number that is three times higher when you compare it to Europe or the U.S., possibly on the back of the GCC having a predominantly younger and more tech-savvy population.
Based on all of the above, the virtual care market in the GCC is expected to reach a staggering US$6 billion over the next three years, primarily driven by the digital transformation and AI adoption plans in the UAE and Saudi Arabia. Overall, digital infrastructure investment including virtual care, remote patient monitoring and AI is expected to account to at least a third of total healthcare investments between now and the year 2030.
How important are public-private partnership (PPPs) to improve the overall healthcare infrastructure in the GCC region?
Even prior to COVID-19, the GCC region was increasingly looking at alternative models to build, operate and maintain new and existing public facilities delivering health services. PPPs may bring new opportunities for efficiency, mobilisation of private capital and expertise, and even service delivery innovation, especially as they continue to become a more regular component of the policy landscape across sectors, including healthcare.
However, many examples of success with PPP arrangements come from developed markets. In the UK, for example, 85 per cent of all hospital projects since 1997 have been done under the Private Finance Initiative (PFI) programme through which 130 hospitals with an investment of US$22 billion in capital value have demonstrated several tangible benefits such as 15-20 per cent lower construction cost, 10-45 per cent lower lifecycle cost and 60-70 per cent reduction in construction delays.
There are multiple benefits that can be derived from the PPP model when applied correctly based on experiences in most of the developed countries, where the assets have been developed with lower up-front capital requirement, lower project cost, and better-quality infrastructure, and this has been delivered at speed and efficiency that hasn’t been experienced in traditional models. With the COVID-19 pandemic, the need for public-private partnership was further enhanced to cater better to the increased demand in many emerging areas like long term care, home health services, along with the conventional hospital and primary care sectors.
In light of all the above, it is expected that 35 per cent of all hospital projects in the GCC over the next five years would involve the private sector versus the current level of 25 per cent. This is expected to be primarily fuelled by the PPP agendas in the largest two healthcare markets in the region – Saudi Arabia and the UAE.
Lastly, tell us about Mashreq’s role in the healthcare industry?
Mashreq has been one of the active banks in Healthcare for decades. We were amongst the first banks in the region to introduce a completely separate specialized industry vertical within the bank – that is dedicated to Healthcare. As a step towards more in-depth coverage of the healthcare space, Mashreq bank successfully launched our healthcare Knowledge Partnership with Frost & Sullivan, known as Mashreq Healthcare Leaders Forum. Mashreq Healthcare Leaders Forum is the first bank / FI backed healthcare forum in the Middle East. It aims to bring together thought leaders from across the Healthcare sector value chain on one platform, aided by insights and research, to discuss ongoing and expected developments in the Healthcare space. The forum makes Mashreq the first bank in the Middle East with that level of integration into the Healthcare space.
By coupling our sector specialization along with our versatile and comprehensive product offering which includes bespoke solutions devised specifically for the healthcare sector, we aspire to become a strong partner of the healthcare ecosystem in the region, rather than just a regular balance sheet bank or lender.