Restructuring in the healthcare sector publication

Restructuring in the healthcare sector:

What does the future hold?

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Publication

Restructuring in the healthcare sector: what does the future hold?

For businesses facing financial challenges, it is important that they map out potential risks and put in place robust contingency plans while having the courage and vision to explore options to streamline their business, if appropriate. Mark Naughton Corporate Finance

Synopsis

The UK’s healthcare sector has been hugely impacted by COVID-19, with the pandemic marking a turning point, accelerating the future of healthcare provision with increased investment in research and development, and an uptick in the deployment of technology and innovation to deliver services. Here, we explore the pressures the sector is facing, and the outlook for the future.

Gary Hargreaves Director Restructuring Advisory Preston +44 (0)1772 440 713 gary.hargreaves@frpadvisory.com

Mark Naughton Partner Corporate Finance Bristol +44 (0)117 203 3686 mark.naughton@frpadvisory.com

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Restructuring in the healthcare sector: what does the future hold?

Restructuring in the healthcare sector

Which sub-sectors are proving resilient?

What is the current state of play?

National occupancy rates in elderly care homes across the UK are currently just over 79 per cent, a fall from the pre-pandemic average of 87 per cent, according to research by social care consultancy Carterwood. Since the start of the pandemic, the ONS has recorded more than 42,000 deaths of care home residents in England and Wales involving COVID-19, and where care is a choice, especially amongst private payers, many families are choosing to care for relatives at home, as evolving working patterns has meant an increase in home working, with relatives now willing and able to provide more unpaid care. However, this means there are fewer new residents placed into care homes. As adult social care providers rely on new residents entering the sector, this reduction in private payers is causing additional pressure with even further tension building due to delays in local authority admissions as service users are moved along the care continuum. When they enter a home, their care needs are often more acute, and as a result, their stay is unfortunately much shorter. The rate of new monthly admissions needed is therefore much greater to compensate for the higher rate of turnover. The downturn in occupancy levels is causing a ripple effect phenomenon, with higher-quality homes admitting residents on lower fees than they would ordinarily consider, simply to fill beds. This has a negative effect on driving overall pricing down, impacting all homes throughout the care quality spectrum and creating scarcity of admissions at the lower end as well as greater financial pressure in an already challenging trading environment. Staff quality and retention remains a critical issue in the adult social care sector. The ability to attract and retain committed staff with the right skills is constrained by low pay levels, negative press, and a lack of a defined career path. The annual rise in the national minimum wage has increased operational costs for providers. Set against low fee increases from local authorities and reduced occupancy levels, this means there is growing financial pressures for all providers. We are currently seeing some insurers not willing to renew cover for some providers, or have increased premiums exponentially to accommodate the perceived higher level of risk, thereby exacerbating this pressure further. Some providers may find it difficult to procure business, clinical and public liability insurance over the coming months, or at least at a cost that they are able to absorb. Many funders are more cautious in their lending criteria in response to the challenges the care sector is facing, particularly where performance is poor. Transactions are taking longer to progress and complete and options remain limited for those providers with facilities at the end of term, who will have to refinance over the coming 12 months.

The healthcare sector acts as a cornerstone for daily life in the UK, and it has occupied a unique position on the frontline of the COVID-19 pandemic. Healthcare in the UK is a vast sector, encompassing everything from primary care to life sciences businesses and the bio-economy, with a range of manufacturing and supply chain companies also feeding into the industry. The NHS alone employs around 1.4 million people in the UK, and is the country’s largest employer. Before the pandemic, it treated more than a million patients every 36 hours. In 2020, total healthcare expenditure in the UK was £269 billion, according to the Office of National Statistics (ONS) – an increase in nominal-terms of 20 per cent on 2019’s spending. In March 2021, the Government announced £6.6 billion of new funding for health and care services to support the next phase of the NHS response to COVID-19, taking the total package of additional Government support for health services during the pandemic to £92 billion. With such a diverse mix of sub-sectors, the effects of the pandemic have been vastly different for each. While many businesses are experiencing strong growth, with an uplift in demand driven by the pandemic, many others continue to face considerable, long-term turbulence.

High-growth areas such as research and development, medical device specialists and specialist care providers are prospering, particularly given the significant scientific breakthroughs in response to the pandemic. Organisations providing high acuity of care, such as those providers of specialist mental health and learning disabilities services, have proven to be resilient to the challenges. There’s a notable uptick in interest from private equity investors in robust businesses in this area, which is proving to be a big driver of M&A activity. Another sub-sector proving to have a track record for stability is the medical consumables and devices arena. The increase in interest in these sectors from investors, coupled with a shortfall of attractive investment opportunities in other sectors hit by the pandemic, has led to strong valuations for robust, growing healthcare assets. The UK’s life sciences sector is globally renowned, and has proven itself to be a fundamental pillar of the UK economy. The sector generated almost £81 billion in annual turnover in 2019 and employed over a quarter of a million people across the country. With the Government focusing on transforming the nation into a life sciences superpower, growth in this sector is expected to surge in the years ahead. The immediate challenges for businesses facing financial difficulties will be funding the working capital they need to continue while managing ongoing liabilities. Over the coming months, businesses that have taken out Government support through the Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) will need to start making repayments. Added to this, many providers will be facing the repayment of deferred taxes, and any other deferred payment plans reached with trade suppliers and landlords. Meanwhile, expectations around performance and efficiencies by external parties, such as the Care Quality Commission, and local authorities continue to increase, meaning there is greater pressure for health and social care providers to achieve greater results with reduced resources. This uncertainty will make it difficult for businesses to plan their working capital needs with clarity. What challenges will healthcare businesses need to face in the future?

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Billion pounds in expenditure spent on healthcare in the UK during 2020 81 Billion pounds generated from the life sciences industry in 2019 Million people employed by the UK’s NHS 1.4

How has COVID-19 impacted the sector?

Although the pandemic has created opportunities for the healthcare sector, COVID-19 has also brought unprecedented challenges, and placed increased demands on the NHS. Many hospital trusts and GP surgeries face a backlog of non-urgent operations and treatment, combined with limited resources, staff and bed availability. The adult social care sector, which employed an estimated 1.52 million people in England prior to the pandemic, has faced similar frontline challenges this year, and a perfect storm is building as a result. Many providers and staff are severely fatigued from the physical and emotional challenges from the onset of the pandemic, and there is uncertainty on the road ahead in terms of occupancy recovery, Government policy reform and financial support, personal protective equipment (PPE) and other rising operational costs, as well as the accessibility of business insurance.

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Restructuring in the healthcare sector: what does the future hold?

What steps can they take to capitalise on growth opportunities?

What steps can operators take to manage risk?

For a long period during lockdown, many businesses in the adult social care sector have been focused on survival. With headwinds continuing, management teams must ensure they have mapped out potential risks, put in place robust contingency plans and built a clear roadmap for managing their future operations. The most important first step for businesses across the sector is building strong forecasting. Cashflow continues to be vital for developing resilience. Management teams will need to ensure they have detailed forecasts of their cash position and their working capital requirements, and how each could change over the weeks and months to come. Within this, it will be essential that they factor in any deferred liabilities – such as rent – as best as they can, considering a full range of potential scenarios to help navigate uncertainty. Should any shortfalls be identified, management teams will need to carefully review their options for moving forward. Once a business understands its cash position, it can then consider ways to give itself extra headroom. Here, management teams may need to consider reducing their business’ cost base in order to drive efficiencies. This can be done by reducing any discretionary, non- essential spending, or postponing any planned capital investment projects. For some, solutions will require raising additional equity or debt, while others might need to consider M&A options, the sale of the business itself, or divesting non- core parts of their businesses. Above all, clear and transparent communication with stakeholders is vital. Where businesses might need to seek concessions or further support, ensuring stakeholders are in a position where they can make informed decisions with accurate data will only improve their chances of reaching successful agreements. If management teams identify any complications within their business, it is essential that they seek support at the earliest possible opportunity to lengthen their recovery runway. Early action gives them, and their advisers, the maximum amount of time to find effective, sustainable solutions.

On the other end of the spectrum, many high-growth healthcare businesses will be actively exploring new routes to unlock further growth, such as expanding their product lines through M&A activity, or growing sales through international expansion. Some healthcare businesses, such as medical consumables suppliers, may have experienced a COVID-19 ‘bounce’, otherwise understood as an uplift in activity linked to demand driven by the pandemic. For any business seeking growth through a merger, acquisition or consolidation, it is important that both the management teams at the helm of these businesses, as well as the investors looking to back these businesses, take a close look at a business’ performance over the last year to understand its long-term capabilities. Management teams looking to draw up an accurate valuation of a business should review every aspect of its operations as a first step. Reviewing the whole picture, including the market environment, financial performance and operational specifics, will give management teams a strong understanding of the current value of a business. It will also help them to determine whether growth is sustainable in the long-term. Investing time and energy into fully understanding a business and its ambitions will allow management teams to take full advantage of growth opportunities in the months ahead.

The most important first step for businesses across the sector is building strong forecasting. Cashflow continues to be vital for developing resilience. Gary Hargreaves Restructuring Advisory

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What does the future hold?

Conclusion

Inevitably, the effects of the pandemic on the healthcare sector will continue to be felt for some time to come. For businesses facing financial challenges, it is important that they map out potential risks and put in place robust contingency plans while having the courage and vision to explore options to streamline their business, if appropriate. Businesses should focus on conserving cash, find ways to reduce costs and be competitive on price as a priority. Meanwhile in high-growth sub-sectors, it is more important than ever that management teams take the time now to review their market position and draw up the most effective ways to build scale, resilience and success, and capitalise on the growth opportunities available to them. There are a number of possible routes for businesses to take, and it is important management teams across the sector are ready to review, evaluate and perhaps adapt their operations to enable their business to evolve and thrive in the new economy. As they navigate the road ahead, in proactively seeking support and advice, where required, it will ensure they have the strongest foundation for recovery.

There are a number of possible routes for

businesses to take, and it is important management teams across the sector are ready to review, evaluate and perhaps adapt their operations to enable their business to evolve and thrive in the new economy. Mark Naughton Corporate Finance

Restructuring Advisory

Corporate restructuring

Corporate advisory

Contentious insolvency

Solvent restructuring

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FRP Advisory Trading Limited is a company incorporated in England and Wales registered number 12315855

July 2021

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