The value of the GCC’s healthcare market has grown steadily in recent years and there is little sign that any slowdown is on the horizon.
The industry is forecast to be worth $71.3bn by 2020, according to Alpen Capital. The investment bank expects the GCC healthcare sector to record 12.1 percent compound annual growth rate (CAGR) between 2015 and 2020, after 10.3 percent CAGR between 2008 and 2013.
“We are positive about the prospects of the healthcare industry in the region,” Alpen Capital executive chairman Rohit Walia says.
“To meet the region’s rising demand for healthcare, the GCC governments are making huge investments as well as encouraging the private sector to invest in the healthcare sector. The introduction of mandatory health insurance across the region is also likely to boost overall spending. The sector has seen a significant increase in M&A [mergers and acquisitions] activity and the trend of consolidation will continue. Overall, the momentum is strong for the GCC healthcare sector.”
A number of factors are driving the growth in the healthcare market and making it an attractive target for investors. GCC population growth (4.4 percent per annum on average over the last ten years) and rising costs are key factors driving growth in investment.
The region also has a growing population of elderly people, partly a result of improvements in healthcare services. The average life expectancy in the GCC states is now approaching 77 years, above the global average and in line with other affluent countries.
The UAE will continue to be the GCC’s second biggest healthcare market, representing 18.1 percent of the total in 2018, according to Alpen Capital.
A rise in conditions linked to sedentary lifestyles and modern diets, particularly cardiovascular disease and diabetes, is boosting demand for healthcare services, while pushing up costs. The GCC population will continue to grow, though perhaps at lower rates than before, creating an ever larger base of customers with increasing life expectancy. The demand for hospital beds in the GCC region is projected to grow at a 2.3 percent CAGR, from an estimated 101,797 in 2015 to 113,925 in 2020.
Abdelhamid Suboh, partner and life sciences and healthcare industry leader at Deloitte Middle East, says the region’s increased ability to afford healthcare is impacting demand.
“Driven by population expansion and rising wealth, growth in Asia and the Middle East markets will be particularly rapid as public and private healthcare systems develop in some countries. In addition, the trend towards universal healthcare is likely to be a growth driver in numerous markets. However, the pressure to reduce costs, increase efficiency, and demonstrate value will continue to intensify,” Suboh says.
The rise of lifestyle-related ailments in the Gulf region is a significant public health concern.
The region’s high projected growth rate is partly because of relatively low levels of investment currently. At just 4.9 percent of gross domestic product (GDP), Bahrain’s spending on healthcare is the highest in the GCC, with Saudi Arabia and the UAE spending only 3.2 percent, according to Alpen Capital. Globally, the average is 10 percent of GDP.
However, BMI Research estimates the UAE’s healthcare expenditure to be higher, at about 4.2 percent of GDP, while the per capita figure is $1,739.
Across the GCC, only Qatar spends more than $2,000 per head annually on healthcare, according to Alpen Capital, with the average annual spend across the GCC at $994 per head. Although this is close to the global average of $1,038 annually, it is well behind the US average of $8,803 per head. The US has the largest healthcare budget in the world and reducing it was a key plank of Barack Obama’s presidency.
Significantly, GCC governments fund about 70.3 percent of total spending on healthcare in their countries, well above the global figure of 60 percent and the American average of 49 percent. It is this high proportion of government expenditure, at a time of lower oil prices, coupled with the projected growth in spending that is prompting governments to reassess how healthcare services are provided.
Medcare Hospitals, the healthcare division of Aster DM Healthcare, operates 12 facilities in the UAE.
“After assessing the demand and supply indicators, the GCC healthcare sector appears primed for a major expansion to fill the gap,” Alpen Capital notes. “Governments are formulating long-term strategic plans to enhance the supply-side factors as well as the quality of care. The GCC states have introduced initiatives such as soft loans and land grants to encourage private sector involvement. There are several mega projects under development, which, once completed, are likely to boost the region’s health infrastructure.”
Mandatory health insurance for expatriates is expected to reduce healthcare costs, especially for governments. Dubai has been leading the way, introducing universal healthcare insurance for foreigner residents in January 2014. According to Dubai Health Authority, more than 98 percent of residents, or about 4 million people, are now registered under the mandatory health insurance scheme.
Under the programme, sponsors of foreign workers earning less than AED4,000 per month ($1,090) is legally obliged to provide a minimum-standard insurance package dubbed the ‘Essential Benefit Plan’. The benefit has now also been extended to include workers’ family members. Mandatory health insurance is likely to add impetus to the healthcare industry’s growth by ensuring at least basic cover for residents who previously may have avoided seeking treatment except in emergencies.
Rohit Walia, executive chairman of Alpen Capital.
As a result of this positive outlook for growth, investors are active in the sector and there has been an increase in investment activity. Recent deals include Aster DM Healthcare’s purchase of a 57 percent stake in Sanad Hospital in Riyadh for $245.1m; South Africa-based Mediclinic International’s acquisition of Al Noor Hospitals Group for $2.2bn in 2016; NMC Health’s acquisition of four healthcare companies in the UAE since 2015, including the fertility clinic Fakih IVF, which it picked up for $189.5m.
Private equity firms also are taking the sector seriously. Dubai-based Amanat Holdings announced earlier this month that it had acquired a 13.18 percent stake in International Medical Company for $96.97m, its second healthcare investment in Saudi Arabia following the purchase of a 35 percent beneficial interest in Sukoon International Holding for $47.75m in August 2015.
Amanat CEO Khaldoun Haj Hasan sees great value in the Saudi healthcare sector.
“Amanat believes that Saudi Arabia’s socio-demographic outlook, as well as regulatory changes expected to expand the role of private hospitals, will continue to create opportunities for market-leading providers like IMC,” he tells Arabian Business.
Demand for hospital beds in the GCC is expected to reach 113,925 by 2020.
NMC Health also continued to make acquisitions in 2016. In August, it bought a 70 percent stake in As Salama Hospital in Al Khobar, Saudi Arabia, for $28m, and a 67.5 percent stake in another facility in Jeddah. In December, it was reported that the group had offered $560m to buy Al Zahra Hospital in Sharjah.
Meanwhile, UAE-headquartered Aster DM Healthcare, which operates 18 hospitals, as well as medical clinics and pharmacies, has plans to open five more hospitals in the GCC and India. Last year, its chairman, Indian businessman Dr Azad Moopen, confirmed plans to sell a stake through an initial public offering in India, with the hope of raising $234m.
While the number of deals indicates an active market, there are limitations for some investors, with considerable funding required.
Amanat Holdings’ acquisition of IMC, for example, values the 300-bed hospital at about $740m, representing the high values placed on the most attractive investments in the healthcare sector.
Saudi Arabia will continue to create opportunities for private healthcare providers in the region.
NMC Health’s Royal Hospital at Khalifa City in Abu Dhabi was built on land donated by the government and still cost an estimated $200m. The year before NMC Health purchased Al Zahra Hospital in 2016, the facility is reported to have made $38.8m in profit. With a reported acquisition price of $560m, the price-earnings ratio (the share price relative to its per share earning) is estimated at a high 14.5. So far, the performance of the region’s healthcare companies appears to justify these lofty valuations. In the three years to 2016, eight listed healthcare companies followed by Alpen Capital registered average annual revenue growth of 15.6 percent, an earnings before interest, tax, depreciation and amortisation (EBITDA) margin of 26.3 percent, and return on assets (ROA) of 13.5 percent.
In addition to the cost of acquiring and building, medical professionals are among some of the most highly paid employees. The small GCC talent pool also means experts are often brought in from abroad, adding expenses such as repatriation costs and school and housing allowances.
GCC governments are relying on the private sector to help plug the region's healthcare shortfall.
Efforts are underway to create more training regionally, with Dubai recently announcing the establishment of the Mohammed Bin Rashid University of Medicine and Health Sciences. Nevertheless, expatriates account for the vast majority of physicians and are likely to do so for the long term. Competition to hire staff is only likely to intensify and drive up salaries, especially as new hospitals and clinics come online in the region.
A number of factors are converging to drive long-term growth in the region’s healthcare sector. Populations are growing and aging, the incidence of lifestyle-related ailments is on the rise and mandatory insurance is ensuring every resident has access to basic healthcare services. Investors that are well-funded and take a long-term view on the sector stand to benefit.
Aster DM Healthcare head Dr Azad Moopen.
Saudi Arabia is planning a major expansion of the healthcare sector in line with its Vision 2030 strategy.
Khaldoun Haj Hasan, CEO of Amanat.