The year 2020 saw a wave of healthcare activity in the Asia Pacific region. Buyouts rose to a record high of 156 deals in 2020, up from 68 in 2019. Disclosed value reached a new peak of $16.9 billion compared with $11 billion the year earlier. This is attributed to macroeconomic trends such as aging populations and increasingly affordable healthcare, and favorable government policies encouraging local manufacturing and development of healthcare products.
Not surprisingly, biopharma contributed significantly to the increased number of buyouts, accounting for over half of the region’s deals. Asia Pacific healthcare investors chose to place their bets on domestic innovation in biopharma and medtech. In January 2021, DKSH Holding Limited announced two acquisitions in Asia Pacific, an agreement to acquire Bosung Scientific, a Korean life sciences distributor, and the acquisition of MedWorkz, a medical device business in Singapore.
Healthcare IT buyouts, including health tech, through sponsor investments and initial public offerings also were active. For developed markets, investors focused on nonhospital deals. Singapore investors have been investing heavily in healthcare startups due to the growing openness to health tech innovations which address the needs and problems of healthcare. For example, Lucence Diagnostics, a genomic medicine company from a Singapore-owned laboratory, raised S$20 million (approximately $14.8 million) from investors for their technology to diagnose cancer through blood tests. In respect of healthcare providers, emerging markets with less developed provider infrastructure saw a rise in hospital deals. In such markets, investors were inclined towards hospital targets such as acute care centers 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 $203 million.
Significant investment opportunities in Singapore and Asia Pacific also were exhibited through the influx of digital health or “HealthTech.” Not only did 2020 see an increase in new players in the digital health market, existing traditional healthcare facilities started to recognize the imperative need for digitalization even in the post-COVID-19 world. The interest in investment opportunities in digital health has been prominent in Singapore even before the COVID-19 pandemic. The Medical Technology market is the fastest-growing segment in healthcare. In the Asia Pacific region, the medical market has become the second-largest market globally reaching $133 billion (S$190 billion) from $88 billion in 2015.() Healthcare companies have also used the increase in investments to expand their businesses. For example, Singapore-founded Verita Healthcare Group has announced in late 2019 that it will be investing into three digital health companies, namely nBuddy, CelliHealth, and Hanako, as part of its international expansion strategy. TE Asia Healthcare Partners, a Singapore-based private specialty healthcare group, will also be injecting $90 million to open specialized hospitals in Southeast Asia to increase their regional footprint.
Finally, the legal considerations for healthcare M&A deals remain largely similar for M&A deals generally in the post-COVID-19 world. Such considerations are as follows:
VALUATION AND PURCHASE PRICE
The pandemic has brought about uncertainty in the commercial world, and purchasers increasingly have to consider whether the effects of the pandemic will need to be taken into account in assessing the valuation of target companies, and if so, how that may be done. This is exacerbated by the high likelihood of unforeseeable events and/or fluctuations that may affect the valuation and purchase price of these target companies even between signing and completion, therefore encouraging purchasers to consider price adjustment mechanisms or other mechanisms designed to mitigate the potential impacts of such fluctuations.
LEGAL DUE DILIGENCE
Purchasers may have to consider expanding the scope of legal due diligence in the wake of the pandemic in order to better assess the impact of the pandemic on the target business, in particular areas such as:
- the target business’s level of exposure to and reliance on jurisdiction which are severely affected by the pandemic, which may impact the viability and future prospects of the business;
- the ability of the target business and its counterparties to perform their contractual obligations under material contracts and the consequences of nonperformance, including reviews of material contracts for force majeure, material adverse change, and related termination provisions;
- customer and supply chains, the extent to which they are disrupted by the pandemic, and the availability of alternative sources;
- the target business’s continuity planning and crisis management strategies;
- solvency of the target and the impact on the target’s ability to service existing debt; and
- compliance with applicable laws, regulations, and advisories relating to the pandemic. The pandemic and its restrictions and social distancing guidelines have also made on-site visits for the purposes of due diligence extremely challenging and near obsolete, which has prompted a significant increase in the use of virtual data rooms and other forms of technology to conduct legal due diligence to circumvent such restrictions. The use of technology may also help expedite due diligence to allow investors and/or purchasers to capitalize on market opportunities efficiently in this period of great volatility.
TERMINATION, FORCE MAJEURE, AND MATERIAL ADVERSE CHANGE
The pandemic has also prompted both purchasers and sellers to reconsider the termination and force majeure clauses of transaction agreements, as well as the definition of “material adverse change” for the purposes of allowing parties to withdraw from the transaction upon the occurrence of such material adverse change.
Purchasers may wish to negotiate for broader clauses, allowing them to retain the flexibility of withdrawing from or terminating the transaction in future events similar to the pandemic, or if the current situation in light of the pandemic does not improve. Sellers, on the other hand, in an attempt to protect their interests, may consider negotiating for clauses with a more limited scope of applicability, such that the impact of the pandemic have been well considered by both parties and this will preclude purchasers from walking away from a transaction generally by reason of the pandemic and the impact it has on the target business. Regardless, parties will now have to consider the specific applicability of such clauses and ensure that such clauses are well-drafted and precise enough to capture the allocation of risk as envisaged by the parties, rather than relying on standard clauses that may not necessarily capture such considerations in the applicable jurisdiction(s) (the law regarding force majeure varies by jurisdiction).
Besides relying on termination or force majeure clauses, purchasers and sellers could rely on the COVID-19 (Temporary Measures) Act (in relation to Singapore) that has provided relief for parties that are unable to carry out their contractual obligations due to the pandemic.
REPRESENTATIONS, WARRANTIES, AND INDEMNITIES
Parties may need to reconsider the representations and warranties given in the context of the pandemic, and to be mindful of providing subjective and forward-looking warranties that may easily be subjected to change due to the uncertainty of the pandemic.
Sellers may also consider incorporating exclusions in the transaction agreement to limit the ability of the purchaser to bring COVID-19-related claims across all warranties or indemnities generally. Parties may also look to warranty and indemnity insurance as a way to apportion risk and reduce losses as a result of the pandemic. Sellers may use this insurance as a way to ensure a “clean exit” and a strategic risk management tool for M&A transactions.
CHANGE OF LAW CLAUSES
Various jurisdictions are rapidly implementing new laws and regulations in order to cope with the impacts of the pandemic, and Singapore is no exception. Parties will therefore have to consider mechanisms that help to mitigate the impact of such new legislation on the transactions, and discuss the allocation of liability for changes in legislation that might have a detrimental effect on the transaction or the target’s business prospects.