The COVID-19 pandemic created many uncertainties and challenges for investors and operators alike across the Middle East, including in the United Arab Emirates, which is often considered a regional healthcare and business hub. As a result, 2020 saw many transactions in the healthcare sector either abandoned or put on hold, but the region has since demonstrated signs of a strong recovery in the transactional space in general and particularly in the healthcare industry.
Growth in the healthcare industry continues with the entry of new, mostly foreign service providers and hospital operators to the market. With the consolidation of existing market players, in response to continued population growth, mandatory health insurance schemes, and a burgeoning health tourism market that is bolstering the United Arab Emirates’ (UAE) established holiday tourism industry, the level of investment into the UAE healthcare sector is growing.
Transactional activity in the healthcare space since early 2021 was further fueled by continued asset sales arising from the liquidation of NMC Health, one of the largest healthcare providers in the UAE, and a drive toward consolidation spurred by the UAE’s sovereign wealth funds, including Mubadala and ADQ. In fact, ADQ recently launched its healthcare platform, Pure Health, which is set to become the UAE’s largest, highly integrated healthcare provider with the consolidation of various healthcare assets from its portfolio within Pure Health, including Abu Dhabi Health Services Company (SEHA), the National Health Insurance Company (Daman), Tamouh Healthcare, Yas Clinic Group, and Abu Dhabi Stem Cell Center.
The uncertain future and the unprecedented spike in demand for healthcare caused by COVID-19 has also impacted transactional dynamics across the Middle East. Key changes to mergers and acquisitions (M&A) transactional trends which have developed since the onset of the pandemic are summarized below.
Material Adverse Change Clauses (MAC Clauses) are often used in M&A transactional documents to allow the purchaser the right to walk away from a deal in the event of a material adverse change occurring between the signing and the closing of the transaction. Purchasers have become more focused on MAC Clauses in the aftermath of COVID-19, particularly in light of the disruption to markets and supply chains that the early days of the pandemic brought, and the shift in public healthcare resources towards emergency pandemic responses. MAC Clauses have become increasingly important because of the difficulty in arriving at valuations as the healthcare industry and regulators across the region attempt to adapt to the pandemic and improve the resilience of primary and emergency healthcare systems. Additionally, MAC Clauses have taken on increasing importance in transactions that involve assets with single or few revenue-generating contracts tied to public insurers, where any change in reimbursement policies could have significant impacts on revenue streams and future prospects.
Market uncertainties have generally compounded the significance given to the MAC Clause in drafting and negotiation. Prospective buyers wishing to insert a MAC Clause should pay careful attention to the wording of the clause to ensure that it is broad enough to pick up pandemic effects, and there have been efforts from buyers to introduce clear language to that effect.
On the other hand, sellers will try to insert language to the effect that pandemic responses are part of their ordinary course of business in order to limit the buyer’s ability to invoke a MAC Clause and retain flexibility to adapt to pandemic-related changes. While UAE law generally seeks to preserve the intent of the contracting parties, it is important that drafters of a MAC Clause ensure the language is sufficiently clear in a UAE-law-governed contract so that the intent of the parties can be discerned clearly by any adjudicator.
It is worth noting that it is common for UAE M&A transaction documents to be governed by English law, in which case the drafting of the MAC Clause should take into consideration English court precedents in this regard.
As various businesses began to see a recovery from the impacts of COVID-19 in 2021, deferred consideration components (such as earn-outs) began to appear more often in M&A transactions. Under these arrangements, consideration is often held back and subject to change dependent on future profitability of a target company. This position was motivated in part by the difficulty of using historic 2020 figures as a benchmark for valuations given the impact of COVID-19 on 2020 results, as well as the difficulty of predicting recovery outcomes. For example, various healthcare businesses involved in responding to the pandemic witnessed particular growth as a result of the pandemic, and purchasers are sometimes wary that such growth is not reflective of long-term prospects.
The pandemic complicated the completion of legal, financial, and commercial due diligence for certain transactions, and gave rise to new areas of focus. Topics of increased interest post-pandemic include the ability of a healthcare target to adapt to regulatory changes resulting from the pandemic, crisis management policies and procedures, implementation of social distancing and other safety policies and procedures, resilience of customer networks, supply chains and human resources, and the effect of the pandemic on legacy contracts involving force majeure-type provisions.
While M&A activity in the healthcare space across the UAE as well as Saudi Arabia continued to pick up throughout 2021, transactions appeared to focus on specialized healthcare sectors such as long-term care, rehabilitation, fertility centers, and cosmetics, where large healthcare groups have been aiming to expand their capacity and geographical reach along with the ongoing pressure driven by sovereign groups to drive consolidation across the industry. For example, Morgan Lewis advised a consortium of private equity sellers in the sale of Cambridge Medical and Rehabilitation Centre in 2021 to Amanat Holdings, a UAE-based healthcare investment group. The $232 million transaction represents one of the biggest healthcare deals in the region to date.
There has also been an increased focus on HealthTech and MedTech transactions, fueled by the need for telehealth generated by the pandemic, the potential for improving processes to optimize healthcare delivery, and regulatory developments such as the introduction of robust health data privacy regulations.
Regional healthcare providers have traditionally been responsible for the largest portion of transactions in the healthcare space, with a few large and prominent healthcare groups dominating the market. However, recently, the space has been generating increased interest from private equity investment funds. Investors see potential for growth through combining capacities, diversifying portfolios, undertaking “greenfield” projects in underserved markets (particularly Saudi Arabia), and optimizing performance in oversupplied markets. Investors are also demonstrating increased interest in HealthTech offerings, including artificial intelligence and cloud-based solutions for the delivery of healthcare services. As such, there has been a rise in regional private equity funds with strategies focused on investments across the healthcare value chain.
In summary, the healthcare sector across the UAE and the rest of the region witnessed significant activity throughout 2021. Growth is likely to continue into 2022 and beyond, with transactional activity spurred by continued consolidation efforts and bolstered by increased private equity interest, particularly in technology-driven healthcare solutions. However, it is possible that the impact of the pandemic on the healthcare industry across the region is yet to be fully manifested, as COVID-19 continues to present novel challenges to traditional healthcare systems worldwide and recommended protocols for vaccination, testing, and treatment continue to shift.
Morgan Lewis provides companies around the world with integrated legal guidance related to all types of corporate transactions. Morgan Lewis advises and represents healthcare entities, including hospitals and healthcare providers, digital health companies, life sciences and technologies companies, employers, investors, and other key stakeholders.
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