Hospital groups’ battle abroad
Investors left asking whether bold foreign forays are right tonic
● Stringent regulations, hubris and an underestimation of a difficult market, along with a language barrier in one case, have combined to make a tough year for SA’s three largest hospital groups’ adventures outside their home market and in the developed climes of places such as Switzerland.
Since the turn of the century, South African corporations that have chosen to move into Europe and other developed markets have seen less success than they achieved from their forays into other emerging markets.
The return of Old Mutual from its London base was perhaps the biggest example of failure.
The results from hospital groups Mediclinic, Netcare and Life Healthcare show that they are facing similar pressures in trying to establish themselves outside SA.
The groups “clearly underestimated” the pressure they faced in the developed markets they invested in, said the deputy CEO of investment company Sentio Capital Management, Rayhaan Joosub.
He singled out the regulatory pressures in those markets as one of reasons for the poor performances.
Ageing populations and complex procedures also put a strain on health-care budgets in those markets, resulting in governments and health-care funders putting pressure on hospitals to lower their prices.
Shares of the groups have taken a battering over the past few years because of the poor report card on their expansion plays.
Last week’s Mediclinic announcement that its earnings would be depressed because of its Hirslanden operations in Switzerland led to an almost 17% plunge in its share price on the day Mediclinic delivered the update.
The hospital group said this was due to changes to inpatient services, which experienced fewer patients, and patients spending less time in hospital.
The impact of the issue Mediclinic is facing in Switzerland is quite significant because Hirslanden contributed 47% of the group’s revenue for the year ending in March 2018 followed by operations in Southern Africa at 31% and 22% from the Middle East.
The bad news on Switzerland comes after Mediclinic’s attempts to regain its footing following a failed bid to buy the balance of a hospital group, Spire, in the UK, in which it already has a 29% stake.
Last year, shortly before Mediclinic announced that it was looking to acquire Spire, its share price took a hit on the news that the hospital would have to reportedly compensate thousands of patients who were treated by surgeon Ian Paterson. Paterson had given patients erroneous diagnoses of cancer and performed unnecessary surgery.
The group’s operation in Abu Dhabi has also faced challenges but is turning around.
Mediclinic, whose interim results are due next month, could not comment as it is in a closed period. The group has had a tough year, with its stock sliding more than 40%, compared with a more than 14% slide in the JSE all share index.
Like Mediclinic, Life Healthcare has suffered from regulatory and reputational issues in its offshore operations. The group has operations in Poland, the UK, Ireland, Spain and Germany.
The group, whose share price is down close to 8% this year, last month announced that it was selling its 49.7% stake in Max Healthcare in India for about R4.3bn.
Political pressure to lower prices and the Shalimar Bagh incident in India, in which a newborn baby was wrongfully declared dead at a Max hospital, contributed to a less than impressive performance for the group.
Life Healthcare Group CEO Shrey Viranna said: “Each of our international territories has particular regulatory, legislative, competitor, customer and operational realities which impact contract negotiations, tariffs, growth of lines of business, and investment decisions. It can be challenging to respond quickly to the unique circumstances of each market when they change.”
However, Viranna said the group was learning from its experience and was focusing on the decisionmaking and innovation aspects of its business to deal with the challenges.
Viranna said Poland proved to be the most challenging country for Life Healthcare due to legislation, which cut prices on cardiac procedures impacting its Scanmed business. With regards to Max Health, Viranna said the sale was a reflection of the group's change of approach from acute hospital care in emerging markets to diagnostics through its Alliance Medical Group in Western Europe.
Netcare’s offshore woes saw it announce its exit from the UK this year, after its protracted negotiation to lower rentals for BMI Healthcare, part of General Healthcare Group, in which it has a 56.9% stake.
Netcare, which now operates only in Southern Africa, is yet to find a buyer for BMI. Despite fluctuations in its share price in the past year, it is now trading at around similar levels compared to October last year.
André Bekker, an equity analyst at Arqaam Capital, said the Swiss health-care market was a tough environment in which to operate because of its health-care insurance coverage and strong public health-care services.
“This provides a unique set of challenges for Mediclinic International and we believe that the outlook for private players in Switzerland remains weak in the short to medium term,” he said.
These markets presented more stability and opportunities for the hospitals — which
They probably didn’t do their homework
... were probably sold a bit of a dud
Rayhaan Joosub
Deputy CEO, Sentio Capital Management
take up 90% of the country’s hospital market in terms of admissions and 83% of registered beds — as they ventured offshore for growth.
Bekker said the other challenges stemmed from the groups having to take on more debt to fund their businesses, which investors were more accepting of when interest rates were lower.
Joosub also attributed some of the issues the groups faced to a lack of knowledge of the environment they were operating in and poor management.
Mediclinic “... probably didn’t do their homework carefully enough when they made the Abu Dhabi acquisition. They were running a very good business in Dubai and then in Abu Dhabi they were probably sold a bit of a dud,” he said.
He, however, added that Mediclinic’s Abu Dhabi operation was on the mend.
For Life Healthcare, the problems in its business in Poland were due in part to management issues. Joosub explained the group had put a Polish speaker in charge there.
The person who was supposed to be integrating the business had not done so and had miscommunicated information to the South African managers due to a language barrier.
“They kind of let those local management teams pull the wool over their eyes effectively, which [they are] starting to rectify,” he said.
Nesan Nair, a senior portfolio manager at Sasfin, said that in addition to regulatory factors, the proliferation of day clinics meant that patients were spending less time in hospitals and procedures were becoming cheaper, thus hurting revenue growth for the hospital groups.