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The impact of the Credit Crunch on the Care Sector -Dr Leonid Shapiro, Managing Partner, Candesic Limited
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SCA Spring Conference 2009
3rd June 2009
Credit Crunch vs. the Care Sector
3 June 2009
Candesic
CEO level clarity with R&D level insight
CONTENTS
• Who we are • Macro changes • Impact on care sector • What you can do about it
SCA Spring Conference 2009
3rd June 2009
CANDESIC IS A BOUTIQUE MANAGEMENT CONSULTING FIRM SPECIALISING IN HEALTHCARE COMMERICAL DUE DILIGENCE AND CORPORATE STRATEGY WORK
2
OUR HEALTHCARE SECTOR EXPERIENCE
UK
Dentistry Acute hospitals/ cos. surgery Psychiatric hospitals
Chancellor Care
EU
Confidential (Spain)
Learning disability centres Fostering Elderly care homes Domiciliary care Pharma distribution Pharma Hospital supplies & services CMO CRO Pathological diagnostics
Confidential (EU) Confidential (Spain) Willowbrook Healthcare Confidential (Spain) Confidential (France) Confidential (Italy) Confidential (France)
Other medtech Animal health
Confidential (EU)
3
SCA Spring Conference 2009
3rd June 2009
CONTENTS
• Who we are • Macro changes • Impact on care sector • What you can do about it
UK HEALTHCARE MARKET MAP
Revenue breakdown, 2007
Dentistry 100% Primary Care Acute medical/surgical Domiciliary Elderly + PD MH + LD
100% = £123bn
0.5%
90%
3.2%
80%
70%
5.4% 4.9%
Public/ 3rd sector supply
60%
40.3% 4.5% 23.5%
50%
40%
6.8%
30%
Private supply 3.9% 1.9%
20%
10%
5.1%
0% 0% 10% 20% 30% 40% 50%
1%
60% 70% 80% 90% 100%
Source: Candesic analysis
5
SCA Spring Conference 2009
3rd June 2009
Regardless of political party, health and PSS have had periods of generous nominal growth and restraint over the past 20 years. The challenge is managing the impact of constrained fees
LONG TERM TRENDS IN PUBLIC SPENDING ON HEALTH & PSS*
Health Growth in nominal Annual Managed Expenditure over previous year %
16.0%
Health and PSS PSS Annual inflation
14.0%
88-92 Recession Good spending growth...
… but high inflation undermined growth in real terms
12.0%
10.0%
Labour pledged to stick to spending restraint promised by Conservatives
Recent events will likely see constrained fees. Question is whether operators can constrain own costs to match
8.0%
6.0%
4.0%
2.0%
Inflation
0.0% 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
Conservative
* A single consistent long term series for both Health and PSS is not available Source: HM Treasury; National Statistics; Candesic analysis (‘Long Term Spending’ (PF))
Labour 6
The last several years of margin improvement seem to have passed for nursing homes...
MARGINS HISTORY: NURSING HOMES
Growth in fee rates vs RPI % Some consider this period of increasing margins as a correction Nursing Home Fees RPI
9% 8% 7% 6% 5% 4% 3% 2% 1% 0%
7.1% 5.6%
8.5% 8.6% 6.0%
8.4% 5.1% 4.7% 4.1% 4.2% 2.4%
2.4% 2.0% 2.0%
3.7% 2.7% 1.3%
2.9% 2.6%
3.2%
98/99
99/00
00/01
01/02
02/03
03/04
04/05
05/06
06/07
07/08
-1%
• •
The annual growth in fee rates was much higher than that of the RPI for 2001-2006 as Local Authorities sought to retain capacity within the industry and while central government funding was strong The last two years have seen less margin improvement for the industry as a whole
Source: Laing & Buisson, HM Treasury
7
SCA Spring Conference 2009
3rd June 2009
The majority of English LAs gave increases below the 3% mark in April 2008 below the increase in the National Minimum Wage
APRIL 2008 LA INCREASES IN ENGLAND
Distribution of Nursing Baseline Fees by LA Number of councils NMW: 3.8%*
73
RPI: 5.0%**
36 18 4 14 4 0 - 3% 3 - 3.5% 3.5 - 5% 5 - 10% 1 10%+ No response
Nursing fee increases
0%
Distribution of Residential Baseline Fees by LA Number of councils NMW: 3.8%* RPI: 5.0%** 85
• Only a minority of councils offered an increase greater than the National Minimum Wage • An increase of greater than 10% typically follows a period of tight, and possibly inadequate, supply and the ordering of a formal review (such as through the True Cost of Care) by the local authority
35 7 0 - 3% 3 - 3.5% 13 5 3.5 - 5% 5 - 10% 1 10%+ No response
3
Residential fee increases
0%
* October 2008 increase ** July 2008 annualised Source: Community Care Market News Special Report; ONS; Candesic
8
Recent drop in property prices may see fewer exits, albeit not for purpose built units
MACRO SUPPLY CHANGES
Beds added/lost
35000 25000 15000 5000 -5000 -15000 -25000 1992 93 94 95 96 97 98 99 00 01 02 03 04 05
High property prices and stricter regulations moved some homes into alternative use
Public sector (LA & NHS) Independent sector Net capacity change
06
07
08
Current drop in property prices reduces alternative use value so supply 09 10 exits should slow
• Converted care homes often don’t meet modern care standards but are allowed to operate because they were ‘grandfathered’ in before the care standards became law; these are likely to reduce in number as purpose built homes take market share and push these poorer quality homes out of the market • Supply has been contracting for the past 10 years, driven by high alternative use property prices. In 2002, the trend began to reverse and a supply increase appears likely in 2008 • Public sector capacity has been exiting at a constant rate over the recent past (recognising that local authorities are inefficient providers)
Source: Laing & Buisson; Candesic analysis
9
SCA Spring Conference 2009
3rd June 2009
CONTENTS
• Who we are • Macro changes • Impact on care sector • What you can do about it
Tighter credit has had several negative effects on the care sector
IMPACT OF TIGHTER CREDIT MARKETS
Chains are in trouble
Falling acquisition multiples • 2007: 10-12x • 2008: 8-10x • 2009: 6-8x • Lower leverage limits return at any given multiple
Fewer deals
“Southern Cross… shareholders have seen much of their investment wiped out” “Lenders [in Four Seasons]… have been asked to write off around half of the £1.5bn debt” –Guardian, May 2009
• 2008 vs. 2007, – Deal volume down 25% – Deal value down 73% • Vendor price expectations still above true market
Source: Press articles, Merger Market
11
SCA Spring Conference 2009
3rd June 2009
Slowed house sales cycle will have a short term effect on private payers, this is likely to recover
IMPACT OF FALLING HOUSE PRICES
Standardised House Price, UK £ thousands YoY -18%
188 184 180 177 174 172 168 163 161 164 160 157 155
• Lengthier sales cycles and apprehension to sell in a down market could reduce private payers as more opt for home care • Yet falling prices should not in themselves reduce private volumes • Providers offering financial instruments (loans and secured delayed payments) to enable quick equity release
Apr- May Jun July Aug Sep Oct Nov Dec Jan- Feb Mar Apr 08 09
“The rate at which properties were sold fell to the lowest since survey began in 1978. The average estate agent is selling less than one home per week, in London practices sold just seven homes in three months.” –RICS
Source: Halifax price index, Royal Institution of Chartered Surveyors,
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Competition will decrease for good providers
SUPPLY IMPACT
Fewer new builds
Fewer extensions •Reducing capacity •Reducing capacity •Lower average quality •Lower average quality •Higher risk •Higher risk
Reduced maintenance capex
Lower staffing ratios/service
Source: Candesic
13
SCA Spring Conference 2009
3rd June 2009
There remains uncertainties going forward
CONTRAVERSIAL PREDICTIONS
• Could we see negative fee rate increases post 2012? • Will private ‘heavy’ providers face tighter public fees (forced cross subsidisation)? • Will Capital Disregard will be decreased? • Will Local Authorities buy failing nursing homes to maintain supply?
Source: Candesic analysis
14
CONTENTS
• Who we are • Macro changes • Impact on care sector • What you can do about it
SCA Spring Conference 2009
3rd June 2009
HOW TO PREPARE FOR THE RECOVERY When credit returns... • Lots of transactions (latent sellers) How to prepare... • Pick out targets now
• Easier funding/debt for consolidation plays
• Be ready to acquire or to sell out, staying put is not sustainable
• Increasing supply, particularly specialised need/demand
• Be the first to build (establish land bank); refurb to meet need/demand
• More private payers, but continued price pressure on LA paid places
• Focus on processes/actions that will increase attractiveness; actively shift mix to more private pay
Source: Candesic analysis
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CONTACTS
Dr Leonid Shapiro Dr Leonid Shapiro Managing Partner and Managing Partner and Founder Founder Tel: +44 (0)20 7096 7681 Tel: +44 (0)20 7096 7681 Mob: +44 (0)7768 773 991 Mob: +44 (0)7768 773 991 lshapiro@candesic.com lshapiro@candesic.com
London office London office New Zealand House New Zealand House 80 Haymarket 80 Haymarket London London SW1Y 4TQ SW1Y 4TQ United Kingdom United Kingdom Main: +44 (0)20 7096 7680 Main: +44 (0)20 7096 7680 Fax: +44 (0)20 7206 9383 Fax: +44 (0)20 7206 9383 Paris office Paris office 71 rue Saint-Honoré 71 rue Saint-Honoré 75001 Paris 75001 Paris France France Main: +33 (0)1 7238 6983 Main: +33 (0)1 7238 6983 Madrid office Madrid office Avenida de Bruselas, 5 Avenida de Bruselas, 5 Planta 1º --Oficina 2 Planta 1º Oficina 2 28108 Alcobendas, Madrid 28108 Alcobendas, Madrid Main: +34 91 829 3795 Main: +34 91 829 3795
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