Jean-Yves Coste is a financial analyst, with over 15 years experience advising healthcare companies. He is now Senior Health Care Director at Michel Dyens & Co. in Paris. He recently spoke during the IMCAS Economic World Tribune at the IMCAS World Congress 2018 about the consolidation in the medial aesthetics and dermatology sector.
The consolidation dynamic is taking an unprecedented scale in Medical Aesthetics and Dermatology. Jean-Yves Coste explains to IMCAS why.
2017 will be remembered for the irresistible rise of the M&A, partnerships, joint ventures, demergers and a transactional flux, with a total of €10.6 billion representing 756 worldwide transactions compared to €9.8 billion and 675 transactions in 2016. However, these values do not take into account the amounts of several transactions for which deal financials had been disclosed (see chart). If we consider the entirety of the consolidation cycle, the phenomenon is even more impressive; from 2011 to 2017, the market has accumulated a total transactional value of €41 billion, representing a CAGR (2011-2017) of +34%. Even if an asymptotic curve is observable and has reached a plateau, this tremendous record exceeds the total value of the Medical Aesthetics market, as published by ISAPS (International Society of Aesthetics and Plastics Surgeons): $9.8 billion in 2017, evidencing the strong effervescence of the market.
The competitive expansion of an industry, in which the key success factor remains technological breakthroughs, also results in an increase of valuation multiples accelerating the 2016 growth trajectory. This can be explained by the need to pre-empt its competitors in a relentless race for the most cutting-edge innovations, to benefit from the first-mover advantage, to dictate the standardized norms for new products and to control the price policy by capturing early market shares. This leads to average valuation multiples from 3.7x in 2016 to 5.3x in 2017, a trend amplified at the level of weighted average due to a correlation of valuations with the size (5.7x to 7.7x). This evolution recalls other industries propelled by technological revolutions such as cloud computing, A.I., blockchain, robotics, Internet of Things and obviously biotechnology, a pioneer in gene therapy (i.e. Kite acquisition by Gilead for $11.9 billion in 2017).
The major changes in 2017 were: 1. The increasing importance of Energy Based Devices, representing more than a third of the consolidation phenomenon (supported by deals such as the acquisition of the cryolipolysis leader Zeltiq for $2.5 billion by Allergan, one of the laser technology leaders Cynosure by Hologic for $1.65 billion, Syneron by APAX for $397 million and Venus Concept, a company dedicated to multi-technology integrated platform devices, by Essex Woodlands for $40 million) 2. The emergence of private equity (PE) funds as a new driver of this consolidation. This consolidation has already been initiated on the last years in Medical Aesthetics, later than other less versatile and technologically sophisticated healthcare sectors (generics, CRO, CMO, Animal Health, OTC, food supplements or Specialty pharma).
Some of the players have been pioneers, such as the Chinese PE funds Fosun (related to a pharmaceutical company) who bought Alma Laser in 2013 for $240 million. This reflects the “coming of age” of an industry in which the consolidation trend is amplifying. Out of the four transactions mentioned above, three have been realized by PEs. They became predatory consolidators as proactive as strategic players, attracted by the sector’s sustainable growth, high margin levels and clear monetization visibility by the M&A transactions whose flux and valuation multiples increase every year, pledging high profits. They are leveraging their assets in terms of monetary firepower and global deployment capabilities. The closed sector of Dermo-cosmetics is also experiencing a similar enthusiasm with PEs, e.g. the acquisition by Bain Capital and Goldman Sachs of Carver Korea in June 2016 for an enterprise value of $558 million, then sold in September 2017 for $2.7 billion to Unilever, or the acquisition by Bain Capital of an approx. 45% equity stake of South-Korean toxin maker Hugel for an enterprise value of $1.3 billion, equivalent to 13x the sales in 2016.
This leading position can be also explained by a favourable “planet alignment”: low interest rates allowing a very high debt leverage, regulatory intensification and extremely high marketing costs pushing companies to finance their growth with the support of Growth Capital funds, real industry organization of PE funds in China and APAC with industry specialists as Temasek, Fosun, XIO, AGIC, Ally-Bridge, Cathay Capital, New Horizon, GIC Legend Capital, etc.). Moreover, the repatriation of a total amount of $3 trillion to the USA, because of the tax reform enacted in 2017 has led to a liquidity flux ready to be reinvested. The multiplicity of factors involved in this trend and the level of valuation reached may suggest a speculative euphoria that might reach its peak in 2018.
