What is the typical structure of a healthcare-related business combination in your jurisdiction?
Healthcare business combinations are largely dependent on what is being acquired or sold. Where the intention is for the whole business to transfer, a share sale is most commonly used as it allows for all assets and liabilities (such as the benefit of any contracts that the company may be party to) to transfer on completion and potentially avoids certain regulatory obstacles. Alternatively, where a business is selling only some of its undertaking (for example, to divest of its specialist care operations while retaining more generalised care operations) an asset sale will be used.
In terms of the internal structure of healthcare-related businesses, where there is a large real estate element to the operations (such as in the care home sector), the business will often utilise what is known as a ‘Propco/Opco’ structure, with the Propco holding title to the relevant property and the Opco taking a long-term lease from which it will operate the business.
In respect of life sciences businesses with a particular asset in development, the transaction might be structured as a joint venture between the target and a larger corporation. Typically, this would entail the incorporation of a corporate vehicle into which the development company would license or transfer the relevant asset, with the larger corporation funding the development of that asset.
In some cases, where a development company has a ‘platform’ technology (ie, one that can be developed for multiple applications), alternative structures have been developed to allow single applications to be spun out into independently funded special purpose vehicles while the assets continue to be developed by the development company. These structures tend to be quite bespoke.
How long do healthcare business combinations usually take, and what factors tend to be most significant in determining the timing to completion?
Healthcare business combinations can take eight to 12 weeks from when lawyers are typically instructed, but could take longer depending on factors such as (i) size and complexity of the transaction, (ii) whether the target, buyer or seller is listed on a stock exchange or is raising external funds for the transaction and (iii) whether there are any competition law, regulatory, change of control or compliance issues.
Representations and warranties
What are the typical representations and warranties made by a seller in healthcare business combinations? What areas would be covered in more detail compared with a more general business combination?
A seller would typically be expected to give a full range of warranties with respect to the target and its business. Areas that would be covered in more detail will depend on the specific business but would be likely to include:
- intellectual property ownership and freedom to operate;
- product liability;
- findings of any clinical trials in respect of life sciences businesses;
- regulatory licences and compliance, including identification of any relevant regulatory registrations;
- employment and pensions; and
- litigation, inquests and investigations in respect of healthcare businesses.
Describe the legal due diligence required in healthcare business combinations. What specialists are typically involved? What searches would typically be carried out?
Legal due diligence must be tailored to match the structure of the proposed transaction and the nature of the target business. Relevant sector-specific due diligence matters may include the following.
Regulatory and compliance
A focus of legal due diligence will be to ensure that the subject entity is registered correctly with the appropriate regulatory bodies and its current and historical performance comply with regulatory standards. This will typically involve an interrogation of online regulatory databases and an examination of registration information and other correspondence with the relevant regulator(s).
Diligence would also be conducted on the target’s data protection policies to ensure they comply with the requirements under the General Data Protection Regulation (679/2016/EU) (GDPR) as healthcare operators hold their patients’ sensitive personal data.
Healthcare can be an employee-heavy sector. Diligence would be conducted to determine:
- the nature of the employment relationships (particularly if there are any zero hours contracts);
- the calculation of holiday pay;
- any employment policies in place; and
- in relation to the right to work in the UK, whether an appropriate work permit has been granted.
In property-rich healthcare businesses, diligence would look to confirm ownership of the real estate assets.
Diligence would look to ensure the adequacy of the insurance cover relating to medical negligence claims, employer’s liability claims, abuse risk, patient safety, care quality and data security.
The focus would typically be on intellectual property ownership and freedom to operate. Specialist intellectual property lawyers, commercial or licensing lawyers and patent attorneys would often be involved, with relevant searches being carried out in current and target markets.
If due diligence is not correctly undertaken, what specific healthcare risks might buyers inherit?
A principal risk from inadequate due diligence is the exposure to civil and criminal enforcement action by regulatory bodies or the police where issues have not previously been highlighted and the risks mitigated. Regulatory bodies have enforcement powers that include civil action, such as imposing conditions on the service provider’s registration, suspending or cancelling the registration if they consider that appropriate actions have not been taken to address identified deficiencies or failures to meet the required standards.
In addition, a number of regulatory bodies also have criminal enforcement actions where they can prosecute for breaches of their regulations, for example, failure to meet a required standard that causes avoidable harm to a service user. Sentences for criminal offences vary, but, for example, in England, Care Quality Commission (CQC) prosecutions can result in an unlimited fine.
Any enforcement action has the potential to cause reputational damage or influence new business. If the service provider is subject to improvement action by a regulatory body, then re-registration of the same service with new buyers could be more difficult without these areas being addressed.
For life sciences businesses, liability, associated fines and reputational damage can result from the way in which a company manufactures, markets, prices and sells its products as well as how it stores and uses personal information associated with its products and their end users. For example, improper activity by a company’s sales force such as offering improper incentives, or the promotion of ‘off label’ use, can lead to civil and criminal actions.
Specific diligence issues
How do buyers typically approach specific material diligence issues in healthcare business combinations?
It is important that specialised categories of information are requested and considered when advising buyers in respect of healthcare business combinations, for example, information in respect of the number and type of safeguarding notifications, regulatory ratings and any enforcement action or unexplained deaths. Most buyers, supported by their specialist healthcare regulatory lawyers and other advisers, are aware of the risks associated with businesses of this nature and can use their experience to assess the risk profile of the target business compared to their existing business or others in the sector. The specialist advisers can advise on mitigating risks identified and actions to be taken once the transaction has completed, to help ensure that any poor practice is addressed under the new ownership. Where appropriate, indemnities supported by purchase price retentions can be sought from sellers in relation to specific identified concerns.
Conditions before completion
What types of pre-closing conditions are most common in healthcare business combinations?
If the buyer is acquiring the business and assets of a healthcare facility, rather than the shares of the relevant operating company, it will need to obtain approval from the relevant healthcare regulator to operate that facility. Approvals will also be required if there are to be changes to certain regulated managers of the operating company or the specific facility, or both.
From a competition perspective, approval may need to be obtained from the Competition Markets Authority (CMA) in respect of the proposed combination. The CMA has taken an active role in recent years in reviewing anticompetitive arrangements and potential mergers and acquisitions in the healthcare sector.
It is very common for private healthcare operators to contract with a public sector commissioning organisation such as Clinical Commissioning Groups (CCG) or local government authorities. In independent healthcare business combinations, buyers may want to obtain the approval of the applicable CCG or local authority of the target business as a condition to entering the transaction, or if the current contract between the target business and the CCG or local authority is about to expire, the buyer may insist on the target business entering into a renewed contract with the CCG or local authority as a condition to the transaction.
Life sciences businesses may also require third-party consent to the change in licensee of key in-licensed intellectual property or the transfer of intellectual property rights.
As with many business combinations, in conducting due diligence, the buyer may have identified a key matter in respect of the target business that it would want to be rectified before completing the acquisition.
In healthcare businesses, the target business may not have rectified an issue identified by the CQC or another applicable healthcare regulator when carrying out an inspection of the healthcare facility. The buyer may request for the seller to demonstrate that any major issues have been rectified.
In life sciences businesses, depending on what stage of its life-cycle the target company or key product is at, pre-closing conditions can include the successful completion of certain development or studies and completion of notified body QMS audits.
What sector-specific covenants are usually included to cover the period between agreement and completion in healthcare business combinations?
Covenants can include:
- Receiving copies of any communications between the healthcare facility, applicable healthcare regulators and the Health and Safety Executive. Depending upon the type of communications, the buyer may seek additional comfort, such as consent rights in respect of any replies provided by the healthcare facility to the regulator, the ability to attend any meetings with the regulator or even comfort that nothing is done that could lead to deregistration or adversely affect the target’s registration with the relevant regulator.
- Receiving copies of communications with insurers, both from an entity and patient perspective, particularly if it relates to any changes to the terms of the policy, or any material claims that exceed a certain amount.
- Owing to the value of the assets of a typical healthcare business, consent rights in respect of the sale or purchase or creation of encumbrances over material equipment or assets of a certain value.
- Consent rights in respect of any amendments to any key commercial agreements or procurement contracts (eg, contracts with public sector commissioning organisations).
What specific provisions are commonly seen in warranty and indemnity insurance policies for healthcare business combinations compared with general business combinations?
There are no significant sector-specific issues, although insurers are wary of regulatory compliance warranties and may often require their exclusion or modification depending on the due diligence presented to them.
Is there any sector-specific documentation typically used in healthcare business combinations? Does this differ depending on the structure of the transaction?
Where businesses or assets are being transferred, there are a number of change of ownership or control applications to submit. For example, the Medicines and Healthcare Products Regulatory Agency requires that its application form to change the ownership of a product licence be completed and supported by documents such as a declaration of marketing status, a cancellation letter, a letter from the dosage form manufacturer and updated patient information leaflets and labels. Changing the legal manufacturer of a medical device will require a successful audit of the new quality management system and the completion of the documents required by the relevant notified body. A notice of rights form is also required to apply to the Intellectual Property Office to register a change of ownership or give notice of rights acquired in a patent or in an application for a patent.
On the healthcare side, there are unlikely to be sector specific documents to transfer legal title to assets. However, other documentation may include applications to change the identity of the various registered entities or individuals involved in operating the relevant facility or novations of agreements such as care framework agreements, nomination agreements and service-level agreements.
Fewer documents are likely to be required on a share sale compared to an asset sale since the registrations with the relevant regulatory authority and relevant agreements are unlikely to change and assets will continue to be owned by the company being acquired.
Which post-completion undertakings are common in healthcare business combinations? Which undertakings are common?
The most common post-completion undertakings seen in healthcare business combinations are undertakings by the sellers not to compete with the business of the company it has sold (known as restrictive covenants). Given the relatively limited and skilled role of management in the sector, a buyer will often view restrictive covenants as important to protect the goodwill of the target. The form of restrictive covenants will differ in length and territory, dependent on the type of transaction and the business of the target. For example, on the sale of a care home portfolio a restrictive covenant will often prevent the seller from competing within a particular distance of the care homes in the portfolio at completion.
Post-completion undertakings are particularly relevant in healthcare business combinations where an earn-out consideration structure is used. This structure is common in life sciences transactions, given the innovative nature of this sector. Where an earn-out is used, various post-completion undertakings will be imposed on the part of the buyer to ensure that the earn-out is not jeopardised. Commonly included within this are undertakings to:
- operate the business in the ordinary course and not make material changes to the business without the seller’s consent;
- not take any action with the intention of reducing or distorting the amount of the earn-out payment; and
- restrictions on capital expenditure and diverting business opportunities.
Laws and regulations
What are some of the primary laws and regulations governing or implicated in healthcare-related business combinations? Are healthcare assets subject to specific regulation that would be material in a typical transaction? Is law and regulation of healthcare national or subnational?
The regulatory framework governing healthcare businesses differs across the four jurisdictions in the UK; England, Scotland, Wales and Northern Ireland. It is a complex area with a large number of regulations, statutory and non-statutory guidance applicable. The main legislation and appropriate regulatory body for each jurisdiction is detailed below.
The CQC is the independent regulator of health and adult social care in England, which includes all forms of service providers from independent hospitals to care homes. It requires service providers to register and the CQC inspects them to ensure that essential standards of quality and safety are met. The main responsibilities of the CQC are set out in the Health and Social Care Act 2008.
There are two regulatory bodies in Scotland, the Care Inspectorate (formed under the Public Services Reform (Scotland) Act 2010), which regulates services such as care homes, and Healthcare Improvement Scotland (HIS) (constituted by the National Health Service (Scotland) Act 1978, as amended by Public Service Reform Scotland Act 2010 and the Public Bodies (Joint Working) Act 2014), which regulates independent hospitals and clinics.
In Wales the regulatory bodies are Care Inspectorate Wales (CIW) and Healthcare Inspectorate Wales (HIW). CIW regulates services such as care homes and its function is set out in the Care Standards Act 2000 and Regulation and Inspection of Social Care (Wales) Act 2016. HIW regulates and inspects NHS services and independent healthcare providers and was established under the Health and Social Care (Community Health and Standards) Act 2003.
The Regulation and Quality Improvement Authority (RQIA) (established by the Health and Personal Social Services (Quality, Improvement and Regulation) (Northern Ireland) Order 2003) regulates healthcare providers, such as independent hospitals and care homes, in Northern Ireland.
The GDPR has had a significant impact on healthcare-related business combinations. Parties are increasingly scrutinising the extent to which personal data issues may impact a transaction, particularly where the exploitation of personal data is critical for the healthcare organisation, or where personal data represents significant potential value to a buyer.
The GDPR has been particularly significant for healthcare organisations that typically hold and process special categories of personal data, such as health or biometric data (which is subject to stricter regulation), in addition to other categories of personal data.
Medicinal products and devices
In the UK the main legislation for the authorisation of medicinal products derives from the Code for Human Medicines Directive, as amended (Directive 2001/83/EC) and Regulation (EC) 726/2004 on the authorisation and supervision of medicines and establishing a European Medicines Agency (EMA Regulation), as amended. The Human Medicines Regulations 2012 implement the EU legislation in the UK and contain provisions established independently of EU law and on matters of national competence. The regulatory pricing regime for medicinal products supplied to the NHS is contained in the National Health Service Act 2006 and the Health and Social Care Act 2012, together with subordinate legislation, along with the Voluntary Scheme for Branded Medicines Pricing and Access 2019 agreed between the Department of Health and Social Care and the Association of the British Pharmaceutical Industry.
Two new EU Regulations entered into force on 26 May 2017 revising existing legislation on medical devices and in vitro diagnostics (Regulation (EU) 745/2017 on medical devices and Regulation (EU) 746/2017 on in vitro diagnostic medical devices). There is an intention to broadly adopt the new EU Regulations upon the UK leaving the EU. Depending on the terms of the withdrawal or exit, many or most of the requirements under the new EU Regulations will apply fully from 26 May 2020 for medical devices, and 26 May 2022 for in vitro diagnostic medical devices. The current UK law is set out in the Medical Devices Regulations 2002, and reflects and refers to Directive 90/385/EEC on active implantable medical devices, Directive 93/42/EEC on medical devices and Directive 98/79/EC on in vitro diagnostic medical devices, each as amended. Where an acquisition involving medical devices and/or in vitro diagnostic medical devices is effected by way of an asset sale, the entity that is to take on the obligations of the ‘legal’ manufacturer of the products will need to ensure that it holds any necessary notified body (ie, a body designated to assess conformity) certificates by the date that it will start placing the products on the market as legal manufacturer. This can be a significant driver for structuring the overall deal. The two new EU Regulations will increase the number of products that are subject to the requirement for the manufacturer to have a notified body. The new manufacturer will also need to ensure that it obtains from the seller the technical documentation required to be held under statute.
Consents, notification and filings
What regulatory and third-party consents, notifications and filings are typically required for a healthcare business combination?
The consents, notifications and filings differ between transactions depending on the specific entity, the healthcare service provided and the deal structure. As a general rule, if changes in legal interests, legal entities, directors and other relevant changes are occurring further up the deal structure so as not to result in changes to the entity that is actually providing the healthcare service, the requirements for consents, notifications and filings are minimised. If, however, an asset transfer of a healthcare business is contemplated, or the buyer wishes to change the details of registered managers, the registered provider, nominated individual or how the service is run, the CQC would need to be notified and approvals for the changes sought. The requirements differ from regulator to regulator and continue to evolve to keep up with regulatory framework changes.
In an asset sale, the transfer of personal data post-completion will result in a change of the data controller of that personal data. Under the GDPR, the new controller will need to notify the affected data subjects of that change and may need to undertake further activities where there is a transfer of marketing databases and future marketing activities are envisaged.
See question 7 for additional details on other conditions to completion.
Are there any restrictions on the types of entities or individuals that can wholly or partly own healthcare businesses in your jurisdiction?
Although there are no specific restrictions on organisations who own healthcare businesses, the organisation will need to satisfy the relevant regulator of their fitness and compliance with the requirements of the relevant regulations in order for registration to be granted. The information required will differ according to the different regulators across the four jurisdictions.
The general rule is regulators will want to be satisfied that the provider or responsible individual is ‘fit and proper’ to carry out the service applied for. This will require financial information to be provided, such as financial references and declarations in relation to bankruptcy and convictions (such as fraud, violent or dishonest offences).
Are there any restrictions on who can be director of healthcare businesses in your jurisdiction?
Some of the regulators across the four jurisdictions, for example, the CQC requires all directors (rather than just those with key roles) to be ‘fit and proper’. This includes being of good character, not previously being responsible for any serious misconduct or mismanagement and not adjudged bankrupt or convicted of a criminal offence. Others will undertake checks on the organisation as a legal entity and responsible individuals; however, there are no specific requirements or restrictions regarding directors.
Operating outside the home jurisdiction
What domestic regulatory issues might arise for a company based in your jurisdiction operating healthcare businesses in other jurisdictions?
This is very much dependent on the specific circumstances, the type of business, which jurisdictions are involved and how they operate. For example, an online GP provider with its legal entity based and registered in England, and which holds CQC registration, but provides online patient services to patients located in Scotland, is unlikely to trouble the CQC or the equivalent Scottish regulatory body. However, the CQC is likely to be concerned if, when it inspects, it appears that the service provider is demonstrating high-risk prescribing practices to patients based in another jurisdiction, which may be considered unsafe if prescribed to a patient in England. Although in this example the patient is not within England, this could still cause poor inspection ratings and requirements to be issued by the CQC in respect of safe practice. Other issues could be in respect of enforcement action (civil or criminal) in other jurisdictions, which could cause consideration as to the entity’s suitability to carry on the regulated service, for example, a criminal conviction in the United States for an offence that, if convicted in England, would mean the person would be unfit to participate in the running of a healthcare provider.
What domestic regulatory issues arise when the acquirers of healthcare businesses are based outside the jurisdiction?
The potential issues vary depending on the jurisdiction. Some jurisdictions require that the legal entity that is the service provider be based and legally registered as a company in their jurisdiction to allow them to register as a service provider with the body (for example, the CQC). Other regulatory bodies are less concerned with whether the legal entity or directors are based within their jurisdiction, but want to ensure that those legally responsible for the overall management of the service, for example, the registered manager, are accountable and based in that jurisdiction (for example, RQIA and HIS). The requirements in terms of regulation are heavily dependent on the business structure and can be complex.
Competition and merger control
What specific competition or merger control issues may arise in healthcare business combinations?
Healthcare business combinations may require assessment under UK merger control, however, formal notification prior to completion is currently voluntary. The CMA has responsibility for reviewing combinations of ‘enterprises’ under the Enterprise Act 2002, which includes public sector entities engaged in economic activities, whether by merger, acquisition, joint venture, transfers of services or long-term management contracts.
For businesses supplying public healthcare services, the CMA’s substantive assessment will incorporate any likely effect on the quality of care, range of services and value of money. The CMA is now well versed in reviewing cases from the perspective of commissioners of services and end users. The latter will generally involve a local area analysis of the competitive effects.
If the CMA determines that a merger is likely to raise competition concerns, it will consider whether the prospect of adverse effects for patients and commissioners would be outweighed by the benefits of it proceeding. The views of NHS commissioning entities are sought as part of the CMA’s consultation process.
In the private sector, transactions that involve private hospital operators operating, managing or otherwise providing privately funded healthcare services at an NHS private unit are similarly reviewable under UK merger control. Combinations that fall outside the scope of merger control may be subject to review under Part II of the Private Healthcare Market Investigation Order 2014. This involves a similar competition-based review process.
State and private healthcare combinations
Are there any differences for healthcare business combinations if the transaction relates solely to businesses servicing private clients rather than state-funded clients?
Generally, state-funded healthcare providers in Scotland, Wales and Northern Ireland are not required to be registered with the appropriate regulatory body as an independent provider would; however, they are subject to inspection by those bodies with limitations placed on any enforcement action. In England, the CQC registers and inspects all private and NHS organisations with enforcement actions applicable to all registered providers.
In Scotland, all independent healthcare providers are required to comply with the National Health Service (Scotland) Act 1978 irrespective of whether their clients are private or state-funded.
Any private entities with a contract to provide healthcare to state-funded clients, are likely to be subject to additional requirements under their contract to provide these services, to ensure that standards apply equally in state-funded and private organisations for the service user.
Financing and valuation
How do buyers typically finance healthcare-related business combinations?
Buyers typically use a combination of debt and equity finance for healthcare-related business combinations.
Describe the typical security structures in healthcare business combinations, including confirmation of any registration or notary fees in respect of the security documents.
A funder would expect to have full fixed and floating charge security over all of the assets in any target (including the shares in any target, any real property owned by that target and the interests of the buyer in the sale agreement and any tax deed). Although not strictly security, a funder may also request that its interest is noted on any warranty and indemnity insurance policy.
Security granted by any entity incorporated in England and Wales has to be registered at Companies House within 21 days of the date of its creation. The cost of filing is £15 (if made electronically) or £23 (for paper filings). Security granted over any real property located in England or Wales must be registered at Her Majesty’s Land Registry. The fees payable are based upon the amount secured by the legal mortgage over the property and the value of the property that has been charged.
Are there any financial assistance rules that arise in healthcare business combinations?
Pursuant to sections 677 to 683 of the Companies Act 2006, public companies are prohibited from giving financial assistance for the purpose of acquiring shares in its private holding company. This is relevant for share acquisitions, not where a buyer is acquiring a target company’s assets.
Price and consideration
What pricing and consideration structures are typical in healthcare business combinations?
Both net asset value adjustments and locked-box mechanisms are seen in healthcare business combinations, with locked box being more common with private equity sellers or funds where certainty of consideration at completion is preferred.
Deferred consideration and earn-outs are also seen where value has been placed on the continuing business performance, for example where there are key contracts that the valuation relies on. It is very common for part of the consideration for life sciences businesses to be contingent on the achievement of milestone events such as product development milestones, regulatory approval milestones or once on the market, sales milestones. This is most often the case when the target is developing a therapeutic product (as opposed to a diagnostic product or medical device) because of the longer periods taken to receive approval and reach the market and the resultant higher risks involved. Sometimes the right to receive contingent consideration is packaged as a ‘contingent value right’ instrument, which potentially may be tradeable either privately or on a stock exchange.
How are healthcare-related businesses typically valued?
This will depend on the nature of the asset being acquired. Healthcare operations such as a hospital or care home business and life sciences businesses with a product on the market will typically be valued based on an EBITDA multiple. Propco values are likely to be based on the market value of the property and the forecasted rental income.
If the target has a product that is in development then often the purchase price attributable to that product will primarily be calculated on a discounted net present value basis, which will in part depend on expected pricing and reimbursement arrangements in the target markets (particularly the United States). However, it is common for more than one methodology to be applied, and buyers will often also apply example comparables before settling on a valuation.
Typical issues in combinations
What are some of the typical tax issues in healthcare business combinations and to what extent do these typically drive structuring considerations? Are there certain considerations that stem from the tax status of a target?
A disposal of the shares in a target company offers the seller the opportunity of a clean break from the business, with relatively straightforward (and sometimes beneficial) tax consequences. If the seller is a company that meets the requirements of the substantial shareholding exemption (SSE) then any gains made by the seller from the sale of the shares will be exempt from corporation tax. However, if the target company had recently acquired certain assets from within the seller’s group and claimed group relief on the transfer then the subsequent sale of the target company may give rise to degrouping charges (giving rise to corporation tax or stamp duty land tax (SDLT)). To the extent such charges cannot be relieved through SSE (which may be the case in respect of certain capital assets), then such charges are likely to reduce the purchase price for the target as they represent a cost for the target going forward.
Stamp duty on the acquisition of shares will be limited to 0.5 per cent of the consideration paid.
An acquisition of the assets and business of a target company enables the buyer to choose which parts of the business it wishes to acquire and avoid taking on the target’s historical and continuing tax liabilities. It should also provide the buyer with a base cost for tax purposes in the assets acquired that reflects the price paid for the assets (in contrast to the acquisition of a target company that holds assets that may have increased in value since acquisition, which would give rise to tax in respect of such gains upon any future disposal). Depending on the type of asset acquired, this may also provide the buyer with the opportunity for tax relief through amortising the asset, claiming capital allowances in respect of the asset or rolling over a historic gain into the asset.
VAT may be chargeable by the seller in respect of the assets transferred (for example, most plant and machinery). Typically, a transfer of an entire business and its assets will fall outside the scope of VAT as a transfer of a going concern. However, if it does not, this could mean that the buyer incurs VAT on the acquisition of certain assets, but is unable to recover this VAT since the buyer itself will be making VAT-exempt supplies of healthcare services. The transfer of any property will be subject to SDLT at 2-5 per cent of the consideration for that property, the cost of which may be significant.
Tax risks for healthcare businesses
What are the typical tax risks that are associated with healthcare businesses? What measures are normally taken to mitigate those typical tax risks in healthcare business combinations?
The supply of most healthcare-related services is exempt for VAT purposes. This means that the business is unable to recover VAT incurred by it on its acquisitions of goods and services for the purpose of making such supplies, thereby increasing its costs by 20 per cent. Certain healthcare supplies are not exempt from VAT, for example, sales of drugs. Where a business is making both exempt and taxable supplies then it will need to apply strict policies regarding its VAT recovery, and this will always be a key risk area to thoroughly review as part of due diligence.
Healthcare businesses often engage significant numbers of locums and contractors either directly or through personal service companies. Scrutiny should be given to payroll compliance to ensure that persons (including locums and contractors) who are in effect acting as employees are remunerated and taxed as such, with appropriate PAYE deductions and employer national insurance contributions made.
Public relations and government policy
How do the parties address the wider public relations issues in healthcare business combinations?
Where there is an element of public finances that underpin a target business the implications will need to be considered in the context of any transaction. Similarly, many businesses will involve the direct provision of services to patients and vulnerable persons and accordingly the wider public aspect will be a factor. In many cases, particularly in the context of trade deals (where both parties are already operators in the sector), the buyer and the seller will take huge comfort from the fact that the transfer of the underlying business or asset will result in no material change to the continuation of the underlying business (and, in fact, could result in an enhancement to the services provided) and, accordingly, while there will be an element of financial return occasioned by the transaction, there will be material benefit that arises for patients and the wider community.
The parties will also have regard to the fact that many elements of healthcare in the UK are, and have for some time, been operated by the private sector and this provided benefits for the public health services and ensures the provision of services to the wider community.
It should further be recognised that in many healthcare transactions a healthcare regulator will have provided its consent or approval to the transaction, thereby recognising that while there will be financial returns arising, these regulators are comfortable with the identity of the buyer of the relevant target business or assets from a care perspective.
How do parties address the wider political issues in healthcare business combinations?
Material legislative or regulatory change in the sector is an inherent risk – and an important factor to be considered in the context of a prospective transaction. In sectors where transactional activity is attractive (child care and dentistry, for example) it will generally be the case that a prospective buyer will invariably use the services of a political due diligence specialist to ensure that the management team and the board of the buyer is advised of the current and prospective political climate that the target business will encounter over the proposed ownership period. Similarly, independent consultants may be engaged on a transactional basis to advise the buyer during the currency of the transaction.
Occasionally, the political or regulatory climate will result in a slowdown in transactional activity in a particular sector – an example being the slowdown in the M&A activity in the hospital sector as the CMA undertook a market study of the practices of private hospitals over a sustained period.
Government policies that lean towards more public provision of health services as opposed to private provision (with public funding) are a constant consideration, especially for those that might not have an existing sector footprint. However, the continued activity across the wider space suggests that this threat is not the cause for concern that it could otherwise be expected to be.
Update and trends
What are the current trends, and what developments are expected in healthcare business combinations in your jurisdiction in the coming year?
Current trends and developments29 What are the current trends, and what developments are expected in healthcare business combinations in your jurisdiction in the coming year?
Current trends include:
- continued strong activity particularly in the acute social care sector and dentistry;
- continued interest from overseas trade investors (including from the Far East) and private equity, particularly since the United States is beginning to be seen as over-valued in the life sciences space;
- a heightened interest in the sector from infrastructure investors who are attracted to the asset backed long-term income that is afforded from certain healthcare businesses;
- an increasing focus on quality owing to the high standards imposed by regulators and a focus by the government on high levels of transparency and clarity for consumers; and
- a consolidation of larger operators as well as the usual consolidation at the lower end.
Expected developments include:
- changes relating to the political climate (Brexit or potential Labour government) will be key and there is still uncertainty as to how this will develop; and
- life sciences M&A is expected to increase as the UK is a key centre for immuno-oncology and gene-based research, both of which have attracted a lot of interest (and high valuations) recently.