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Asia to be focus of several mega healthcare deals in 2019

Singapore

ASIA will be the centre of several mega healthcare deals in 2019, including Japan's largest corporate takeover, as global healthcare deals are forecast to rise 7 per cent this year.

In a report published on Monday, multinational law firm Baker McKenzie predicted that several cross-border and domestic megadeals like Japanese company Takeda's acquisition of Irish pharmaceutical company Shire for US$58 billion, as well as increased initial public offering (IPO) activity in the US and Asia, will fuel growth in global healthcare transactions to US$331 billion.

Dealmaking was muted in 2018, falling 5 per cent to US$308 billion amid political uncertainty and regulations, said the Global Transactions Forecast 2019 report for healthcare. Baker McKenzie predicts that these same factors will be a drag on the sector and eventually lead to a cyclical trough in healthcare deal activity in 2020.

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However, the past year saw many of the largest pharma companies divest non-core assets to one another in a bid to specialise and gain access to new technology, and Baker McKenzie expects this trend to continue this year.

"For the past few years, we've seen healthcare companies increasingly seeking to meet the demands of this fast-changing healthcare market," said Ben McLaughlin, global chair of Baker McKenzie's healthcare industry group.

"Pressure to lower costs and adjust to value-based care models, as well as meet the demands of technology-driven consumers, and the rise in consumer healthcare devices mean that buyers are looking to acquire companies capable of evolving within the landscape."

Asia and the US are expected to dominate overall deal activity in 2019 for a couple of reasons. First, the relatively high disposable incomes of the regions' populations will spur companies to try to attract new technologies and leverage this spending power.

For instance, insurers and care delivery operators have been merging to create integrated healthcare service providers, improving efficiency and providing growth opportunities for the companies.

Second, recent developments in the two regions are likely to stimulate IPO activity in the biotech sector - the US Food and Drug Administration took steps to speed up drug approvals in 2018, and the Hong Kong Stock Exchange now allows biotech companies with expected market capitalisation of more than HK$1.5 billion (S$260 million) to list, even if they are not profitable or revenue-generating.

In comparison, companies looking to list on the Shanghai and Shenzhen exchanges in China must first prove three consecutive years of profit and revenue.

Ashok Lalwani, healthcare IPO partner at Baker McKenzie, said: "The new rules mean in Hong Kong the number of biotech companies coming to the market in the early stages of research and development and with no profit or turnover is expected to grow."

Deal activity will likely slow after 2019, feeling the effects of political uncertainty from US-China trade tensions and Brexit, said Hideo Norikoshi, healthcare mergers and acquisitions (M&A) partner at Baker McKenzie. He added that healthcare players will face the challenge of data protection under new rules like the EU's General Data Protection Regulations.

"These regulations will force companies to protect patients' data, but at the same time, they need to collect data for the development of new drugs," said Mr Norikoshi.

"Whether regulators tend to enforce protection or make data available to responsible parties, M&A activities will be impacted."