Medtech distribution in South-east Asia ‘at inflection point’, ripe for private equity play: EY

Distributing medical technology devices in South-east Asia could pay off for private equity (PE) firms capitalising on growing demand and a fragmented value chain, according to EY's Private Equity Briefing: Southeast Asia report for June 2018.

With middleman distributors at risk of being cut out of the game, “the device distribution industry is ripe for consolidation and a roll-up play” by PE firms, the report says.

ASEAN BUSINESS gives you a wrap of the key points.

Demand and distribution

Expansions in healthcare coverage and a growing aspirational middle class are some factors driving the use of medical devices across South-east Asia, writes Abhay Bangi, EY Asean health transaction leader and a partner at Ernst & Young Solutions.

Such products are likely to see growth of between 8 per cent and 10 per cent in most markets, led by the consumables, diagnostic imaging and lab devices segments. But growth will largely be on volume, as prices fall on lower budgets and productivity gains from improved technology.

Mr Bangi notes that, in South-east Asia's medical technology space, “the overall value chain has been traditionally disparate” with multinational manufacturers and licensers tapping distributors - such as former employees' family businesses - to access markets.

“Due to the complex purchasing landscape, challenges with cash collection and vast and difficult topography, the reliance on distributors and sub-distributors, especially in developing markets of Indonesia, Philippines and Vietnam, is very high,” he adds.

PE opportunities and challenges

PE firms are looking to roll up small distributors onto a single regional platform to deal with the principals, says Mr Bangi. This gives distributors easier access to new markets, as well as better cost, operational and management efficiencies, among other advantages.

“Unlike the pharmaceutical sector, the region is yet to see a few dominant distributors, suggesting the potential for further deals in this space.”

But Mr Bangi cautions that, as markets mature, bigger buyers will have better leverage in the sales cycle and medical technology principals will be more likely to sell directly to the market.

He recommends that distributors consider the following approaches:

• Widening product portfolios by moving into adjacent segments. For example, distributors could tap procurement synergies between imaging or diagnostics, and patient monitoring.
• In-licensing value segment products in certain categories. Distributors could, for example, in-license products to players from India and China that are moving to grow beyond their home markets and into South-east Asia.
• Predictive maintenance. Tapping the Internet of Things, distributors familiar with both customer needs and technical product details can help to facilitate last-mile sales and maintenance solutions.
• Additional services. Services that distributors can tack on could include supplying hospital or laboratory furniture, information technology solutions for small-scale set-ups, or working capital support such as collections or payables tracking and monitoring