Just over a year ago, Mediclinic was on a high. Shareholders and regulatory authorities had approved the group’s reverse takeover of the London-listed but Abu Dhabi-based Al Noor healthcare group creating the third biggest acute hospital group outside the United States.
The share price swung upwards sharply, rerating at the R200 mark in anticipation of the relatively easy and cost-effective listing on the London Stock Exchange and inclusion into the FTSE 100 index.
Since then however the company has been ensnared in regulatory catgut, which has constrained earnings and profits in its fast-growing Middle East market, and which threatened its lucrative Swiss market. The share price has fallen 36% to R124.92.
In February the company warned that results for the full year to March 31 would be constrained, despite a good trading performance from its two largest platforms in Switzerland and Southern Africa.
“The challenging environment in Abu Dhabi has unfortunately continued into the second half of the year. We are taking many steps to build the foundations for a successful, sustainable, long-term business in the Middle East,” said CEO Danie Meintjes in the update.
Thus the news that came out of Switzerland this week was a regulatory breath of fresh air for the company.
On Monday the Zurich Cantonal Parliament voted not to approve a levy that was to be imposed on the proportion of privately insured patients treated in listed hospitals, known as the VVG levy.
This is positive for Mediclinic. “The introduction of the tax in Zurich would have reduced Mediclinic’s Swiss profits materially,” says Aslam Dalvi, associate portfolio manager at Kagiso Asset Management. “There was also a small risk that, if passed in Zurich, other cantons would follow and adopt a similar levy.”
However he notes that despite the positive outcome of the vote, regulation remains a large concern, as evidenced by the proposed tariff adjustments and recent amendments to cantonal hospital law in Zurich. “In our view this paves the way for more aggressive regulatory intervention down the line.”
The announcement also highlighted a set of tariff adjustments proposed by the Swiss Federal Government, aimed at reducing overall healthcare costs in the outpatient sector. But if these transitional tariffs are adopted, the impact on Mediclinic’s revenue and profits should be limited given the company’s low outpatient exposure along with management actions to deliver efficiencies, Dalvi says.
Regulatory issues are among the challenges that Mediclinic has experienced in the UAE since its purchase of Al Noor.
In particular the Abu Dhabi government introduced a 20% co-payment last July for all Thiqa (government health insurance) members using private facilities for inpatient and outpatient services in Abu Dhabi. “This had an immediate and significant impact on the Group’s Thiqa patient volumes,” said Meintjes in the trading update. While the patient volume mix has stabilised, absolute Thiqa volumes are lower than previously expected.
At the time of the deal the UAE’s contribution to group revenue was expected to mushroom as the region offers significant growth opportunities, particularly as the UAE government was meant to be very supportive of private sector industry development.
However Mediclinic’s operations in the Middle East have been a disappointment, and the company warns that it expects a steeper revenue decline and a lower underlying Ebitda margin for the Middle East for the full year 2016/17.
“I have been cautious on “healthcare” stocks – drug companies, hospital companies, assisted living facilities – all of these are subject to the irrationality of government officials at some point in time,” says Reuben Beelders portfolio manager with Gryphon Asset Management. “Sadly, even in developed countries like Switzerland and the UK, the same applies – their politicians while more eloquent are as emotional. Just have a look at what Trump and Clinton did to healthcare stocks during their campaign – sadly with the potential repeal of Obamacare.”
Meintjes says that the group is committed to its Middle East strategy and added that the integration of the Al Noor and Mediclinic operations into a single business unit was progressing well.
Financial results for the 2016/17 financial year will be published on or about the 24 May 2017.
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