Investing for the future: Spire

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Jared Stevens
5 years ago
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An ageing population coupled with increased fiscal constraints has led to lengthening hospital waiting lists and the need to shift

1 Investing for the future: Spire Healthcare Aslam Dalvi - Associate Portfolio Manager The UK public healthcare system has come under increasing pressure in recent times. An ageing population coupled with increased fiscal constraints has led to lengthening hospital waiting lists and the need to shift patients from burdened public hospitals to the private sector. London-listed private hospital group,, has strategically invested in capacity ahead of this shift and stands out among its peers as optimally positioned to benefit. 13

2 Investing for the future: Public healthcare systems globally The World Health Organization (WHO) publishes a ranking of global healthcare systems based on a comprehensive study. It looks at expenditure, quality of care, access, efficiency and outcomes per dollar spent. According to the WHO, France is rated the number one healthcare system in the world. The rest of the top five are (perhaps surprisingly): Italy, San Marino, Andorra and Malta. The United Kingdom ranks reasonably well in 18 th place. The National Health Service (NHS) is the publicly funded national healthcare system responsible for arranging the provision of free health services at the point of care, including running hospitals and employing doctors. The public sector dominates UK health services. Government healthcare expenditure, which is funded via general taxation, accounts for around 80% of total healthcare expenditure. The UK spends around 9.6% of GDP on healthcare, marginally higher than the OECD member-country average. The NHS is increasingly under pressure Despite relatively high spend, the NHS has come under increasing pressure due to a combination of demand growth and UK budgetary constraints. High healthcare inflation, low economic growth and an ageing population have led to funding challenges at the NHS. Patient admissions have grown at 3% to 4% per annum over the last decade while limited investment in new capacity has put significant strain on NHS resources. Overnight occupancy is currently more than 91% with little room for further growth and waiting times for procedures are at record highs and lengthening. The financial viability of the system is consequently at risk (graph opposite) with more than 65% of NHS trusts 1 in deficit and unable to meet the growing demand for healthcare. Demographic trends for the UK are a concern with over a quarter of the UK population likely to be over age 65 by 2050, up from 18% currently. Healthcare costs increase significantly for ages over 65 and this increase in the older population will exert substantial pressure on the public sector in future years. The UK s Office of Budget Responsibility expects that overall health spend will have to rise by 6% per person per annum just to keep up with this demographically generated demand. In 2014, the NHS was given a mandate to reduce spend in real terms over future years, recognising that there are simply not enough financial resources to meet current and expected future demand. The net result will be a further rationing of healthcare services, growing waiting lists and a shift of patients to the private sector. 1 Trusts are the regional executing branches of the NHS, providing ambulatory, hospital and mental health services in different areas. NHS patient population ageing Average patient age (LHS) Number of patients that are over 75 years old (RHS) 4.5 Average patient age Patients over 75 (millions) Source: NHS Digital

3 The role of the private sector Against this backdrop of rising demand, increasing healthcare spend, lengthening waiting lists and growing budgetary constraints, private sector hospitals stand out as a key solution to the capacity problem. Structural pressure around funding will force the NHS to use the lowest cost and most efficient providers of care, shifting more volumes to the private sector over time. Total NHS outsourcing to the private sector has grown by a compound annual growth rate of 15% over the last nine years, from 2.9% to 7.6% of total NHS services. Only a fraction of this outsourcing is acute care requiring treatment at a private hospital, but growth has been equally impressive within this segment going from 250 million in 2004 to 1.6 billion in Despite this explosive growth, only 6% of all NHS-funded admissions are treated at private hospitals. Accordingly, a small shift from the public sector to the private sector will provide a substantial boost to revenues for private players. Spire is the largest private hospital group in the UK with 38 acute care facilities, 12 clinics and two specialist care centres. The group listed on the London Stock Exchange in 2014 and South Africa s Mediclinic acquired a 29.9% stake in The group has delivered solid growth over the last five years and has consistently taken market share from competitors. This reflects a consistent investment in existing and new facilities, top class management and underinvestment by its largest competitor, BMI Healthcare (owned by locally-listed Netcare and previously the largest player in the UK). BMI s ability to invest remains heavily constrained by its operating structure, which encompasses high rental costs and a large debt burden. This structural weakness of a large competitor should allow Spire to continue gaining share over the medium term. Well-positioned for growth In 2014, Spire began a programme of investment, adding three new hospitals, 14 new theatres and a specialist oncology laboratory in the space of four years. The new hospitals are situated within large catchment areas, namely Manchester, Nottingham and Surrey and position Spire ahead of competitors to capitalise on NHS and private volume growth. Further expansion opportunities in London are currently being investigated. We view this investment programme as a key enabler of future growth, which we expect will start delivering returns over the next three years. Around 32% of Spire s revenue is generated from NHS work. While NHS procedures are typically charged at a much lower Growing number of people on NHS waiting lists Millions of people Jan 10 Jul 10 Jan 11 Jul 11 Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17 Source: NHS England; Referral to Treatment Waiting Times

4 Investing for the future: tariff than private patients, the key opportunity for Spire comes from filling existing capacity as theatre occupancy (at 64%) remains very low. The benefit of NHS work in particular is that it is mostly elective. This allows Spire to precisely schedule procedures to fill vacant slots and thereby increase occupancy levels. Given the high fixed cost nature of a hospital, the incremental cost of performing an additional procedure is low, resulting in good profit growth, notwithstanding the lower price per procedure. An ongoing challenge faced by the UK private healthcare market has been the decline in private medical insurance (PMI) members. Data from healthcare research provider, LaingBuisson, highlights that the overall PMI market has declined by 7.5% since This has had a large negative impact on Spire as PMI patients pay a higher rate per procedure and are twice as profitable relative to a typical NHS patient. Following the recent strength in the UK formal job market, we expect PMI volumes to stabilise and eventually grow again. Spire can shift its mix towards PMI patients relatively quickly and any recovery in the PMI market will therefore be very positive for future profit growth. While PMI cases have been in decline, self-pay cases (where patients pay for treatment themselves) have been rising, though off a smaller base. This trend is likely to continue as the challenges at the NHS intensify many of these patients are older and therefore longer waiting times (sometimes as long as 18 weeks) have a significant impact on both quality of life and recovery. This represents a further substantial opportunity for. Outlook stands out as having a younger, higher quality portfolio of hospitals versus competitors and excellent clinical outcomes. The group has strategically positioned itself ahead of its competitors to take advantage of the increasing reliance on private healthcare facilities to deliver growth over the medium term. is a core holding in our funds with global exposure and investors should benefit from their ongoing growth. Spire s growth has outpaced its closest competitor Spire s higher capital expenditure BMI Healthcare BMI Healthcare Revenue (GBP millions) GBP millions Source: Spire and Netcare company reports

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July 2014 Kagiso Asset Management Quarterly

July 2014 Kagiso Asset Management Quarterly Global brewers: working harder for growth pg 1 Volkswagen s ambitious vision pg 5 The coal conundrum pg 13 www.kagisoam.com Hospital groups face tougher times