Oxford BioMedica PLC (LSE:OXB), Smith & Nephew PLC (LSE:SN) and Spire Healthcare Group Plc (LSE:SPI) are among UK midcap health-care companies "vulnerable” to takeovers from private-equity (PE) firms, investment bank RBC Group says.
The stocks trade below historical multiples and have under-geared balance sheets - making them ripe for "PE firms seemingly well-funded and large trade players having strong balance sheets, and in some cases post-COVID earnings holes to fill," according to the bank.
A trade buyer or investment firm seeking greater exposure in cell and gene therapy, with the ability to “leverage R&D costs”, may be interested in Oxford Biomedica, RBC said.
The bank’s analysis of the listed biotech company found its earnings were “depressed by very high investment into R&D, as well as underutilisation of existing capacity”.
The company is estimated to post a net loss in 2022, rocked by finance expenses that threaten to lessen the earnings per share for shareholders, despite boosting its revenue by 63% to 142.8m in 2021.
Oxford Biomedica is currently trading on a multiple of “3-4x”, RBC said, whereas a potential IRR could be 90% for an investor willing to use debt to finance its research and development activity.
Other healthcare companies that might be in the frame for possible takeovers include UK-based medical equipment manufacturer Smith & Nephew and acute care provider Spire.
Trauma and orthopaedic equipment provider Smith & Nephew’s shares are trading “35% below their peak”, the bank said, partly due to the impact of Covid-19 on hospital activity, while its balance sheet is “only modestly geared at 1.6x EBITDA”.
RBC said a consortium of buyers might opt to divest the company's wound care business for a partial return, but with such a hefty price tag, the asset would be likely to come back to the public markets in future.
“A re-IPO could be the potential exit route for PE,” it said.
If rival care operator CareTech Holdings (AIM:CTH), which is currently the subject of potential bids from the Sheikh Holdings Group Ltd consortium and DBAY Advisors Ltd, were to accept an offer, then Spire would become the only publicly listed company at that scale within the acute care space.
Last year, Spire’s shareholders rejected a bid from Australian hospital operator Ramsay Health Care Limited (ASX:RHC).
“Should management deliver on cost control and operating leverage, EBITDA growth could be substantial, in our view, further de-gearing the balance sheet, and making the asset more attractive to potential PE buyer,” RBC said, which noted some uncertainty over the company's "near-term earning trajectory” due to “inflationary and staffing pressure”.