A regulatory cold front has caught the Australian healthcare landscape in the rain.
The Australian Competition and Consumer Commission (ACCC) is throwing its weight against the proposed merger between pathology giants Healius [ASX:HLS] and Australian Clinical Labs [ASX:ACL].
This decision dashes the ACL’s hope to create a giant in the pathology market with its $1.02 billion buyout offer.
The ACCC raised concerns about reduced competition, higher prices, and impacts on patient care.
Shares of both companies are down in trading today, with Healius down -2.12%, trading at $1.49. ACL is down -1.38%, trading at $2.87.
Both stocks have failed to excite investors this year, with Healius down -47.38% in the past 12 months and ACL’s down -7.31%.
Source: TradingView
Deal or no deal
In an announcement this morning, ACL said that it intends to withdraw its offer for Healius.
Interestingly, ACL did not mention the ACCC’s decision today but instead pointed to poor performance.
ACL noted a 45% slide in Healius’s share price since the 20 March offer and said its board were ‘concerned‘ about FY24 performance.
In Healius’ 1H24 guidance, the company gave a $14–17 million range in underlying EBIT.
ACL said based on this guidance, the company was ‘at risk of a significant statutory NPAT loss in 1H FY24′.
Given this, ACL believed that its 0.74 ACL shares for each Healius share was no longer a fair offer.
The irony here is that much of the deterioration of Healius’ share price was due to the second condition of the bid.
ACL made the deal conditional on Healius reducing its debt by at least $150 million. To do this, Healius announced a $187 million equity raise, which diluted its shares.
As soon as Healius announced the raise, its share price fell by 30% in two days.
For the ACCC, the opposition to the deal revolved around market dominance.
A merged ACL-Healius would control nearly half of the pathology centres in Australia. Leaving patients with limited choices in some regions.
This raises the spectre of reduced competition. Potentially leading to price hikes, service reductions, and longer wait times.
Commissioner Stephen Ridgeway summarised the ACCC’s position:
‘The ACCC is concerned that the proposed acquisition would be likely to result in a substantial lessening of competition in Australian pathology services markets.’
Outlook for healthcare sector
The impact of this decision extends beyond market dynamics and into the realm of patient care.
The ACCC also expressed concerns about potential quality reductions. Citing the possibility of less support for medical practitioners and longer times for test results.
For these stocks moving forward, Healius is clearly worse off. Pressure is mounting on management to bring down costs and right the ship.
For ACL, the deal is a big setback in its attempts to compete with Sonic Healthcare [ASX:SHL]. But the company leaves the deal in a better position.
The Healius-ACL deal isn’t the only healthcare merger facing regulatory hurdles.
The backdoor listing of Chemist Warehouse, via a merger with Sigma Healthcare [ASX:SIG] will also likely face resistance.
The ACCC has blocked Sigma’s mergers in the past. In 2002 it opposed a deal with Priceline owners Australian Pharmaceutical Industries (API). The reason given then was the reduced number of wholesalers.
This deal is slightly different, as it’s a vertical integration between a wholesaler and retailer. But the sheer scale of the combined entity could see many parties oppose the deal.
The Pharmacy Guild of Australia, considered the most influential lobby group in Australia, was caught off guard by the deal.
They will have some choice words about a 600-plus store behemoth with wholesale distribution.
Analysts remain divided on the fate of this deal. Some are predicting approval, while others fear it could create an unfair advantage.
It seems ACCC’s pushback has reignited the debate about the balance between markets and patient welfare.
The decisions made in the coming months will likely have a lasting impact on the future of healthcare in Australia.
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Regards,
Charlie Ormond
For Fat Tail Daily
