What’s the smartest growth strategy for healthcare firms?

Entering JVs is not the best option, analysts say.

For healthcare firms looking for a profit boost, mergers and acquisitions may prove to be the most lucrative strategy to achieve rapid growth.

A report by CIMB highlighted that acquiring targets is better than teaming up with other companies because this strategy eliminates start-up costs and does not have a long gestation period.

“In the small/mid-cap healthcare space, in addition to organic growth (i.e. ramping up of patient footfall in existing clinics), we see corporates expanding via three strategies: 1) M&A, 2) JV with other doctors, and 3) opening up new clinics by recruiting new doctors. We think that an acquisition-led strategy offers the greatest immediate impact to the bottomline,” said the report.

In particular, CIMB said that Q&M Dental’s acquisition-led strategy has allowed the company to ramp up its presence in China in a short period of time. The inclusion of profit guarantees in Q&M’s acquisitions also protects it from downside risks.

As opposed to M&As, joint ventures, are more risky and provide no guaranteed income. The risks posed by JVs is illustrated by ISEC Healthcare’s 55% joint venture to expand into Sibu, Malaysia, which is expected to commence late this year or in early 2016.

“This strategy requires: 1) an established brand name to drive patient flow, 2) partnering the right doctors, and 3) higher initial investment to equip a new clinic,” said CIMB.

Other healthcare firms could simply choose to use the traditional method of recruiting new doctors into new clinics, but this strategy takes time and does not have an immediate impact on a company’s earnings bottom line.

“Challenges include 1) compensation (where wages are typically the biggest cost of opening a clinic at 30-60% of revenue), 2) long gestation periods, and 3) retention of ‘star doctors’. ISEC witnessed this first hand, and closed their Mount E Novena clinic as the slow patient buildup made the high doctor wages untenable,” said CIMB.