Brad Armstrong, partner at Lovell Minnick Partners, believes there are exciting investment opportunities to be found at the intersection of financial services and healthcare – in other words in facilitating the healthcare payer system.
“There are some characteristic similarities between financial services and healthcare. Both industries are large, highly regulated and complex, converging around certain marketplace participants and prevailing trends,” Armstrong says.
He points to insurtech themes driving change in the life, annuity, property and casualty markets, that also apply to the health and benefits marketplace, which is undergoing a digital transformation that is arguably decades overdue. “Payer and provider cost considerations drive many of these innovations, as does consumer preference, with patients and plan participants demanding more transparency, improved patient access, and more streamlined payment solutions,” Armstrong adds.
“The result is a constantly evolving set of new software, service and payments models, many of them aimed at addressing these cost and consumerisation needs.”
But the financing of healthcare is also interesting from another perspective – the appetite of lenders to support PE investment in the sector has increased dramatically in recent months. “In the last 18 months there has been massive growth in appetite and activity around financing of healthcare assets, particularly from our private credit clients,” says Alex Griffith, partner at Proskauer Rose.
Healthcare remains a highly fragmented industry, creating ample opportunities for growth equity.
“There is a huge M&A opportunity,” says Ben Long, partner at Inflexion Partners. “Barriers to entry in pharma and medtech are also lower as a result of covid. You used to have armies of reps going in and out of hospitals and doctors surgeries in order to educate clinicians about the medicine or device you are selling. Now sales have moved completely online and that is here to stay. That makes it easier for smaller, growth companies to compete.”
International expansion is another key trend for growth businesses in healthcare that has, ironically, been made easier during the pandemic, due to adoption of digital tools. “If you have the combination of digital expertise that allows you to get your remote communications right, and capital to allow you to invest in your cost base, it has never been a better time for a growth business in the sector,” says Long. “Barriers to entry have come down.”
Todd Sisitsky, co-managing partner at TPG Capital and co-head of the firm’s healthcare practice, also believes that a growth strategy can pay off. “We believe that when you take a long-term view and invest for growth, you can build healthy and high-performing companies,” he says. “Staying focused on growth and having a flexible mindset allows you to find and create efficiencies and innovations that the market is demanding. For example, we more than double R&D investment on average during our ownership and have made more than 100 add-on acquisitions across the portfolio over the past decade.”
The economic imperative to improve long-term healthcare outcomes while managing skyrocketing healthcare costs is driving dramatic change. Simultaneously, a wired healthcare technology infrastructure has been established, and the proliferation of interconnected electronic health records is creating a highly valuable data trove that can be exploited to deliver the triple aim of more accessible, higher quality care at a lower cost.
“As investors, we are bullish about companies offering new technologies and tech-enabled services that are uniquely positioned to provide solutions exploiting the infrastructure underlying the rapidly evolving and expanding healthcare market,” says Mike Balmuth, managing partner of SV Health, based in Boston.
“The healthcare industry’s stakeholders – providers, payers, pharma and patients – are looking to leverage technology to increase connectivity and improve health outcomes.
“Areas for healthtech enablement include the provision and monitoring of care in lower cost settings; innovative payment solutions related to value-based care initiatives; the evaluation of clinical performance and patient outcomes and the decentralisation and democratisation of clinical trials participation.”
Graham Ewart, the chief executive of medical device business Direct Healthcare Group, which is an ArchiMed portfolio company, is also excited about the opportunities healthtech presents for companies at both ends of the size spectrum. “Industry giants in healthtech have enormous research budgets and daunting capacity for mergers and acquisitions,” he says, “but they often don’t seize the opportunities that smaller firms do, particularly those that are private equity-backed. Industry giants – especially listed ones – tend to look for shorter-term payoffs than small firms with big ambitions.”
Tom Allen, managing director at Advent International, also sees healthtech as more of a venture play. “These are smaller, innovative businesses, that can then be consolidated into the big tech or medtech giants that have the scale, marketing and distribution infrastructure to maximise the potential of those opportunities,” Allen says.
Advent itself, meanwhile, is focusing on the businesses distributing these products, rather than developing them. Netherlands-headquartered Mediq, for example, is at the forefront of rolling out connected glucose monitors across Europe. “We invest behind companies that aren’t necessarily innovating these devices, but that are creating platforms to collect the data from those devices,” Allen says.
Infectious disease has been front-page news, dramatically increasing private equity interest in the sector.
“Attitudes have turned around 180 degrees since the pandemic’s onset and many private equity firms are now looking to invest in companies with technologies for diagnosing and fighting infectious disease,” says Vincent Guillaumot, partner at ArchiMed. He cites portfolio company Diesse, an in vitro diagnostics specialist, which has been partnering with infectious disease research institutes for years, notably developing tests for Ebola.
“Partnerships between private equity-backed companies and research institutes focused on infectious diseases will multiply rapidly.”
Because, of course, covid is not the only infectious disease to warrant our intention and investment dollars. “If you look beyond covid and viruses in general, antibacterials may have a comeback,” says Antoine Papiernik, managing partner at Sofinnova Partners. “Bacteria may not be seen as problematic compared to airborne viruses like covid-19, but there are major disaster bugs out there for which we have not got treatment available.”
Papiernik is hopeful that the experience of covid will push authorities including the US Food and Drug Administration and the Centers for Disease Control and Prevention to make changes. “These organisations need to think differently beyond the pandemic, particularly when it comes to the need for new treatments for antibiotics.”
But before infectious diseases can be treated, they must first be diagnosed, something that the covid pandemic has demonstrated so acutely.
Foresight portfolio company Mologic, for example, is a specialist in lateral flow testing. Lateral flow testing has become a household name throughout the pandemic, but again, covid is not the only infectious disease that this business has been tackling. “Mologic provides point-of-care testing for all sorts of unpleasant infectious diseases including dengue fever,” says Foresight Group partner James Livingston. “These tests are relatively cheap compared to lab-based testing and can be produced in large quantities.”
Ling Yang, managing director for Carlyle in Asia, agrees that covid has increased awareness around the proper diagnosis of infectious diseases. “We are seeing a move towards better diagnostics practices in China as a result of the recent health crisis, for example,” she says, pointing to Carlyle’s 2018 investment in Adicon, an independent clinical laboratory in China, and Metropolis, a chain of diagnostic centres and laboratories in India.
As private equity’s involvement in the healthcare arena continues to ramp up, trends have started to emerge beyond straight forward acquisitions, including non-traditional funding approaches such as strategic partnerships and joint ventures.
David Manko, partner chair of the healthcare practice at law firm Proskauer Rose, says his team has seen a lot of joint venture activity over the years but that the trend is now gathering pace. “In particular, we are seeing more joint ventures in the ambulatory services space between health systems and private equity than in the past,” Manko says.
Vincent Guillaumot, partner at ArchiMed, also sees a growing number of partnerships between specialist private equity firms and private equity generalists, backing the cutting-edge healthcare companies that have suddenly become hot.
“That’s a major positive for everyone from investors to the general population, since it links healthcare expertise with the global networks of the largest private equity groups, ensuring the rapid expansion and availability of the best medical treatments,” he says.
“We have our own joint venture along these lines with Warburg Pincus, which took a 50 percent stake last year in Polyplus, one of our portfolio companies. Polyplus develops breakthrough solutions for the delivery of nucleic acids for research and the biologics-based production of therapeutic drugs and vaccines like those used to combat covid-19.”
The pharmaceutical and medical devices sales model has been turned on its head.
Traditionally, an army of sales reps would bombard physicians, but access to those decision-makers has become increasingly challenging. The transformation is particularly evident in the US where the use of sales reps has been severely curtailed in the wake of the country’s opioid crisis.
“Historically reps wined and dined clinicians as incentives to buy their products. Any expenditure of more than $1.50 now has to be reported by both the clinician and the rep,” says Ben Long, partner at Inflexion.
Instead, a group of key opinion leaders, or KOLs, has become critical to the healthcare sales model.
“These top scientists are clinicians themselves but also have a significant academic presence, speaking at conferences and publishing articles,” explains Long.
“It is vital to win the support of KOLs for your product. These scientific influencers represent a structural shift in the pharma industry and it is critical to maximise a business’s ability to interact with that scientific community.”
Apposite founding partner David Porter says: “KOLs are hugely important from a marketing perspective. Their support makes such a difference.” He adds that Apposite also uses KOLs in its due diligence and on its company’s advisory boards: “If a KOL speaks to another medic, it is a completely different conversation to a rep turning up and trying to sell. It is a conversation of equals rather than a sales pitch.”