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What are you currently seeing in terms of activity around healthcare partnerships and how does that impact the way CVC looks at deals?
Cathrin Petty: The last 18 months have been the most extraordinary period for partnership and collaboration in healthcare, including in biotech, pharmaceuticals, medtech and medical devices. Because of the pandemic people have had to collaborate more closely, including at the regulatory level between regulatory authorities.
It has also been one of the most ground-breaking periods of scientific development in healthcare, with a multitude of effective vaccines and new tests having been developed over a 12-month period. What has occurred is the result of the extraordinary partnerships between peers and close collaboration in vaccine development globally. This is a real step-change.
Historically, the healthcare industry has been very siloed because of the intellectual property challenges that encouraged companies to keep information to themselves. Now, covid has created a kind of opensource environment. The partnerships we have seen between Pfizer and BioNTech, and between Oxford and AstraZeneca, for example, really would not have happened in the past.
That is something we at CVC really want to build on. It sets a great example for private equity, where CVC has been pushing for some time to create more of these type of win-win partnerships. For example, we have created partnerships with leading companies like Recordati, an Italian pharmaceuticals business focused on treatments for rare diseases, where we collaborated closely with the family, brought in new capital and new executive talent to take the company to the next level, while Andrea Recordati stayed aboard as CEO. We own 52 percent of that business and our partnership with the remaining shareholders has created a great result for all of us.
Phil Robinson: As another recent example of CVC’s partnership approach, Genetic Group is a pharma CDMO business that focuses on the development and supply of products into the respiratory, ophthalmic and oncology therapeutic areas. We partnered with an Italian family and invested in the business for approximately 60 percent shareholding, with the CEO and his daughters staying to work alongside us and grow the business. They recognised the company had gotten to a scale at which they needed help and more resources, and we have been working with them to expand into the rest of Europe.
On the whole, I think healthcare executives have become more open to looking at creative ways of working with their industry peers.
How does it change deal dynamics and/or influence the investment thesis?
CP: These deals are not straightforward; you have to really understand the other party’s objectives and requirements, because otherwise it will go wrong. The key for investors is to understand the other party’s needs and then come up with a structure that meets those requirements, which takes time. In a hot equity market you see companies in straightforward situations going to auction processes or going public, but where there is something with additional complexity and flexibility these are partnership deals that can really work.
We spent about 16 months working closely with the Recordati family before we did that deal in 2018, and they were very clear that they wanted the company to remain independent but they needed a partner with expertise and the resources to help them build it. The process was not just about due diligence but aligning around the future business plan and developing a capital structure to continue to investing in the business, with the right people in place.
Another example is System C, which provides vertical software solutions to hospitals and social care, and is a 2021 investment for CVC in the UK. The founders are staying in the business alongside CVC, and we have got to know them over the course of a year. They wanted people to come on and build out the business across the UK for the NHS, but also to help them to expand internationally. They very much wanted to stay involved in the business, but wanted to leverage our global resources and expertise. Through our portfolio of hospital and provider businesses, we were able to provide them with a broad network outside of the UK to tap into and they have just signed their first partnership in Australia.
How has CVC been pursuing this trend, within its existing portfolio?
CP: At Theramex, which is our women’s health business, we have formed great partnerships with other pharmaceutical and biotech companies. Theramex is headquartered in the UK and provides a portfolio of products across the life cycle of women’s health, including contraception, fertility, menopause and osteoporosis. These are products that women from all economic backgrounds can access, and affordability is very important to us. Theramex has partnered with US biotech companies and pharmaceutical giants like Johnson & Johnson to license or acquire their products, and commercialise them in the rest of the world. They are now marketed in more than 50 countries worldwide.
PR: We also invested in a business called DFE Pharma, headquartered in the Netherlands, which is a leading excipient manufacturer for the pharmaceuticals industry. Excipients are the inactive substances that are blended with the active ingredients in medicines for purposes such as binding, bulking, disintegration, or to aid in the processing of the active ingredient. That business was owned by two dairy conglomerates, one of which wanted to exit. We stayed on in partnership with the Dutch shareholder, working together to expand the business and bring new focus and energy to the board and management team. DFE is now working in close partnership with Genetic in the Respiratory space.
What challenges and opportunities do these deals create around the value creation story?
CP: Value creation is one of the reasons why it is so important to really take the time to build a good relationship at the outset. In the time we spent talking to Recordati ahead of the deal, we agreed on the strategy around putting more emphasis on rare diseases and investing in its specialist and primary care business. That was the top line value creation story, and is starting to bear fruit.
The important thing is to align priorities around the business plan early on, including governance and the eventual exit. Where issues arise, it is usually if there is a conflict around those elements.
PR: It is about achieving alignment upfront and just talking very openly around what each party wants to achieve. The other thing is removing complexity: you want to keep it simple in terms of how these deals are structured. You want all shareholders to participate in the same way and same scenario as much as possible.
With Genetic, we were very conscious that the family wasn’t in a hurry to exit. So, we actually invested in that business through our longer term Strategic Opportunities Fund and that investment can be held for up to 15 years. That fund typically partners with founding families looking for longer-term partners and with lower leverage. In the case of Genetic, we are also planning on maintaining an annual dividend, which was important to the family.
Really, value creation comes down to building strong relationships. During covid it made a big difference that we had people on the ground, including in Italy for Genetic. Our Italian team was able to go down and sit with the management team and further build that relationship – whereas the rest of the deal team were restricted from travelling for much of 2020.
Cathrin Petty is a managing partner and global head of healthcare and Phil Robinson is a managing director in the healthcare team at CVC
How do you expect healthcare deal activity to play out for the rest of 2021 and into 2022, and what do you see as the key drivers of transactions?
CP: Right now, about 20-25 percent of our pipeline involves family-owned businesses, including potentially large, global businesses where families are looking to manage succession, estate planning or want capital to take the business to the next stage.
Families take great comfort from the fact that we have formed partnerships before, and not just in healthcare but in many other industries. They can see that we know how to work with them and meet their needs, and they do cross-reference with one another.
The pressures we have seen from globalisation and changes taking place in technology, distribution and systems over the last few years has led many families to want to bring in external capital to help catalyse a situation. This may be for an acquisition strategy, or a specific investment or to provide additional support to reach the next level of growth. That’s where we can come in as a partner – sometimes in a minority position – to help facilitate that goal. We can be very flexible in helping with how they would like to ultimately manage our exit, whether that’s giving them an opportunity to buy us out or bringing in another partner.
Going forward, we are going to see an acceleration of the pace of technological adoption in healthcare, which has been so fast in the past year, along with the pace of the regulatory response, which accelerates this progression.
We are seeing deal opportunities across the board in this industry, and it’s a real global moment in time. For us, what’s important is seeing strong underlying sustainable growth in businesses and situations, where we can help to add value via technology adoption, product rollout or geographic expansion, for example. I think we are going to see an incredibly active 12 months in healthcare, particularly involving opportunities in healthcare IT and medtech, and a growing theme of collaboration and partnerships among peers.
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