This article is sponsored by KPMG
What exactly do we mean by ancillary care?
Kristin Pothier: Ancillary care refers to the entire range of healthcare services that support primary care physicians – so your doctors, nurses and dentists, etc.
It covers diagnostics, therapeutics as well as a whole host of custodial services.
The diagnostics component of ancillary care, which spans everything from in-vivo imaging (MRIs, CTs, ultrasound) to in-vitro clinical lab testing (core lab, molecular, companion diagnostic testing for therapy selection), has been a red-hot space over the past year.
What are some of the long-term drivers behind these sectors and why is it therefore an attractive space for private equity?
KP: Ancillary care is one of those areas where there is simply a great deal to choose from. Diagnostics, therapeutics and custodial services have been part of the patient journey since the beginning of medicine; as such, this is a sector that investors can really understand and get their arms around. Even as patients increasingly engage with care services via digital means – as they try to diagnose themselves using a variety of apps – they will still end up in front of a primary care physician to definitively diagnose their infectious disease, heart problem or pregnancy. The primary care gateway has always been an essential component of care, and critical to ensuring that we don’t overload our specialists. It will remain part of the healthcare ecosystem well into the distant future, making for solid investment opportunities.
In addition, there is a huge amount of change taking place, particularly with regards to telehealth and consumer health. Invention is something that private equity has always been drawn to. They invest around innovation and want to be a part of it. In short, this is a sector that can generate returns within a five or 10-year time frame.
What impact has covid-19 had on the ancillary care space?
KP: Certainly the most dramatic impact will be on innovation. Covid-19 changed not only the way we consume products and the way we work, but also the way we receive healthcare. A common theme that arose across other sectors as well was that companies that were reliant on physical presence and volume or companies that simply couldn’t adapt quickly enough with new technologies suffered tremendously. And, as we’ve seen in the past, whenever an industry focuses on adoption of technology to produce efficiencies and increase exposure, PE flows in to fill the gap.
Glenn Mincey: Certainly the most dramatic impact will be on innovation. As my colleague Kristin can attest, there was already a tremendous amount of steam building behind the ancillary care space, and diagnostics in particular, prior to the outbreak of covid-19. Diagnostics has always been the engine that ensures people find their way to the right therapy at the right time. Over the last decade this whole practice area has stepped up with the rise of precision medicine – the ability to make decisions on patient care based precisely on their diagnostic testing. The capacity to sub-segment patients and put them in the right therapeutic category meant the diagnostic element of ancillary care was already extremely exciting for private equity and for our corporate investors, even before a global pandemic came along.
KP: Then covid-19 hit and diagnostic testing really took centre stage. Diagnostics have proved crucial to understanding what has been going on in the population throughout the pandemic. In fact, we at KPMG have spent an enormous amount of time working with diagnostics labs to help them build out their covid-19 testing capabilities, so that everyone in the US, and internationally, could be tested and tracked appropriately. Of course, there were challenges. The test needed to be created to begin with. Once that happened, the covid-19 testing machine has been unstoppable, and that has meant a huge amount of revenue pouring into diagnostics, which has only made the sector more enticing for private equity.
Lockdowns and social distancing measures also had an impact on the ancillary services space, and the industry had to evolve in a short period of time. In particular, covid-19 forced telehealth to flourish. Prior to the pandemic, despite advances in technology, there was a reluctance to engage. Patients were insistent that they wanted to see a doctor face to face, and physicians didn’t push change. But when face to face proved impossible, providers embraced telehealth, and patients followed suit, seeing how much easier, and, especially in a pandemic, safer, to have consultations virtually. Post-pandemic, while some patients and providers will gravitate back to the old ways, the familiarity and efficiency with this form of consultation, we predict, will cement its use in care of the future.
Are there any other areas that you find particularly exciting?
KP: There are those that believe the diagnostics industry is experiencing a covid-19 bump, and that demand will wane once the pandemic has eased. But precision medicine means we are just at the start of an incredible journey. As we begin to tailor drugs in all therapeutic areas – not just cancer, but cardiovascular, infectious disease and mental health, for example – diagnostics is going to be required more than ever.
GM: I think the opportunity for private equity to deploy in ancillary services is exciting, not the least of which is in the context of an increased focus on both ESG and impact investing. The message from private equity is that you can do well by doing good. Improving the quality of people’s healthcare is a perfect example of how you can make a positive impact on people’s lives and well-being. Investment behind innovations such as telehealth has the potential to take healthcare to the most vulnerable members of society and make a real difference.
How competitive is the ancillary services space as we move through covid-19?
KP: There has been intense competition for almost every single asset that we have come across. When I look at the multiples that diagnostics labs have been trading at over the past year, even when they are not necessarily generating a huge amount of revenue but have that promise, it has been absolutely incredible. This has led to a real desire to get ahead of auctions. Companies are working with labs to get ahead of an IPO, or any other partnership that might be in the offering and looking to convert on the opportunity early to limit the contest. Once out to bid, valuations are very high, and competition is fierce.
Is that true across the board in ancillary care, or are there pockets of value to be found?
KP: I would say that the same is true of biopharma services, everything related to running clinical trials, working with pharmaceuticals companies to bring trials to fruition and then commercialising the launch. That is an exciting subsector. Contrary to this, and as a related point of interest, medical devices has been negatively impacted by covid-19 because elective surgery was halted for a long period of time. I do think that sector will come back, but we are not seeing the same kind of multiples there that we are in other areas.
Obviously, every country has a different healthcare system and demographic. Are there some geographies that are more attractive than others?
KP: We are seeing an increasing focus on geography in our diligence efforts overall. When it comes to diagnostics and therapeutics, there is still a tremendous amount of interest in the Asia-Pacific region. Not just major markets such as China, but also medical tourism strategies in places like Thailand. Investors are also looking at geographies that are easier to understand, such as Australia and Singapore. Finally, we are seeing increased interest in partnership models, particularly in regions such as Asia-Pacific. Travel restrictions mean that investors sometimes feel more comfortable with a partnership than a full-fledged acquisition.
In addition to partnerships, what types of deals are dominating?
GM: We are seeing corporate spinouts, secondary buyouts, privatisations, take-privates, really across the board activity on the deal front. In addition, there is an increase in IPO activity. Obviously, we have also observed a great deal of SPAC activity in recent months, but that now appears to be slowing to some degree. Many PE firms have funds dedicated to investment in healthcare and life sciences assets, and the often-publicised record levels of dry powder available to PE funds means that there is an abundance of capital available to PE firms to invest in healthcare and life sciences businesses than ever before. Accordingly, the trend of increasing PE investment into these businesses is likely to continue, especially as many healthcare and life sciences businesses should continue to do well in the post-covid-19 climate.
And what do you think the future holds for the ancillary care space, as we reach a new normal?
KP: I think it is important to say that the ‘new normal’ is not here yet. In the US, we may be celebrating because we are finally no longer required to wear masks if we are fully vaccinated, but the story is not the same around the world. There are new lockdowns elsewhere. The Indian variant is running rampant. Covid-19 is not done with us yet. That all means that an asset class that has been forced to become more innovative because of covid-19 must now continue to pioneer. Not only is it essential for services to continue to evolve, but we must also find ways of cutting costs around providing those services. We are just at the beginning of this journey and transformation will prove critical to our continued progress.
The last comment I would make refers to mental health and behavioural health services. There are huge problems brewing worldwide, and in the US in particular. There is an undeniable mental health crisis upon us, as well as an expansive opioid epidemic, both heightened by covid-19. While it can be seen as crude if not understood properly, the need for investment to tackle such burdensome healthcare issues requires private investment and is an opportunity at both ends of that equation. The need is there and there is a prospect to embrace technology in that sector in a way that hasn’t happened before.
Glenn Mincey is national practice leader of private equity and Kristin Pothier is global healthcare and life sciences strategy leader at KPMG