iGlobal Private Equity - Spotlight on the Industry
Two years into the global COVID-19 pandemic, private equity (PE) interest in healthcare and life sciences remains at an all-time high. We take a look at the fields that look to offer the most promising opportunities in 2022.
The healthcare sector has seen enormous enthusiasm and infusion of funds during the pandemic, and the pace of transactions shows no signs of slowing anytime soon.
Several factors have contributed to this highly active market. A brief transaction slowdown in early 2020 resulted in a backlog of available deals and extra dry powder. Simultaneously, COVID-19 spurred demand for digital health solutions and opened doors for new technology to improve care delivery, access, and outcomes across the board. The pandemic also dramatically underscored the value of health data, clinical research and biopharma development.
As the pandemic turns endemic and new variants emerge, PE investors are putting even more focus on these critical health and life sciences sectors. Like any market, healthcare will continue to experience fluctuating demand, but if the challenges of the past two years have proved anything, it’s that healthcare is a resilient investment.
UNDERSTANDING THE REGULATORY CONTEXT
Stakeholders looking to engage in this evolving and highly active market can position themselves for success by developing a deep understanding of the target entity’s regulatory, political, and economic context. Across the world, health systems may face common pressures such as increasinvg costs, staffing recruitment and retention issues, as well as the challenges of aging populations and integration of care. However, the regulation and reimbursement of healthcare typically varies significantly country to country, reflecting as it does the political and social priorities of particular markets. These unique features can fundamentally alter the dynamics of a deal and, with transactions moving at record speed, it’s more important than ever to come to the deal table fully prepared.
The legal framework governing healthcare and its reimbursement varies widely across jurisdictions and in many cases is rapidly evolving. For example, several countries have recently intensified their scrutiny of PE investment in healthcare-related organisations. At the same time, the pandemic underscored the crucial nature of health systems, such that some may now be considered critical national infrastructure. As a result, healthcare PE transactions, particularly those relating to biosciences and technology, increasingly fall under foreign investment control regimes where countries remain reluctant to surrender authority over assets that may be crucial to supply chains and pharmaceutical supplies. Investors need up-to-date insights into these political sensitivities in order to appropriately value a transaction, with a view to both headroom for growth and the ability to accommodate future change.
TRACKING THE DRIVERS OF HEALTHCARE AND FINDING THE RIGHT SECTOR FOR INVESTMENT
While regulations and reimbursement vary according to national regimes, the drivers of healthcare are often global. Countries around the world are facing similar healthcare demands and trends: an aging population; increasing adoption of health technologies; and the push toward consumerism in healthcare, i.e., equipping patients to be better informed on, and to make their own decisions about how to manage and deal with, their health conditions. Tracking these trends can help investors understand where and how healthcare is evolving, and where there are opportunities to fuel growth.
Health Providers and Services
Looking at the trends shaping 2022, standout sectors include diagnostics and lab services, digital health and services, biopharma and its related services, and specialist health services.
In many areas, the demand for particular health services may have been altered by a country’s response to the pandemic and its reimbursement systems. For example, many countries report a slow down in the diagnosis and treatment of behavioural health conditions, elective surgical care, and cancer diagnoses, resulting in increasing demand for investment and provision of these services.
Demand is also surging for specialised areas of medicine, such as fertility, women’s health, and behavioural health. The latter in particular is experiencing a significant backlog, in part owing to a lack of investment and difficulties accessing such services during lockdowns. Countries with public health systems experiencing care shortfalls may be more receptive to private investment to support these critical areas.
Biopharma & Related Services
The pandemic has shone a spotlight on the value of biopharma, and activity in this space is booming. In a survey of global PE investors conducted by WSJ Intelligence and sponsored by McDermott, 62% of respondents said that PE has driven interest in biopharma investments that support the creation of COVID-19 vaccines and therapies. Other hot subsectors for 2022 include cancer medicines, mRNA, immunotherapy, cell and gene therapy, companion diagnostics, and genetic testing.
Health IT
Health IT and telehealth stands out as the subsectors that will attract the most attention from PE investors over the next three years, according to the WSJ Intelligence report produced in collaboration with McDermott. The challenges of the pandemic facilitated the rapid expansion of telehealth, home and point of care diagnostics, and other digital health applications, and demand for digital health is here to stay. Health systems are deploying health IT to improve not only healthcare delivery, but also its administration. Data analysis and artificial intelligence applications have powerful potential to help providers manage patients appropriately, ensure that patients are treated in the right setting, and identify outliers in the care provided. Areas to watch in 2022 include medtech, remote monitoring, life sciences tools and diagnostics, and devices and wearables.
ESG IN THE SPOTLIGHT
As healthcare investors pursue deals in 2022 and beyond, they should keep environmental, social and governance (ESG) issues top of mind. Historically, engagement in the healthcare sector itself was viewed as sufficient to demonstrate ESG accountability, but that is no longer the case. In recent years, ESG topics have garnered headlines and increasing public attention. Limited partners are putting more pressure on PE firms to make ESG a high priority, and they want to see these principles reflected in the investments being made.
As part of due diligence, healthcare investors should examine a target’s sustainability practices: how does the organisation use or reuse goods? How environmentally responsible are its building management practices and energy use? How does an organisation recruit, incentivise, and retain staff in a way that balances the important contributions those people bring on the front line.
Staffing issues currently raise particularly pertinent ESG issues for healthcare deals. Being able to hire and retain talent is vital to a successful investment vehicle. But in a field suffering from many healthcare staff reporting burnout, the recent “Great Resignation,” and an aging physician population, recruitment and retention are proving markedly difficult. Some stakeholders have turned to cross-border recruitment to fill staffing shortages, but recruiting across borders might raise ethical questions when there are resource disparities between the countries involved.
The recruitment and retention of healthcare professionals will remain a significant social consideration for healthcare investments for the foreseeable future. At the same time, leadership and motivation of healthcare organisations remains crucial: healthcare services, in particular, remains an area where the policies to recruit, incentivise, and retain the right staff and, more importantly, build and enhance the right culture, can underpin the success of that organisation.
