Q&A: SHS's Alilovic on healthtech investing

Harriet Matthews: How does investing in healthcare and health technology during the current crisis differ from investing during the 2008 global financial crisis?

Sascha Alilovic: In 2008, there were not that many healthtech companies compared to today – the field really started to develop around this time. The healthcare system as a whole is more reluctant to adapt to change than other industries, which is perhaps a reason. So in 2008 you barely had any healthtech investments. But in the last three to four years, healthtech investments have peaked, and a lot of companies have been invested into that were not necessarily sustainable businesses early on, but they will need to be now. Many companies we are now looking at need at become a bit more mature and show the capability to finance themselves to a large extent and not just start off with high spending and deficit – that would not be of as much interest to us these days.

Typically, in healthtech especially, we invest only in companies that have significant revenues in the magnitude of millions of euros. And they have to have decent margins and high growth trajectories in their markets. There has to be quite a significant need for their particular healthtech applications. We see some fractionised offerings all catering to a specific niche, but it might not be interesting or big enough to be sustainable going forward.

HM: Healthcare and healthtech companies are generally regarded as non-cyclical – but what kind of liquidity problems, if any, have your portfolio companies been facing during the crisis?

SA: Some of our portfolio companies did need more liquidity earlier than planned, as they are not as focused on respiratory topics or corona-related events, which is the large focus of the healthcare sector at the moment. Some planned developments on the customer or clinical side have been postponed to a later stage. For example, all of the clinical and pre-clinical studies for other topics beyond coronavirus are postponed or slower, so these companies must be very careful and manage their liquidity.

But a number of healthtech companies are benefiting: telemedicine is of course hugely benefiting. Our portfolio business Selfapy is tailored to helping patients with depression and we have even promoted specific free opportunities to users to use the app during the crisis, so that people who are anxious can work with psychotherapists and psychologists, and use their tool from home. That is one of the companies benefiting.

One portfolio company that is not directly involved is Neuro Event Labs in Finland, which does diagnostics of epilepsy patients as a remote session. But there are millions of epilepsy patients who need to be monitored or hospitalised – they can get the equivalent for the video EEG surveillance and can therefore do their diagnostics from home without needing to be in touch with a physician directly, and the data is then transported to the relevant neurologist.

HM: In SHS's current portfolio, which companies have been involved in efforts to fight Covid-19 or in producing products related to its treatment?

SA: Single Use Support (SUS) is at the forefront when it comes to the supply chain in almost all types of innovative medicines: the most advanced vaccine is currently being developed by a US company, and they are using SUS's freeze-and-thaw packaging systems to deliver vital and expensive products. A number of gene therapies are using their product to ship from filling plants around the world to their customers or in the next step in the value chain, where this part of the supply chain was previously in doubt as they needed to be 100% sure that it would arrive at the relevant patient undamaged and not tampered with. They are at least quadrupling their revenues based on that this year, probably even more.

SUS is looking at a growth rate previously of maybe doubling or tripling their revenues. The quadrupling is driven partially by Covid-19, but also by large contract development and manufacturing organisations that are using them. Thermofischer is a publicly known customer of SUS and is using the product to ship and pack modern and novel therapeutics worldwide. That is a big driver.

SUS is in the lucky position to be cashflow-positive to a large extent and can finance growth by themselves, but it is likely that they might draw down some funding from us to expand their production and manufacturing facilities. This is something that we arranged when we originally invested, so we have the option to have an additional reserve to add into the equity.

HM: Where do you see opportunities to deploy capital now? Will you be making new platform investments in healthtech or looking to deploy more equity into your existing portfolio?

SA: The existing portfolio is doing well in spite of the current environment – we need to take care of two or three companies that are more affected, but we have others that are doing way better than planned, so it balances out with regard to liquidity planning. We would like to add some investments of high quality in medical and health technology that now need an experienced investor who understands the sector and the specific indications there, and who can provide equity. We are looking at established players who have a high growth rate but see delays to their original plan and might need some dry powder added.

We are looking to add mid-market platform companies, too; businesses with succession topics where we could come in as a minority partner and help the owners reorganise, or even take a majority of up to 100% in small to mid-market domestic companies.

Many owners may have been thinking about succession planning for a long time. But this could be a crisis that helps to form a stronger opinion in their mind that it is necessary to get an investor in and prepare a succession, since this is a very stressful time for many companies and owners, and they will need to survive it. So an external investor with deep pockets could be helpful to them and there are many opportunities for minority stakes where they might plan a full exit in a couple of years' time.

Things have been liberalised a little in Germany since the start of this week. We have a lot of existing relationships in the industry and a lot of owners in the healthcare space know us, so now we can build on these relationships that we have established in the last few years. If needed, we can do a transaction quickly on that basis. On the other hand, it always takes time with preparation and execution, so we may start with preparation via videoconference and it would be fine to wait for the first personal meeting for a couple of weeks and maybe even months before final execution.

HM: Looking to the future, what kind of exit opportunities do you see in the current portfolio? Have these changed as the crisis has progressed?

SA: I think it's fair to say that transactions that have to be done now are being postponed; potential acquirers are getting themselves in order and they don't have the energy or appetite for deals. We saw some delays on that front – this was not as bad for processes in the last stages, if they were close to finalising the transaction and it was essential to the acquirer. But it is more difficult if assets come to market now: it will raise the question of "why now?"

We have therefore not had as many inbound approaches as we would have had typically, and where we do, we are just focusing on the bandwidth of our management teams, tying not to be too distracted by exit processes that are not yet very tangible.

We have quite a breadth of companies in our portfolio. For earlier-stage, innovative medtech companies doing clinical studies for FDA approval, the strategy has not changed much. The risk appetite for those has decreased among strategics for now. But when it comes to stable mid-market companies generating decent cashflow, which are profitable but not experiencing significant growth, we are seeing a lot of influx of capital because it is non-cyclical and could therefore benefit in comparison to other industries. We see some more inbound interest in those kinds of companies from new investors such as family offices, for example. But for the others, the strategy of when to exit has not changed much.

HM: What do you think LPs who have invested in healthcare- or healthcare-focused funds will want to see from their GPs during this time?

SA: I think what they all like to see is transparent communication; it's very good to inform all the LPs and keep them in the loop on how the companies are performing, how the crisis is affecting the portfolio companies and our future investment strategy. They also need to know how we are coping as a firm. It is important to be much closer to your LPs these days.

We have always been a more conservative investor; we always plan for how to reach break-even on each investment case. Our investors are very much benefiting from this strategy now, they like that we are not pushing or forcing our companies to the limit, but trying to support the possibility of them getting cashflow-positive on their own.

There is a question of how the healthcare sector as a whole will shift its budget: will it be increased for everything that is coronavirus-related, or will it be shifted? There will be a change in thinking from what is "nice to have" to what is "must have" – the commercial risks may be shifted and we are looking for this in our new investments as well. Bits and pieces in the market will shift and LPs are also looking to see if we follow that.

HM: Are there any other key developments in the market that you think should be mentioned in conjunction with the current coronavirus crisis?

SA: The pressure will be very high to prepare our healthcare system for the next pandemic, not just coronavirus but for any similar event. People will take a close look at ICU capabilities and capacities. There will be, in my view, some real increases in budget. But there will be more pressure on the system of cost versus vital healthcare benefits of the "nice to have" aspects; the portion that patients must pay themselves could increase to justify specific treatments, especially in countries like Germany where you have a very limited self-payer market.

In the healthcare investment space, it's key to look at what we are doing and what function we provide: financing innovation in the healthcare space is key. But at the same time, generating returns for investors is vital. The societal impact may not have had as much weight in the past due to the cost burden in combination with the patient benefit, but this will be crucial for the economy as a whole, and we as an investor can play a very helpful role.

Europe needs to have a very significant base of healthcare innovation. If innovation is all focused in Asia or the US, that can't be a viable strategy – and that is also a very important piece of the whole system. We need a functional system in Europe as people will cater for their own societies first – it will be outright disastrous if we don't have sufficient innovation and capabilities within our own society.

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