Healthcare under observation among European GPs

The European healthcare sector is proving increasingly attractive to private equity firms. In the first half of 2018, the sector saw two of the highest value private-equity-backed deals in the past five years. EQT Partners' hearing aid manufacturer Sivantos merged with Denmark-based hearing aid developer Widex in May – creating a consolidated group with an EV of €7bn. Meanwhile, in July, a consortium led by CVC Capital Partners acquired Italian pharmaceutical company Recordati from the Recordati family in a deal with a €5.86bn equity value.

"In the past five years we've seen the attitude towards healthcare in PE becoming more professional and knowledgeable," says Kevin Bottomley, partner at Results Healthcare. "The asset class has become more attractive as an investment."

Last year saw similar notable deals. Bain Capital Private Equity and Cinven Partners acquired German pharmaceutical company Stada with an EV of €5.6bn in August 2017. Two months earlier, buyout house PAI Partners agreed the sale of French private nursing homes operator DomusVi, which valued the business at €2.36bn.

In the past five years we've seen the attitude towards healthcare in PE becoming more professional and knowledgeable" – Kevin Bottomley, Results Healthcare

Healthcare as an industry is broad, and not all areas of this sector have proven profitable for private equity houses. GPs are less interested in early-stage drug development, as a rule, with multiple pitfalls involved in ensuring products are safe for the patient. However, GPs have regularly generated strong returns from pharma spin-outs involving commercialised drugs.

Says Goodwin partner Graham Defries: "These could be companies producing older products that are beyond their peak sales. PE buys those sorts of assets. It is a common feature in the market." A prime example of this was recently seen in the US, where Platinum Equity acquired Johnson & Johnson's LifeScan, its blood glucose monitoring business, for $2.1bn in June 2018. In the UK, Bain acquired Plasma Resources UK from the government's NHS in 2013, exiting the business to trade for £820m in 2016.

These lucrative spin-out deals are rare on the PE landscape. Self-contained pharma assets require a significant amount of time to complete due diligence. Therefore, GPs that already own manufacturing sites have a head start as they bring fully operational product development capabilities. Yet even when this is the case, healthcare companies often prefer other buyers.

"A challenge for PE is that pharma likes to sell to other strategics," says Keith Hunt, managing partner at Results Healthcare. "Often, long-term supplies of products are important and [trade] feels the better choice rather than a financially driven PE buyer. This is an old prejudice as we are seeing more companies divest to PE and more importantly, PE is more understanding of the sector."

Digital disruption
Typically, the healthcare sector has proven lucrative despite the challenges in securing assets. Yet technology has created fresh opportunities for private equity investors. High return potential is weighed against equally high challenges for investors, not least those related to regulation and safety.

"Digital is disrupting the sector massively, as it is disrupting other sectors," says Denis Ribon, managing partner at ArchiMed. "The difference in the healthcare sector is how it impacts therapeutics. Indeed, this is highly regulated, and any change needs to go through a very strict process, which takes time. As a consequence, industry players and their investors have to be patient, even if technology is ready."

Big data is an area of digital disruption in healthcare that provides strong opportunities for PE, explains ArchiMed's Ribon, and biotech company IQVIA is one example of a company building such a service offering. Says Ribon: "When it comes to challenges and opportunities in big data, it is about how to extract value from data and how to monetise it. In the healthcare industry we see this through personalised medicine and personalised cancer treatments."

When it comes to challenges and opportunities in big data, it is about how to extract value from data and how to monetise it" – Denis Ribon, ArchiMed

Results Healthcare partner Bottomley explains that companies using artificial intelligence to manage and mine huge data sets are particularly attractive. "Private equity sees data volume as a huge opportunity, for example companies using artificial intelligence to mine the huge data sets generated in life sciences," says Bottomley. He cites London-based artificial intelligence company BenevolentAI, which is focused on health and drug development and received $115m in VC funding in April 2018.

Indeed, BenovolentAI offers an example of how venture capital and private equity are managed separately. Other asset classes such as fintech require fewer technical skills, blurring lines between VCs and PEs, which have even been known to merge. But the healthcare sector requires a unique understanding to be investable.

"Traditional private equity buyers can be put off by valuations in the healthcare technology sector, as the biotech sector traditionally takes longer to create value than in other sectors," says Defries. "And many of those investing in biotech have yet to be convinced of the benefits of technology and healthcare coming together."

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