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Tuesday, September 6, 2016

Follow The Money: 3 Healthcare Verticals Attracting Private Investors

3 healthcare sectors that are grabbing the eye of private equity investors

(from MedCity News)

The healthcare and life sciences industries continue to spur thousands of new investment opportunities each year – especially on the heels of the Affordable Care Act. This fast-paced environment and significant upside potential can be quite intriguing. While different investors will favor certain sectors over others, at NewSpring Capital, we continue to see promising opportunity in behavioral health, home health, and big pharma outsourcing.

Behavioral Health

According to the National Institute of Mental Health, approximately 10 million people experience a serious mental illness in a given year that substantially interferes with or limits one or more major life activities – evidence that behavioral health services are becoming increasingly necessary. While financing options for these services continue to improve as a result of the Affordable Care Act (ACA) and the Mental Health Parity and Addiction Equity Act (MHPAEA), the lack of available behavioral health service options is creating a growing demand. In fact, many people today with mental health issues are not receiving the proper treatment they require.

Women and children often suffer the most from this lack of proper treatment. According to the World Health Organization, women are two times more likely than men to develop certain mental health conditions like depression, eating disorders, and panic disorders. Children are also at a disadvantage, as many of them begin to develop mental illness at a young age and do not have the proper resources to identify and treat the issue early on. Similarly, many non-violent offenders often end up in the prison system as a result of an improperly managed mental health issue or drug addiction. As a result, the prisons suffer from overcrowding and many don’t have the capability to properly manage inmates with behavioral health issues. These situations create an opportunity for companies who can effectively manage and properly treat these mental health issues.

The behavioral health space has continued to see a number of growing opportunities since the introduction of legislative moves, such as the MHPAEA and ACA. Additionally, regardless of this year’s election outcome, many aspects of the behavioral health market won’t change, making it appealing for prime investments in the near future.

Home Health

To combat the high cost of healthcare, we are starting to see a much-needed shift from a fee-for-service to a fee-for-value model, which focuses on the quality of care that patients receive, rather than the number of services billed. Therefore, many providers are now being rewarded for keeping patients out of the hospital, which is the most expensive point of medical intervention, whereas the home is the cheapest. As this shift takes effect, providers are now incurring more risk, so it’s critical to establish home health networks that are efficient, safe, and convenient for patients out of treatment.
As investors, we are interested in the most cost-effective and care-effective home health services. Specifically, connected health technologies such as mobile apps, sensors and wearables that help patients proactively manage their health, offer tremendous investment opportunities.

Big Pharma Outsourcing

The pharmaceutical industry is currently battling a mounting number of issues, including shrinking profit margins, heavy competition, a cost-heavy structure, increased regulatory pressure, growing expenses, and more. Faced with these challenges, big pharma has shifted their business models. More specifically, they have embraced outsourcing as a way to drive economies of scale without hindering their operations. It’s become common practice to outsource different processes from research and development to manufacturing and clinical trial management. In reality, many large pharmaceutical companies have evolved into managers of the drug development process, as opposed to completing the work in-house.

As private equity investors, the explosion of outsourcing over the last 10 years has created promising opportunities. We find the most value in companies that focus on cost saving initiatives for big pharma companies, provide a niche service — such as software — that either allows sponsors to access real-time data on clinical trials, or better manages patients or data or both. Another example would be specialized contract development and manufacturing organizations, known as CDMOs or CMOs, that have developed a specified line of service where they’re the only player in the market or one of only a few with proprietary know-how and/or technology. If that company is the best at what they do, then they have the potential to become very profitable.

The healthcare landscape is always evolving, making it an appealing space in which to invest. Whether it’s partnering with companies that help people receive proper treatments – both physically and mentally – or investing in outsourcing companies to help lower the cost of pharmaceuticals, we look forward to the opportunities inherent in this market.

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