What is the outlook for private equity in healthcare?

Despite the possibility of heading into a recession-type environment, private equity (“PE”) and venture capital (“VC”) managers investing in healthcare remain optimistic, saying the sector remains one of the most stable parts of the economy – even in downturns. However, they remain concerned that lower valuations could delay exits and potentially slow deal-making in some healthcare sectors. Finally, while companies may need to deviate from their core competencies to raise capital amid a possible economic downturn, investment managers say their due diligence best practices remain the same.

EisnerAmper recently spoke with several PE and VC executives who shared their perspective on healthcare (minus the provider side). They include:

  • Tommy Martin, CEO, Mammoth Scientific
  • Chris Mizer, CEO, Vivaris Capital
  • Tad Wessel, Managing Partner, Petrichor Healthcare Capital Management

Opportunities

PE and VC executives agree that the healthcare sector presents numerous opportunities as it is an essential service whether people get sick, have accidents or otherwise.

“Healthcare is a stable horse to bet on in times of economic downturn,” Toomey said. “Over the past four decades, public and private health care spending has consistently outpaced GDP growth.”

Indiana-based Mammoth Scientific manages Series A to Series C venture capital funds and invests in life sciences, biotechnology, late-stage medical devices and healthcare technologies.

According to Chris, specific attractive sub-sectors in healthcare include items making their way into the clinic, including protein chemistry due to artificial intelligence, CRISPR technology (therapy) and oncology, which is more mature.

“We’re getting back to normal in space,” said Chris, whose San Diego-based firm invests in therapeutics, diagnostics and devices. “COVID-19 has absorbed a lot of attention among regulators and researchers; not much has happened that is not related to COVID-19.”

Tad said it’s a good time to be in biotech: “Advances in basic science and genomic/proteomic sequencing have generated insights into the underlying mechanisms of disease and enabled the development of more targeted diagnostics and therapy.”

New York-based Petrichor operates a PE vehicle that partners with healthcare executives and businesses to provide capital for late-stage development or early commercialization of new therapeutics, medical technologies and diagnostics. Petrichor also has a biotech startup business, Petrichor Scion Therapeutics, which forms, capitalizes and builds new companies around innovative therapeutics with the potential to significantly advance or transform the treatment of serious diseases.

Tad noted that advanced computational methods, including machine learning, have brought new and emerging insights into many subsectors of the life sciences, including therapeutics, instrumentation and diagnostics.

“The future is bright and the industry’s collective ability to identify and address unmet needs is accelerating like never before,” added Thad.

Assessments

Despite the many opportunities PE and VC managers see in healthcare, their primary concern is that valuations will tighten and exits will be more difficult.

“In a lower valuation period, it will be much more difficult to manage meaningful exits,” said Chris, who specified that biotech companies were among the worst performing sectors due to revaluations.

Tommy added: “Companies on the verge of an exit or those considering an IPO may delay doing so, make a strategic exit or sell to another company.”

Given the low valuations, investors often push for more funding than companies originally intended as they seek a cash cushion.

“After a quiet four to five months into the year, capital markets are re-emerging as companies and investors work through price discovery,” Thad said. “M&A and business development volumes are also starting to pick up, although the sector continues to wait for the Merck-Seagen acquisition to be formally announced. Assuming the macro framework holds, which is far from certain, these ‘green shoots’ should develop into fully functioning capital markets.”

Due diligence

Even within the economic hub, PE and VC managers said their due diligence process will remain consistent.

“We don’t like to invest in companies that have only two outcomes: success or failure,” Tommy said. “We want to see a company that has three to four solid paths to success. So if one isn’t working, the team can turn around. That doesn’t change regardless of the economy. What may change is the frequency with which companies turn depending on the challenges of raising capital.

Thad added that Petrichor’s due diligence has always included how the company’s technology fits into the future of healthcare delivery: “Typically, we’ve found that early identification of technologies or products that become standard of care offers the best returns .”

Despite the possibility of a recession, PE and VC managers remain bullish on many healthcare sectors. However, concerns will remain about valuations and slower exits.

“There’s a debate going on in the market right now,” Thad said. “One group believes we have passed the point of peak inflation, evidenced by falling interest rates and commodity prices. The other believes that we are not witnessing capitulation or peak pessimism, as estimates currently predict an economic slowdown or only a mild recession. This is very hard to know, although we will point out that several macro risk factors we are currently facing have never been seen by the latest generation of investors.

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