R&D, Reimbursement Atop Euro Healthcare Trends

As one of the largest and most successful European private equity investors in the healthcare sector, Cinven has a good handle on what trends and topics that investors in the space are looking at.

Hot topics that Cinven and other PE firms investing in European healthcare are looking at are the challenge of reimbursement and the resurgence of research and development (R&D) in pharmaceuticals. The latter is being driven in part by the Food and Drug Administration approving more drugs than it used to, and because R&D quality has improved.

For a PE firm investing in healthcare in countries with diverse demographics, Supraj Rajagopalan, the lead partner in the healthcare team at PE firm Cinven, says there is good news and bad news. The universal fact is people are living longer, have more healthcare requirements, and that is good from an investor perspective because it increases demand, he says. The bad news is this increases the demand on payors. The aging population is the key investment opportunity in developed markets, while emerging markets there is the emergence of the middle class and, therefore, more people who can afford healthcare.

A current trend is American, as well as Asian, strategic buyers looking for European healthcare opportunities. Cinven has been successful at selling some of its portfolio businesses to overseas investors, such as its sale of Sweden-based allergy and autoimmunity diagnostics company Phadia to Thermo Fisher Scientific in 2011. Rajagopalan says Cinven made a €1B capital gain on the sale.

In the past 20 years, the firm has done several large healthcare deals, including a transaction valued at £832 million overall for Mercury Pharma—one of the 10 largest healthcare PE buyouts in 2012—and Amdipharm following the merger of these two businesses in 2013.

“The mantra of Cinven in healthcare is to take a good business that’s on the margins for strategic buyers, and make it a great business that a strategic buyer wants,” says Rajagopalan. “As a private equity firm, you can’t buy the latter. You can’t compete with the cash-rich healthcare companies that are able to pay more with significant synergies, but you can create businesses through things like R&D and investing in globalization

Cinven’s strategy is acquiring companies producing niche products and turning them into a “big business focusing on small things.” Cinven portfolio company AMCo makes several off-patent niche pharmaceuticals that are below the radar of big-name buyers, says Rajagopalan. Collectively, however, that stable of drugs is big enough to attract potential big-name buyers.

“We aren’t investing in new drug development,” says Rajagopalan. “It can take 10 years to bring a new drug to the market. We’re invested in the contract research space through our investment in Medpace.” He adds that the increased investment into R&D is benefiting the contract research market, as more companies are undertaking clinical trials that are also increasingly being conducted on a global basis. The U.S. is a key driver in the pharmaceutical development space.

So what kinds of healthcare businesses does a European PE firm look for that would work for cross-border investments? Product-based companies generally work well, Rajagopalan says, as a patient benefiting from a drug or technology in the U.K. would line up with a patient in Germany benefiting from the same drug or technology. It’s tricky to make a healthcare services business like care homes multinational, as there are differences in regulation, culture and clinical practice in different countries, although it’s not impossible.

Of Cinven’s current investments, Rajagopalan says AMCo is performing “outstandingly well,” and on course to be a very successful acquisition, two years in. Of Cinven’s exited investments, the sale of French diagnostics company Sebia Group in 2014 represented a capital gain of more than €500M capital; U.K. hospital group Spire Healthcare Group successfully floated on the London Stock Exchange in 2014, and saw a 70 percent increase in its share price until mid-January 2015 when the firm achieved a partial sale of its shares in the business.

“There are very few large PE funds that have invested in healthcare on our side of the Atlantic; it’s challenging to make money,” says Rajagopalan, referring to Europe and other areas outside of the U.S. “It’s been challenging to navigate reimbursement. You don’t have that in any other sector other than healthcare. It’s a space where a small number of PE firms have been successful.”