Europe: US healthtech key market for investors

The US healthtech market has emerged as the current focus for private equity firms seeking to break into North America.

Panellists at the virtual JP Morgan European Healthcare Services Private Equity Forum discussed the trends that are transforming the European and international healthcare markets and named healthcare technology as an attractive investment.

‘Where we are finding interesting opportunities is probably in the healthcare technology space,’ said Raj Shah, head of healthcare at Nordic Capital.

‘We’re continuing to see quite a strong depth of innovation there. And medtech obviously continues to be an interesting area for us.’

In December, Nordic Capital – alongside Astorg – jointly acquired US statistical software developer Cytel.

David Issott, partner at HG Capital explained that, as a software investor, the importance of the US couldn’t be overstated.

‘The US software market is extremely deep. A lot of the trends in software come out of the US and go into Europe and other parts of the world, so we’ve always had an eye on that part of the market,’ Issott said.

Several of the panellists highlighted the scale of the US healthcare market and the huge opportunities that this presents – a noticeable difference to the European market.

‘The US provides access to east and west coast biotech industries and ecosystems which creates opportunities for investment that are not of the same scale or maturity that assets are in Europe,’ said Tony Drabble, partner at EY-Parthenon.

Krist Werling, partner at McDermott Will & Emery, noted that the investors with whom he works are focused on the life sciences and health IT markets. Around 60% of all biotech development spend occurs in the US, making it one of the key markets for those investing in life science services, he added.

‘We’ve seen many of our European clients take platforms that may have been born in Europe and did an initial investment in Europe, expanding to the US to access that R&D spend,’ Werling explained.

‘It is well-known in healthcare services that the US market overpays in a wild fashion […] and we see a clear trend for European healthcare services platforms to want to be there.’

Outsource services were highlighted as another emerging player, with (again) a huge span of global spend deployed in the US.

‘You’ve got quite a lot of outsource service innovation, both in Europe and in the US,’ said Alan Mackay, managing partner and co-founder of GHO Capital.

‘You can find innovative models, whether it’s in e-clinical trials which are being nurtured in Europe that you can take into the US market, and you can find some incredibly refined delivery models in the US which haven’t got round to Europe that you can take across that way. My world is looking at the innovation within the big flows of capital where all the spend is going.’

Mackay went onto explain how the Covid-19 pandemic has majorly distorted supply chains. Nonetheless, pharmaceutical services have seen a ‘perfect storm’ of pushing up prices, and in turn a lot of capital inflow from the profits being reinvested in research and development.

‘My only problem with the pricing increase is not the absolute numbers of the multiples, it’s the fact that all boats seem to rise,’ he explained.

‘Innovative companies were getting priced at very high multiples but the investment banking intermediaries are trying to sell some very average businesses as equivalent. There’s very little calibration on pricing.’

Shah shared similar thoughts, outlining the challenge for investors in distinguishing the strong companies from the mediocre.

‘[It is whether] you can make that distinction between a great company and a mediocre company and avoid paying great multiples for the latter. Where the US market differs from the European market is in volume, and therefore availability and the opportunity to stumble across assets which, for one reason or another, may not be priced to perfection.’