Outsourcing companies to see 'significant investments' from private equity

Pharmacuetical outsourcing companies attract private equity

Outsourcing companies are expected to witness “significant investments” from private equity and venture capital, despite decreasing investment in the overall healthcare industry.

Six of the top 10 private equity healthcare deals in 2015 were in services, including outsourcing companies such as contract manufacturing organizations, according to a report by GBI Research.

To learn more about the role and future of private equity (PE) and venture capital (VC) in the healthcare services industry, Outsourcing-Pharma.com talked with Rodrigo Gutierrez Gamboa, a managing analyst at GBI Research.

  • Healthcare PE deals by value witnessed an overall decline from 2010 to 2015, exhibiting a negative CAGR of 12%.
  • 65% of total US VC investments were directed to fund expansion-stage and late-stage companies in 2015.
  • VC investment in early-stage healthcare companies continues to decline, particularly outside the US.
  • Oncology, central nervous system disorders, and immunology are the therapy areas that attracted significant investments.

What can outsourcing companies expect in terms of investment from private equity and venture capital?

Healthcare service providers and outsourcing companies, such as contract manufacturing organizations, continue to witness significant investments from PE firms.

In fact, our research shows that six of the top ten PE healthcare deals in 2015 were in services.

A primary cause of this is that such sectors are relatively insulated from potential reimbursement cuts, and consequently have a relatively small direct reimbursement risk, unlike some other sectors of healthcare such as biotechnology.

Why is PE funding important to the healthcare industry?

Both PE and VC funds, although to a much lesser extent than previously, remain one of the few sources of funding for healthcare start-up companies, which can often bring life-saving medical interventions, technologies and services to the market.

Indeed, many industry-transforming medical innovations that have cured diseases, or provided new treatment options and better health outcomes for patients have come from venture-backed investments.

Furthermore, medical innovations brought about by PE and VC investments are often reported help decrease overall healthcare costs over time. For example, it is estimated that every dollar invested in novel therapies saves nearly seven dollars in other costs in the US, such as hospital readmissions, or inability to work at full capacity or live independently.

PE and VC funding in health care also plays a critical role in optimizing R&D pipelines of large pharma companies. Medical interventions developed by VC-backed companies, for example, are often acquired by Big Pharma that have the resources and distribution channels to develop and market these products successfully.

Despite large pharmaceutical companies having increased their level of investment in development stage companies in recent years, they do not tend to invest in early-stage or seed-stage companies as much as PE and particularly VC firms.

What have been the trends in healthcare investment over the last decade?

Our research showed an overall decline in healthcare PE deals by value in the last 6 years, with 2015 and 2014 being the exception. 2015 was characterized by strong PE investments and exits, with strong prices and competition for high-value assets in most major markets causing the uptick.

Despite the uptick, deal values were nowhere near pre-financial crisis levels and major challenges remain. Corporate buyers are expected to continue to be active in deal sizes that are often preferred by PE firms, making it difficult for PE firms to secure deals.

What are some of the major challenges investors have faced?

Ongoing capital market uncertainty and healthcare industry challenges have seen venture investments in the sector decline, particularly for early-stage investments, as investors pulled their capital out in favor of other asset classes.

Important specific challenges affecting the healthcare industry include pricing pressures, stringent regulations, rising development costs, reimbursement issues and declining R&D productivity.

Geographically, where do you expect PE investments to expand?

Many parts of the Asia-Pacific region, including India, remain significantly underpenetrated in terms of healthcare spending per capita, thereby offering noteworthy investment potential.

For instance, India’s growing population, increasing chronic disease incidence, greater healthcare affordability, expanding insurance coverage, and rising disposable income are key drivers of growth and investment in the country.

North America and Europe are still expected to account for most of the funds being invested by PE and VC firms, although emerging markets such those in the Asia-Pacific region are expected to outpace them in terms of growth.

(Feature image: iStock/Nastco)

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