Private Markets 360° | Episode 28: Strategic Shifts in Healthcare Investing

View Full Transcript

Chris Sparenberg:

Welcome to Private Markets 360, your insider's guide to the world of private investments. Today we're joined by Daniel Berglund, the Head of the US and Co-head of the Healthcare sector at Nordic Capital, a leading private equity firm. Daniel brings a wealth of experience and a unique perspective on the private equity landscape, particularly within the fast-evolving healthcare sector where he's been instrumental in shaping and growing investments. With a proven track record in healthcare investing, Daniel is well equipped to share his insights on navigating this dynamic market. Daniel, welcome to Private Markets 360 and on a day when you've just announced another deal. So congratulations on that and tell us more about it. 

 

Daniel Berglund:

Thank you. It's a company called Arcadia and you can think of them as having built their interstate network but for data here in the US. So they connect thousands and thousands of providers and hundreds of payers so that they can have one and the same shared data view, especially in the realms of value based care as they are driving more efficiency by sharing the both the upside and risk of value based contracts. So these are really the, the providers of that infrastructure. 

 

Chris Sparenberg:

Incredibly interesting and I'm glad we were able to jump right in with deal news. But as we're kicking off the episode here, we'd love to start from the beginning. We'd love to get an introduction to you and talk about your career and background in investing in the healthcare sector. 

 

Daniel Berglund:

Yeah, so I grew up in in Sweden, in Europe working as a consultant after college with Bain & Company. And some 16 years ago I joined Nordic Capital, a leading private equity firm specializing in healthcare and technology investments. I actually joined in our tech practice doing investments both here in the US as well as in Europe for that and some little bit more than 10 years ago I was in Finland of all places in October and it was awful weather and this was pre uber in and I was Techcom friends and it was probably two hours worth of waiting to get a taxi. So just asked random people if I could pay for their taxi to the airport and I'd share a cab with them. And as serendipity has it, the two fellows that I shared a cab with, they had founded a company in pharma technology. They had an idea to take mobile phones, this was in 2013 to do clinical trials. So collecting of data through for clinical trials and this was an area that we were excited about the intersection of data software and pharma as Nordic capital owned a lot of pharma companies and I personally had worked a lot in this like vertically specific software so these two fellows talked about their company and are they building a new market? And we pursue that company. Ultimately that deal didn't work out because they didn't have all the papers in order. 

 

Daniel Berglund:

But I did discover what I now call in the Silicon valley of, of PharmaTech, which is Philly and surrounding areas where these two Finnish guys had actually moved because that's where the world market is. And we eventually acquired their number one competitor, a business that we, through various iteration has built now to the biggest company in the pharma tech space, a company called Clario, over eight years. That's my background, how I ended up in in pharma and pharma technology. It really started with a tech background and eventually all I did was investments into healthcare. 

 

Chris Sparenberg:

Quite serendipitous. 

 

Jocelyn Lewis:

For sure. It's really interesting too how that all evolved and you were able to pivot from technology into healthcare and look at technology today. It's everywhere. 

 

Daniel Berglund:

Yeah. 

 

Jocelyn Lewis:

So really appreciate that overview, Daniel. And it's really fascinating how that chance encounter can lead to such significant insights and shift in perspective. And speaking of those shifts, with the substantial technology investments that are really revitalizing the healthcare sector, how has your investment philosophy changed over the years? Specifically, can you elaborate a bit on the transition from prioritizing healthcare services to focusing more on healthcare products and whether any external factors like inflation and even your team's expertise that's been developed over the years are being used to address key challenges facing the healthcare industry? 

 

Daniel Berglund:

It's a great question here. So just giving maybe a little background that in the world of private equity and healthcare, something to the tune of 50 to 60% of all deals historically have been healthcare services and Nordic. We have been invested there too, and with great success. But having said that, we are really returning to our roots as a firm. Our first, very first investment was in 1991, a chemical meta pharma company. And we have probably, if not the biggest, at least one of the biggest teams of any private equity out there for healthcare. So we have a lot of expertise within our firm and very specific focus on various subsectors. So what we've found over and over again is that if we apply the expertise, we get better returns by focus on more complex value chains, whether that is medtech, Life sciences, what we call health tech, which is really pharma technology and healthcare IT or medtech. 

 

Daniel Berglund:

There you need much deeper expertise when it comes to healthcare understanding and investments. Compare that to healthcare services, where obviously you need healthcare understanding for healthcare services. But it's more an operating game compared to deep analysis and understanding of the end markets. So that that's one reason. The other one is really that we pride ourselves on providing a product to our LPs, our limited partners, where we should be void of any macro influence. And what we found with healthcare services is that the market is much more dependent on the overall macro environment, the interest rate environment. We really saw that when interest rates shut up after the great financial crisis as well in as in the post Covid world where the roll up business model that most healthcare services tend to rely upon gets challenged and those investments tend not to very well in those environments. So it's really us coming back to what we always have done. 

 

Daniel Berglund:

Focus on products, complex value chain and really leveraging our expertise here where we feel like others have a hard time following us. 

 

Jocelyn Lewis:

Makes sense. I remember going into doctor's offices, dentist offices and the likes and just seeing walls of folders. I'm sure some still have it today, but it just makes me think as you're talking about different types of investments in the healthcare sector broadly all of that paperwork, so to speak, even having all of that go away, which is so essential, and you still need all the information that's in those folders for each specific patient that you have. But even that has changed so drastically. I'm sure you've looked at investments that have actually helped transition from those files folders of paper really into more of a technology solution. 

 

Daniel Berglund:

Is an excellent point that you're bringing up something that we rarely talk about when we talk about the healthcare landscape and us in particular, but it goes for most of the western world is that in the US on average every American pays something to the tune of $100 per month for healthcare administration. So all these folders that you mentioned, and I once actually measured the amount of paper that is required for just one patient visit. Yeah. And it was something like 25ft of paper not stacked together but next to one another for just one new patient visit. And that's why this has become so incredibly expensive to handle all of this administration. And what we find all over again is that if we find ways for society to save money or provide more effective care, whether that is through the delegation, which is a big area for us here at Nordic, or through smarter provisioning of drugs as we own pharma companies, or for that matter better medtech devices, when society wins, we do great investment when it comes to digitalization. As an example, we invested in a company called Inovalon that provides a lot of information, a lot of data processing for payers and providers in the US and, and also increasingly for life sciences. We have invested in companies such as State Clario that essentially digitalizes the clinical trial process for drug manufacturers. 

 

Daniel Berglund:

And we have many of these companies in our portfolio today and they all seek to do the one and the same thing, make sure that pharma or healthcare providers or healthcare payers really are future proof. And I cannot stress enough the importance of investing into AI for our portfolio companies because that really helps our customers achieve the efficiency and effectiveness that they need in order to meet a societal demand of lowering both the drug and healthcare costs. 

 

Jocelyn Lewis:

Yeah, anything that really is done for the benefit of society. I definitely think and agree with you that that's a win. That's a good investment. Especially now, just like you mentioned, with the adaptation of technology and AI, it's just, it's quite a fascinating time. And it's also evident that adapting to market dynamics is really vital for success. So Daniel, with technology driving transformative changes in healthcare, how does Nordic's investment approach, particularly with molecular companies, set it apart from other market players? 

 

Daniel Berglund:

Yeah, so your first highlight, maybe one of the key points here is that currently we are the majority owner of two companies who are actually pharma companies developing their own branded drugs. Which means that we will use both internal scientific expertise but also our scientific advisory board members in order to evaluate down to molecule level commercial pharma companies. And that generally is quite different. You have obviously venture funds and life sciences funds, but very few private equity firms would would do this type of investment other than in generics. The reason why we can do it is a we have scientific prowess internally within the firm. But then we were very early on, both in terms of investing into technology to for decision support and for evaluation. But also when we evaluate companies today we, we tend to use a more comprehensive data decision support than most of our peers. 

 

Chris Sparenberg:

And when you find those opportunities, it would be great to touch on the execution side. So how does Nordic approach financing for deals, particularly in the context of using leverage versus going in pure equity? I imagine in healthcare you have a different set of considerations. 

 

Daniel Berglund:

Is a great point. Yes, generally the way we think about financing here is that we want to make sure that we maximize growth. As a house, we consider ourselves to be what we call growth buyouts. And a lot of our companies, they're at the stage where they have a stable set of cash flows from a legacy type like product set and they can be very well levered. But then we usually have A growth, what we call a growth envelope that could be both initial equity or subsequent equity issuance in order to help the companies grow. And on average our portfolio tends to grow a little bit more than two times the average for health care private equity as a whole. And that really is a testament that A that we make sure to invest into what we believe to be growing companies. But B we also tend to help them both with inorganic but as well as with greenfield type like investments and giving them the financial flexibility to do that. 

 

Daniel Berglund:

Now, to give you quite recent example of our Arcadia that we just invested into, we did exactly this. We have massively reduced their death burden so that they are unshackled to truly help them with the promise of value that value based care has to the market so that we can both have better care for the patient as well as a lower cost for society. And there you need an appropriate financing structure in order for them to fulfill their mission. 

 

Chris Sparenberg:

That's a good lead into talking about deal flow and how you identify these opportunities that are not just attractive investments in themselves, but produce those additional outcomes you're looking for. Can you talk to us about how you're identifying companies, how you're building portfolios and some of your criteria? 

 

Daniel Berglund:

It usually starts with a conversation with our scientific advisory board. And a very typical problem for us could be we see that healthcare in terms of pharma is not increasing its efficiency I cost of developing new drugs is not coming down and if effectiveness is not increasing I that success rates are not coming up despite all the investments into technology. And we can then have a conversation about that. And our scientific advisory board in this very case led us to how we are, how we're designing clinical trials, the architecture of clinical trials. And as our type of diseases that we're researching are different now than 30 years ago, today it's much more in the field of oncology and rare diseases, where running clinical trials are fundamentally different than if you're researching large indications. So that is an example of how we then found the company called Sitel really where the two founders were the pioneers of what's known as adaptive clinical trials. And at first they end up in what we call our shadow portfolio, where we spend where they usually spend a couple of years, where we are following the company, developing our thesis, developing our advisory network and developing our value creation plan until they become actionable for us. And actionability for us usually comes when we have followed the companies for a couple of years. 

 

Daniel Berglund:

We have had a lot of discussions with usually the founders and management Teams and if they're outside capital very often I think the latest stat is 83% of our deals come from our shadow portfolio. And most of these deals are one to one between us and the founder. Arcadia, as I said, is a great example where we had a conversation with the co-founders and the board and we were able to come to an agreement that excluded any competition. And it was obviously a great deal for us. But frankly we also have shown over and over again to sellers that we will give them a good value. And if we can build a business plan together, it tends to be better for everyone. Now in the way we then assess them. It really starts with the strategic value of a business. 

 

Daniel Berglund:

There's one thing we have learned in the post Covid world is that you obviously need good financials for a company to be sellable. But even more importantly, you need the companies to have a strategic direction and a strategic importance that attracts the large strategic buyers. And in this case we actually now develop what we call our business quality index which follows something like 42 different type of KPIs, predominantly non-financial because we have obviously always tracked a lot of financial KPIs with our acquisitions. But really trying to put science around what drives a strategic importance and a strategic attraction so that we have an exit landscape and regardless whether the IPO or private market is open or we can attract the strategics to really want to buy one of our businesses, what it does for their business development. 

 

Jocelyn Lewis:

That's really insightful, Daniel. Thank you. And another example that if you wouldn't mind touching on. I remember we spoke about it in our initial call that we had and that was the opportunity with the PBMs. And maybe just explaining what a PBM is and where there might be opportunities because I found that really eye opening when you had described that previously. 

 

Daniel Berglund:

Yeah. So a PBM is a pharmacy benefit manager. And what we're probably going to talk about now is one of the biggest problems in US healthcare called the gross to net bubble. And that's the difference between the retail price and the price charge net of all rebates. That bubble used to be around 30 billion when you go 10 years back, is now grown to $300 billion. So what we, what you create here is that a lot of distribution in the US passes from pharma to these PBMs. And these PBMs tend to be owned by the big insurance companies. And because of that concentrated distribution they demand a lot of rebates from pharma. 

 

Daniel Berglund:

And today the rebates are actually Bigger than the entire revenue pool of branded pharma in the U.S. these rebates are then partially passed on to employers with lower, lower rates. But a lot of value gets captured by the PBMs themselves and the insurance companies. So this creates an inefficiency in terms of the distribution landscape in the US and often when we have these big problems, it raises the attention of politicians. And there are a couple of politicians, both on the Republican side and the Democrat side, who have highlighted the issue with the PBMs becoming so powerful and taking such a big part of the overall value landscape. Now, what we believe at Nordic Capital is that politics can solve a lot of problems, but technology and innovation can solve even more problems. And if we can be part here, and we made an investment here in Integrochain, a company outside of Philadelphia, we're really trying to help pharma and the patients here in the US to find an optimal distribution. Lowering the ultimate cost for the patient and increasing the value for the pharma company and squeezing effectively the inefficiencies in the distribution part of the equation. 

 

Daniel Berglund:

Now tackling a $300 billion problem, I think it's a great example. If we can lower that to become a less and less of an issue, there's a lot of money for us to be made by making that more efficient. But the good news is, if we make a good investment here, it's been an absolutely astonishing investment for patients and employers across America. 

 

Jocelyn Lewis:

Yeah, I find that really interesting because when think about technology, and you mentioned that this is an area where it's just inefficient today. That's where I feel technology really can come in and help with the efficiency leading to better outcomes all around. So thank you for sharing that. 

 

Daniel Berglund:

Yeah, you can think about the current market when it comes to distribution, when it comes to these rebates or gross to net, the gross to net bubble, you can think of it as mainly a market that is today essentially dark. It's very hard for pharma to know what happens with the rebates and companies such as Integra Chain, and they have been a pioneer in this market. So they really, without any other comparisons, they're really trying to be a modern version of Edison finding a way to digitally produce light to this massive problem in this massive market to the benefit of everyone here, both payers as well as providers as well as patients and then pharma companies. So it's really a win, win situation. 

 

Jocelyn Lewis:

Love that. And Daniel, as we look ahead, it's essential to consider the future landscape of healthcare investing and technology. We just spent a lot of time talking about some opportunities. But before we wrap up, what are some emerging trends that you foresee in the next five to 10 years? Are there specific areas of growth that you're really excited about? 

 

Daniel Berglund:

Yeah. So in terms of future trends here, the first one, it really starts with the macro and it's really specifically to the US landscape. Healthcare as a percent of GDP is now, depending on who you ask, 17 and a half, up to 20% of GDP. And I personally see this as a national security issue. The US spends actually as much money from public funds as Europe does as a percent of gdp. But is it more or less doubles that on the private side? And with increasing healthcare cost that's been growing more than twice the rate of inflation, eventually this will start becoming an issue from spending power on other things such as military and other security measures. So I think if I look five, ten years into the future, I think we'll start talking about health care and curbing that cost curve as a national security imperative. And that naturally leads us down the path of increasing adoption of technology. 

 

Daniel Berglund:

But it also leads us to I think within the remits of the private market to different type of payer models where I believe that we will eventually see value based care. I risk sharing between payer and provider not only in the primary care market, but also in the specialty and maybe even the in the acute market where all participants in the markets will work together leveraging technology in order to curb the inflationary pressures from healthcare. So that's one big theme that I'm very excited about. I think the other big theme, it's something that we have seen now for quite some time but I think it will accelerate going forward. And that's really the advent of new forms of diagnostics within oncology as we love fantastic innovative biotechs abroad drugs to the market. That makes some of our cancer indications not maybe as a curable diseases, but as could potentially be turned into more like a chronic conditions. We also now see the advent of precision diagnostics where especially for example as myeloma, you don't have a need to find new models for diagnostic that doesn't diagnose the initial disease but actually how your care is progressing. So think about it as you may have some sort of myeloma and you're taking a biological drug that's appears to be curing you, but you continue to take this drug because we are cannot test, cannot diagnose small enough strands of, of cancer that we continue to over use drugs because we don't have these resources now. 

 

Daniel Berglund:

There are innovations happening here where diagnosis is becoming better and better. In the future you may be able only to need to use these cancer drugs when for example your cancer account for myeloma comes goes over a certain limit. So that's a new and quite innovative field that I'm very excited about. And then you come into radiopharma. We have seen obviously cell and gene therapy, the rise of that and now we have the rise of radiopharma. Whereas Nordic Capital is unlikely to invest in either cell and gene therapy or radiopharma. What we are quite excited about is to be the picks and shovels for these markets. As an example, we just recently invested in into a company called Minerva that does radiopharma. 

 

Daniel Berglund:

It's a radiopharma CDMO and Croft. That's a great example of how we can help drive this very innovative type of treatments without taking the ultimate molecule risk if you will. So these are some of the themes that we're quite excited about. 

 

Jocelyn Lewis:

Daniel, thank you so much. We really appreciated all of the commentary that you had today and thank you for joining us for this episode of Private Markets 360. We had an engaging conversation with Daniel Berglund, head of the US and Co-head of the Healthcare sector at Nordic Capital. Daniel shared his unique journey in the healthcare investment landscape and highlighted the evolving role of technology in this sector. We explored Nordic Capital's distinctive investment strategies, particularly their focus on molecular companies and their approach to identifying promising opportunities in the market. Additionally, Daniel provided valuable insights on topics such as disrupting pharmacy benefit managers and the importance of adapting to market dynamics. We appreciate your time and hope you found this discussion both informative and inspiring. Don't forget to subscribe to Private Markets360 for more expert insights and trends in the world of private investments.

Jocelyn Lewis: 

Until next time.