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PE investors see 'opportunity of a generation' in EU healthcare IT

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PE investors see 'opportunity of a generation' in EU healthcare IT

The digitalization of healthcare offers private equity and venture capital investors a multitude of opportunities, but access to data and the appropriate handling of it is a huge challenge for all involved, according to sector specialists.

The venture space in the underfunded European healthcare sector has gradually outperformed the U.S. venture space in many dimensions over the past decade, Ulrich Grabenwarter, head of private equity at Europäischer Investitionsfonds, told delegates at SuperReturn Europe Virtual on March 1.

"If we compare just on the European scale, the ICT segment and the health care segments we realized that healthcare is outperforming the technology venture space on both realized and unrealized valuations, but also in terms of cash and cash returns on funds," Grabenwarter said.

U.S. companies that reach unicorn status are rarely able to hold the valuations that they had pre-IPO pre-exit, while in Europe those companies typically continue to grow their valuations in an exit scenario, he said, adding that the necessary funding will likely come from outside the region.

"We still have a very poorly developed equity culture in Europe. We are still relying in the institutional investment space very much on fixed rate instruments," he said.

For Anja Bickelmaier, co-head of healthcare at Triton, healthcare remains a "fundamentally attractive sector" with improvement and digitalization potential. "With the additional effect of technology, I think we see still a lot of attractive investment opportunities also in the short term," she said.

While the sector has been slow to adapt to technology in the past, due to regulation, data protection, and the misalignment of stakeholders, its adoption will create widespread opportunities, Bickelmaier said, adding that COVID-19 has been an inflection point in adoption. Patients tried telemedicine for the first time during lockdowns, for example, and that is reflected in the big push for all the telehealth companies.

COVID-19 has highlighted an observation that investors in the European healthcare space have discussed for a long time but were unable to prove that once people start to use remote solutions, they do not stop.

"The particular thing we noticed, and this was true across North America and Europe, was that even as lockdowns ease, usage did not fall back," Henry Gladwyn, Principal, OMERS Ventures, said.

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Easing barriers regulation, reimbursement and people's willingness to embrace digital

Christian Weiß, managing partner at heal.capital Management GmbH, or Heal Capital, sees traditional barriers to entry such as the regulatory environment becoming more conducive for more investments, adding there are more opportunities than hindrances.

"If you look at Europe and Germany, with the Digital Care Act, with the openness to speed up FDA process, with the openness to actually run software through FDA and so on and so forth, I have the feeling there is more opportunity than ever," he said.

A couple of the firm's portfolio companies are now in breakthrough designation-discussions with the FDA, which seems to be "much more open and open-minded and accessible than it used to be," Weiß said. There are always threats and challenges in particular sectors, but "all in all, the opportunity to build the next big healthcare platforms, has never been better," he added.

On the consumer side, Weiß said there is a change toward a willingness to pay for good digital health products and services, which address unmet patient needs.

"There is a significant amount of people willing to spend their own money on healthcare topics as long as the product is good and it's not old school, old-fashioned," he said. "There is a shift, the willingness to pay, to top up your healthcare insurances, out of your own pocket. And I think that's a great shift and the right shift. And it's a good development for the overall patient outcome and healthcare sector."

Challenges

For Alex Frolov, general partner & CEO at Target Germanium GmbH, or Target Global, user retention could be an issue for business-to-consumer companies, but there is evidence of increased adoption of digital health among, for example, doctors previously unavailable for telehealth but who are now for it, and patients now more open to trying digital health services.

Jean-Marc Patouillaud, co-managing partner at France-based Partech Partners SAS, said privacy, a big challenge in the digital health space, could also serve as an opportunity.

"The vast reservoir of data can be a leverage for better improvement of how to understand diseases, how to better treat disease and how to find better drugs," he said, adding that while the pandemic is accelerating the need for digital transformation, it is also slowing that effort as COVID-19 is overwhelming hospitals, slowing down their capacity to transform.

The possible shift from reactive healthcare to preventative or proactive healthcare is "the opportunity of our generation," Frolov said, but added it is dependent on the availability of patients' data, and the data that they are willing to share about themselves.

One issue the sector could face is that it gets treated like any other consumer tech sector, Shane Chesson, co-founder and partner at Openspace Ventures Pte. Ltd., said.

"That could mean valuations go up, a lot of competitions come in, and in certain stage of the cycle, people can chase 'vanity metrics' such as number of consults, number of patients, without thinking about the quality, which is so important in health. So there is a risk of excessive capital, excessive valuation, a lack of focus on what I think what we all care about, which is quality outcomes."

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Healthcare demand is 'through the roof'

The imbalance between healthcare demand and supply has been magnified during the COVID-19 pandemic. Demand for healthcare has gone through the roof but the supply of healthcare in terms of the resourcing, the availability of staff or facilities is obviously highly constrained. Any businesses that can help address that discontinuity between supply and demand by improving efficiency will be successful, Sam Gray, managing partner at London-based healthcare private equity firm Apposite Capital LLP, said.

Investors have traditionally categorized healthcare into silos such as health care services, pharmaceuticals or digital health. Apposite targets businesses that address those intersections with digital and services between pharma and device companies and services or digitally enabled services and looks at how these different silos overlap and converge.

"If you're a doctor or if you're a patient, you don't care about those definitions. You're looking to get better, you're looking for an outcome. You're looking for a sort of holistic pathway or experience that yields the best outcome," Gray said.