Private equity and healthcare & life sciences

Matt Weiss:

Welcome to the KPMG US news, Twitter space, private equity and healthcare will deal pace continue conversation. I'm Matt Weiss. I'm a director at KPMG where I lead our industry communications teams. And I have the good fortune of moderating the discussion today between KPMG's national sector leader for healthcare and life sciences, Ash Shehata, as well as KPMG's global and US private equity leader, Glenn Mincey and Tania Carnegie, she's also joining us today. She's the private equity and asset management globally at KPMG impact. So great to be speaking with all of you and we'll get to the conversation in a moment. I just want to make clear for everybody listening today, a few points. First is I want to remind everybody listening that you can ask questions by tapping the microphone button on your mobile device, or you can direct message us at the KPMG US news Twitter handle to request to speak if you're not comfortable with asking a question via microphone, and we're going to be stopping during the conversation to see if there are questions and we certainly welcome participation today.

This conversation's being recorded and it will be available. And for those listening in who are in the media, this is an on record conversation. So you can leverage any of what's discussed today for your reporting. And as stated a moment ago, we welcome and encourage any of you might have on private equity or healthcare, which'll be talking about today. So Glenn Ash, Tania, it's great to have you all here, Ash. I want to start with you and then certainly welcome Glenn and Tania's perspective. When you look back at '21, it was a landmark year for investment and our 2022 healthcare life science investment outlook, which we came out with about a month or so ago, it was fascinating Ash, to note that the outlook among the PE investors, they are just ready to accelerate their active deal, pace even more with more than half of the survey respondents saying, they're going to do at least 10% more deals this year. Welcome your perspective Ash, from your perch and what you make of that finding from our survey.

Ash Shehata:

Well, thank you, Matt. And it's a pleasure to be joined by Glenn and Tania today. And as you said, I think the survey was really a resounding yes. I mean, we obviously came off of a very strong '21. M&A and deal activity both across healthcare and life sciences did bounce back after 2020. And we actually saw, just for example, last year we saw 460 transactions per quarter, versus 405 and 2020, and even 386 and 2019. So to your point, as we look forward to this year, and certainly we have a lot of twists and turns ahead us, but in '22, we are expecting a potential 10% growth factor on top of that very, very strong year. And specifically in life sciences we obviously expect to see sustained innovation. Certainly people will be looking to replace that lost revenue from some of the maturing products. Overall 702 acquisitions in life sciences, over 280 billion in value in '21.

And clearly when you look at hospital transactions, we also jump by 27% and you start to see a lot of folks again on healthcare it, and then as also behind biopharma. So this has clearly been a very, very strong year, big headlines, Oracle Cerner, and others also in healthcare have become big. So for 22 like you said, we're very bullish across healthcare and life sciences survey response are saying, look, cost of capital is still low. Even though we have some inflationary headwinds, clearly there'll be some pressure to deploy some of that capital. And I think we're going to see that movement go across the board, not just PE investors, we'll probably see that across a lot of our areas, because I think what we like about this industry is there's a lot of optionality. You've got obviously corporates that are moving in this space aggressively, and we're continuously strength across PE

Matt Weiss:

Ash. It's really interesting when you mentioned optionality and want to bring Glenn and Tania into the conversation, Glenn, I'll start with you as the global and US leader for private equity and conversations you're having with clients. And you look at the healthcare sector in particular, what stood out to you over last year or so, as we mentioned, 2021 was a landmark here, an investment, and then welcome your perspective, Glenn, from, from your position here at the firm, when, when you saw that statistic from our outlook survey that I, that I mentioned a moment ago.

Glenn Mincey:

Yeah. Thanks Matt. And thanks also to Tania and Ash for being here today. And so really stepping back, Matt, the question is why PE? Why is PE interested in this industry? And just stepping back entirely the US healthcare market, it's a massive industry. At $4 trillion, it easily represents maybe 20% of the economy and it continues at a rapid pace of growth, but it's plagued by legacy fragmentation. It's plagued by local and federal bureaucracy and inefficiency, and frankly, there are pockets of areas for improvement, including quality of care, accessibility, cost, innovation, responsiveness. And if you think about it, those gaps create large opportunities for private equity, particularly [inaudible 00:04:43] health tech companies backed by PE, and Matt. You're having sessions... Ash is having a session tomorrow on tech and healthcare. You've heard us state that tech is no longer a vertical, but rather a horizontal across all other industries.

 And that's really exemplified in healthcare. Healthcare seems like the last frontier for adopting digital tools, big data analysis and optimized processes, right? How many of us still visit healthcare providers who write notes on paper charts? So healthcare writ large is such a wide ranging sector that includes telemedicine, telehealth, remote patient monitoring the use of DNA, or I guess I should say data and analytics in this context, but the use of DNA, AI for drug discovery and development. Think about the possibilities, not only for patient care, but for record management and payments and drug testing. So not just core technologies, but technologies that enable patient access and enrollment and registration, so just bringing it back to the survey very quickly, the survey respondents noted that when it comes to deploying capital in '22, healthcare investors said that their key priorities would be improving operational efficiency and investing in innovative products and services. And just real quick looking back at '21, healthcare and life sciences have the highest growth rate in deal value 132% followed closely, or not even closely by consumer and retail at 90%. And we certainly expect that trend to continue.

Matt Weiss:

Some great points there, Glenn. Tania I want to bring you into the conversation before we open up to see if anybody listening in might have any questions. Tania, if you could, for our audience, not everybody listening in is necessarily well versed in private equity and the term impact investing. I was wondering if you just level set for the audience, what that is, and then the question for you would be, impact investing is another growth area for many PE firms. And the question is, how does that affect a PE firm's existing focus on investing in healthcare, Tania?

Tania Carnegie:

Thanks very much, Matt. So impact investing, it's an investment approach that seeks to deliver both financial returns, as well as social and environmental outcomes in a way that's being measured, monitored, and managed actively. So these are not competing interests. These are very complimentary interests and healthcare is a key focus area for impact investors across the board. What we've noticed is that an increasing number of the large private equity firms have launched impact funds and a large number of private equity firms have launched impact funds, excuse me, that explicitly are focusing on investing in improved health and wellness outcomes. So if we think about impact funds, what they invest in, versus the broader healthcare investment opportunity, very complimentary, impact funds are typically structured to deploy capital in that complimentary way to existing investment areas, and it may differ through an impact fund. They may focus on different geographies companies in different stages of maturity of growth or check size.

But the one thing that's consistent is the focus on generating commercial rates of return. I just want to pick up on something that Glenn mentioned around access. What we've seen pre-pandemic is that healthcare and health and wellness is a big focus, but of course COVID-19 really highlighted and exacerbated the gaps in access to healthcare and health equity, really adding to the imperative of finding dignified solutions. And as Glenn also mentioned, a tremendous opportunity that is just ripe for disruption and innovation. And what we've seen, just tying back to the earlier conversation around tech, health tech is just such a critical enabler of health equity and an area that we see a focus across the board.

Matt Weiss:

Tania, thanks for that perspective. I don't believe we have any questions, so we're just going to continue with the conversation for now, and again, remind those listening in. If you do have a question, you can tap the microphone button, or if you don't feel good doing that, you can direct message us at the KPMG US news Twitter handle. Before I go back to Ash, Glenn, just want to close the loop there and follow up on some of the points that Tania raised there because I know those are areas, ESG and impact investing, that you speak of often.

Glenn Mincey:

Yeah, absolutely. And Tania hit the nail on the head. Historically, if you think about it, and historically engagement in the healthcare sector might have been presented as an ESG or an impact metric in and of itself, but that's no longer the [inaudible 00:09:20]. And as Tania mentioned in the question of whether you're really doing good, a driving goal is accessibility and equitable healthcare for disadvantaged communities. So the pandemic really put a spotlight on an acute demand for digital services to provide more access and more equitable care. One example is that we have an increasingly aging population and people over 65, on average, spend three times more in healthcare per person than working age individuals. And that spend is projected to more than doubled by 2050 as the US population ages, and in addition, a significant segment of the population still can't afford healthcare service, which provides a need to really bridge that equity gap.

And as the industry finds ways to reach and care for that underserved population, the demand for health services is going to grow, and I mentioned that the cost of services is really unsustainable for the public at large, and so driving accessibility, it's really of absolute necessity for underserved communities and populations. Driving efficiency, which is the job of PE, that's going to help with the cost of services and help make the availability of care, more equitable. And Matt, before you move on, I always bring up workforce impact. And the great resignation is particularly acute in the healthcare industry as Ash can tell you. It's a field that's disproportionately feeling burnout, and it also has an aging physician population, so big factors of the future are not only going to be how they recruit healthcare professionals, but how they lead and motivate those professionals in a way that balances the important contributions those people bring to the front line.

Matt Weiss:

Glenn, lot of astute observations there. And we could probably do a whole show on any number of those points you raised, but I want to Ash ask you. Glenn talks about some of those, those challenges down the road, but of course here and now, in addition to the burnout aspect, as Glenn noted, the economy is in such a volatile state. Every single day brings with it different news. And of course, inflation is one of those issues. That's been a persistent challenge for the year, supply chain issues. I think most people, Ash, when they hear about inflation, when they think about supply chain issues, it's very easy to go to industries such as oil and gas energy, but the reality is of course it has a direct impact also in healthcare and life sciences and what your perspective as the national sector lead on how inflation and how even supply chain issues are starting to present themselves in the healthcare space.

Ash Shehata:

Yeah. Thanks Matt. I think, just to break it down, I really do want to focus on those three mitigating factors, those three risks. The first one being kind of that geopolitical unrest and how that impacts obviously a variety of the capabilities that we need in the industry. The second one is workforce and the third one is inflation. And I think right now, obviously, as we look at the lens of the news, all three of those are certainly at play today and they're all working clearly to create some headwinds, but also I would say some opportunities. So I just want to start with the first one. I mean, when we look at the impacts of the political unrest and it seems to be much more pronounced, of course, every day. The areas that we have been really, really figure out in this industry is certainly looking at that supply chain across pharmaceuticals, distributors, medical equipment manufacturers.

 And it was really a combination of things. Obviously we look at cost of capital. We look at cost of transportation, but it's also availability of resources and looking at resources in manufacturing regions around the world and looking at trying to create a little bit more risk reduction across those pockets, so I think it's going to be an opportunity, and this is kind of my point. There have to be different ways to manufacture different models, different partnership, different technologies. I think the industry is looking for those solutions now, and I do believe, and I'm very optimistic that I think a combination of private equity and corporates will stand up to it. And I think it's going to look a lot more like the tech enabled world that we're going to be talking about more and more, and it's going to be a world where we're using AI and analytics and different partners are coming together to form these alliances, to create new products and services.

  So I know it's hard to look at that optimistically, but I definitely have confidence in the industry and the innovators that's going to come forward. On the second risk of workforce, I do think this is one that has a lot of short term solutions now that people are looking at, certainly on the healthcare delivery side and also just on the general workforce side to be able to staff the opportunities. But I do think we are going to see amazing opportunities around robotic process automation, physical robotics, different transportation capabilities. We've seen some really innovative areas around distribution robots. And I think the third area we're going to start to see some really, really insight on is looking at ways to begin to improve workflows and real clinicians working at the top of their licensure. Those are areas that are starting to see really, really good movement.

And then the third one on inflation, I know that's obviously a big concern for everybody in the industry. The way I look at inflation for us is we are going to start to see continued, I think, headwinds on inflation throughout the year. However, cost of capital today is still attractive. That might actually accelerate deal volume in the first half of the year. And I think as we've talked about that optionality on the back half of the year, maybe when cost of capital becomes a little more constrained, there'll be opportunities to sell to sponsors and strategics who are looking for ways to improve their bottom lines, and I think a lot of that is going to be based on the resumption of the inpatient volumes. And I think you're going to see it across the innovation cycle on the life sciences side.

Matt Weiss:

Ash, lot of really, really great points that you raised there. I just want to pause for one moment. I don't believe we have any questions, is that correct? [inaudible 00:14:49]?

Speaker 8:

Yep. No questions at this point.

Matt Weiss:

So I just want to, Ash, before we go back to Glenn, I mean, you raised a lot, a lot of points across a bunch of areas. I want to stick with, Ash, a point that you had raised previously, you had posted on LinkedIn a few weeks ago in a long form post talking about whether the healthcare life science base could be poised for kind of a modern version of the roaring twenties. And I know that you're working on a new piece now where you're talking about some of these challenges about the geopolitical and certainly the market dislocation and inflationary pressures, but I found it very interesting.

I think our listeners would too, Ash. Historically speaking, it was really interesting to note, if you go back about 50, 60, 70 years ago, a period, not very much unlike this in kind of the run of the Second World War, some of the big advancements that we saw in that in the healthcare space, the Hill-Burton Act law, as an example, I know you'd share that with me, and also it was under the Franklin Roosevelt administration. We had the national defense research committee that was developed. Are there any examples you see in the modern era right now, Ash, going on? I mean, I guess the code vaccines are the most obvious example of how there's still innovation taking place at a rapid pace in healthcare. Are there any other areas that have stood out to you recently despite all the headwinds?

Ash Shehata:

Yeah, exactly. I think that is what I call the outline of the story. In the last a hundred years, we have seen economic prosperity in the twenties and certainly throughout the 20th century, but all of that has also been underpinned by a variety of geopolitical conflicts, world wars and local and regional conflicts. Throughout that whole period, healthcare and life sciences have both been able to incubate massive investment and massive innovation. And I do think you look at examples like Hill-Burton and that was the biggest expansion of the physical infrastructure of US healthcare that's ever happened. That all happened in the 20th century. We saw massive expansion in investment, in life sciences, and distribution capabilities, the spawn of new capabilities and deliveries like PBMs and the integration of distributors into the supply chain.

But if you look at today, we are poised to see the same kind of complexity, inflationary pressures, geopolitical conflict, all of those things. But I do believe that this is a very resilient industry. It's one that today is underpinned by innovation and technology. It's underpinned by new partnerships across the ecosystem between healthcare and life sciences. And it's also underpinned by more importantly, this daunting kind of opportunity for growth because I just came out of a session with our [inaudible 00:17:13] innovation center. And I'm hearing some amazing things about wellness and the focus on longevity. So all of those forces are going to drive more and more demand. And they're really, really going to force us to innovate in ways that maybe this industry has been a bit behind. And I think you're going to see it unleash a wave of growth like we saw in the early 1920s. It's going to be the continuation of the roaring twenties. If we can kind of look back at a hundred years and build the confidence we need to keep moving forward.

Matt Weiss:

Yeah. And that's really, like I said, Ash, when you first raised it with me, I found it'd be fascinating point about the act in the 1940s. I think it was 1946 was the Hill-Burton Acts you talked about. So you think of all the headwinds that were there and something like that to happen is pretty fascinating. Glenn, Tania, I want to shift back to you and speaking of a more present day conversation, ESG, right? I mean, it's something that we hear across all industries and healthcare and life sciences, and of course, private equity are no exception to that. Tania, I just want to start with you given your role at KPMG impact. Many PE investors these days are certainly focused on the E of ESG and mitigating the risk of climate change across their portfolio, but what would you say that means for their investments in healthcare?

Tania Carnegie:

Thanks, Matt, such an important question. I think about it from two perspectives, the first perspective is that the climate crisis is a public health crisis and contributing to the healthcare crisis directly. I mean, think about natural disasters just over the past year. They are increasing both in number and intensity and that's resulting in both acute and chronic illness, as well as an unprecedented number of deaths. People being forced from their homes, being put into unstable situations. It has such a wide ranging impact on health and on the healthcare industry. So appropriately addressing climate change in our communities, finding more sustainable climate positive ways of doing business, the way that food production is occurring, the way we're consuming goods and travel. These all have direct implications for healthcare.

 The second way to think about it is I guess, more direct to healthcare organizations themselves. So while they generally have a low carbon footprint, climate does have a number of critical considerations and implications. One of such is the physical risks of climate change on facilities or thinking about sustainable sourcing of energy or the safe disposal of hazardous waste or responsible sourcing to minimize waste. So these are all things that are directly relevant and really critical for healthcare organizations to be actively thinking about managing

Matt Weiss:

Yeah, Tania, Glenn speaks often, and I want to bring him into the conversation here about one of the challenges, certainly from the PE lens, Glenn, now you've talked about the lack of standards or definitions rather, and that's an ongoing conversation. I think again, for our listeners who may not be necessarily private equity focus, if you could kind of give the background and your high level overview of that, it'd would be helpful for our listeners.

Glenn Mincey:

Oh sure. And Tania and I talk about this all the time. We hear from our clients the number one thing hear is that there is not one standard to rule them all yet, right? Impact means so many different things to many different people. And the folks who are within the large PE houses who are managing impact and managing ESG, it's almost death by a thousand cuts. It's questions from so many different constituencies, whether they're LPs, whether they're other sponsors, whether they're portfolio companies, whether it's the industry at large, and it's just questions all over the place. So the industry really, really fervently desires, one single set of standards that not only prevents greenwashing and allows you to navigate the criteria, but also it acknowledges that you're actually doing something significant to do good.

 And coming back to the question of ESG and impact writ large, I mentioned before about the ability of PE to increase accessibility and equitable access for healthcare. Increasingly, and we've all seen this, people want to be involved in something that has a real impact in changing the world for the better. And that really makes healthcare very, very attractive for the investment community. Matt, I don't know if you have another question very quickly, but I did want to come back to Ash's point about innovation and the roaring twenties for healthcare. And in addition to all of the headwinds that we noted, and let me say first, the crisis between Russia and Ukraine is certainly heart rending. And we're all concerned about the innocent people involved, but that crisis is going to exacerbate the already existing inflation and supply chain headwinds for the global economy.

And then you add the great resignation and all of the headwinds are significant, but as you and Ash both mentioned, investors are frankly undaunted for 2022, and they express optimism over even the incredibly robust 2021 activity. Innovation to me is the clear mitigating factor against those headwinds. And the point that the only point that I was going to make is it is clear that the industry has shown that it can move more quickly and that it can innovate, and I'm very excited about it, but the PE playbook often boils down to providing scale, adding customers, driving revenue higher and improving balance sheets, and in addition to that, PE has a reputation for innovation and technology and being nimble. And that will really help spur the roaring twenties that Ash is hoping for.

Matt Weiss:

Well, Glenn, it is a perfect segue. Certainly I don't want to steal Ash's thunder for tomorrow. We're going to be talking extensively about tech and healthcare, and innovation will be a large part of that conversation. I wanted to circle back. I know we're coming up close to the bottom half of the hour here, so I just wanted to take a moment to pause. I don't believe there's any questions I saw come through, but just want to double check [inaudible 00:23:16] so that there aren't any questions.

Speaker 8:

No, nothing yet. Anybody could press on the microphone to ask a question or send us a DM through @KPMGUS_news. We'll be happy that your question.

Matt Weiss:

Thanks, [inaudible 00:23:27], for that reminder. Ash, I want to bring it back into the conversation, and I certainly want to go back to Tania who I know certainly has some additional perspectives on what Glenn just said before we sort of wrap up in a few moments. Ash, if you look back at our survey response and as you noted how strong the optimism was, do you think Ash, it would be different if we took that survey now? Do you feel that the conversations you're having with clients right now, or those in the space, do you think that optimism's still there? I mean, as Glenn just outlined, there's such a ripple effect when you think of how just interconnected the economy is these days. It is truly a global economy. Do you think that if we ask those same investors, would it still be more than half who would expect to be 10% more deals this year?

Ash Shehata:

I think that's a great question. I think that obviously of all the data points we're facing today would likely, I think, put a little bit more of a cloud over people's prognosis. And that's why I think a lot of times I always kind of remind ourselves to remain resilient in the way we look at these trends. I do feel however, the trends, as Glenn said, are overwhelming. A lot of times when we see this kind of dislocation and complexities with the interest rates and inflationary pressures, healthcare has been a safe haven traditionally. And I think when you see the emergence of healthcare and life sciences post-COVID, it will retain its status as a safe haven, amidst a lot of the uncertainties that we may see in other industries.

So I think to your point is I think once we can alleviate some of the concerns of the industry, successfully exiting some of the impacts it's seen on the inpatient side and the acute side, and you retain that difficulty in the world, we're starting to see, I think investors will remain confident within the healthcare and life sciences sector. I do think the one thing that we're going to have to figure out in the industry is as many are, is what is the pricing strategy going forward? What is the impact?

And I think many industries are asking that question, but even more importantly, I think healthcare and life sciences, the answer to that question is tied in a lot of things. It's tied with what we talked about, our commitment to things like ESG, our impacts at the federal government level around funding initiatives. And I think thirdly, I think pricing strategy is really going to be also focused on how we look at payment sources, both public and private. So I think a lot of those areas, but we always know healthcare and life sciences does get funded. And I think that is going to be the overwhelming reason why it will stay on that positive side of people's sentiment.

Matt Weiss:

Yeah. Ash, it's really like there's so many moving variables and it really will be fascinating to see how it all plays out, but you certainly raise a number of astute points and Tania, I want to just circle back. I know you had a few points you wanted to add onto what Glenn had said most recently.

Tania Carnegie:

Yeah, no, thanks, Matt. And just to add the perspective that is as much focus, tremendous focus there is on investment in healthcare and in particular, what we see from an impact fund perspective on increasing access to healthcare and health equity, there's also a tremendous amount of capital being deployed in investing in determinants of health, often with our clients using the sustainable development goals as a guide. So for example, they're investing in companies that are focusing on improving employment outcomes and the quality of jobs to create a more safe and stable work environment, which then increases earnings potential, or they're investing in companies that are improving sanitation and waste management or investing in responsible packaging or circular economy alternatives, which help avoid the need for landfills, or they're investing in providing more sustainable housing options. So what really encourages me and fuels me as we are in now 2022 is the breadth of investment dollars that are being focused on improving health and wellness outcomes from a number of different perspectives. So just wanted to share that with the audience.

Matt Weiss:

No, thanks for raising it, Tania. It's a great point. And I know we're at the half hour mark, know how busy folks are and mindful of everybody's time. So going to wrap things up in just a few moments. And I'm cognizant of the aspect of Twitter spaces where individuals listen in at different points. So I wanted to use this time, I'll start with you, Glenn, and then we'll go back to you, Tania, and we'll close out with Ash. Glenn, is there anything that you didn't raise that you feel is important for the audience, or perhaps there's a point that you brought up earlier that you feel is worth stating again for those who perhaps joined a little bit later on in our conversation?

Glenn Mincey:

No, I think Ash and Tania were very insightful and I think that I'm frankly optimistic about '22 as well. I do think there's plenty of room, as I mentioned before for scale and defragmentation and innovation, and frankly, I think private equity can certainly help in the industry,

Matt Weiss:

Tania, anything further from your end? I thought you raised a number of astute points on ESG's side, and here we are here in March. Coming up next month, you're going to have Earth Day. It'll certainly be at focal point of conversation then, but ESG is at the front of everybody's agenda these days. So we didn't know if there were any further ESG related points that you wanted to circle back to.

Tania Carnegie:

Thanks Matt, just to highlight that really taking a holistic view of the macro ESG related issues on healthcare organizations, as well as being really focused on what are those material issues that are within the span of control of the organization to manage. So being really focused on that and communicating progress to stakeholders, that's incredibly important and such an increasing expectation of stakeholders. It helps the organization to tell its story. Also, it's a key point of differentiation. So a really big opportunity on the journey of ESG.

Matt Weiss:

It's great points, Tania, and Ash, you'll be back on tomorrow, of course, talking with Mark Gibson about tech and healthcare, and that'll be a great conversation. I encourage everybody to tune back in for that again, if you think of how technology has and continues to be utilized in the battle against COVID-19 or the ongoing challenges of COVID-19. Ash, just wanted to close out with you and any thoughts that you may have that again, weren't covered today.

Ash Shehata:

Well, and I just want to say thank you for organizing this and thank you for tuning in everyone. I do want to just remind everybody, the PE mindset, the PE lens is what this industry needs the most today. I mean, to overcome those forces that we talked about around global uncertainty and workforce and inflation, and to focus on the opportunities we're seeing in biotech and partnerships and creative financing, looking at the new disease types like oncology, immunology, neurology, orphan diseases, infectious disease. These are the things of our generation, of our time, and we need the PE mindset. We need that ability to deploy capital, and we need everyone's best thinking for the sake of humanity. So this is the time and we are so fortunate to be a part of that community and so fortunate to have those resources targeted toward the opportunities in healthcare and life sciences.

Matt Weiss:

Thanks, Ash. And of course, Ash, you'll be down at the HIMSS Conference next week in Orlando, one of the biggest conferences of the year. There'll be plenty of ongoing conversations about the latest in healthcare and life sciences.

Thanks for joining KPMG US news Twitter spaces. Be sure to stay tuned for more great conversation.