Healthcare Investing: As hard as Brain Surgery?

There is an old adage that medical matters are best left to the professionals. So how can sophisticated, but not specialist,
investors participate in the market? Family Office Investor Magazine speaks to James Palmer & Dr Dee Kotak of Stratal.

Structural factors such as ageing demographics and political changes, particularly in major markets such as the US and Japan, are luring venture capital towards the medical sector at a pace, arguably, outstripping the tech market.

We see the emergence of personalised medicine, exponential advances in innovative, but costly, digital technologies. These and other developments continue to increase health care demand and expenditures: between 2017-2022 global health care spending is expected to rise 5.4 percent annually to just over $10 trillion.

This figure could be on the conservative side. Illustratively, although much attention is placed on major efforts to combat cancer, heart disease, malaria etc., there are several thousand designated “Rare Diseases” effecting nearly half a billion people across the world where novel treatment can dramatically change the lives of sufferers. Currently less than 10% of these disorders have treatments considered adequate.

From an investment perspective, the three largest reported ventures backed M&A transactions in Q1 2019 were in the pharmaceutical sphere. Total Venture Capital investment into biotech and related areas was $28.7Bn across 2018, up nearly $10Bn from 2017 according to recent Crunch base figures. “It is certainly an attractive area for investors. Hyper connectivity and increased computing power in research allows new innovative products to be modelled and brought to market in a way that disrupts conventional ‘Big Pharma’ R&D practise. Stratal acts as consultant to number of these early stage healthcare businesses, ranging from cancer treatment to medical devices.”

Competition is fierce as the pharmaceutical behemoths are loathe to miss out on cutting edge technology, constantly needing new products due to inability to innovate internally, patent expiry and lower cost alternatives challenging incumbent therapies. Novartis’s venture fund, for example, has completed 40 deals for young businesses over the last three
years, with an aggregate value of $1.6 billion. This comes at a time where in-house development programmes are being shelved, even in heavily subsidised fields such as

Further encroachment comes from traditional tech firms eager to apply machine learning in disciplines such as drug development, mental health and well-being. Google’s DeepMind has its own health “stream”, working in conjunction
with Moorfields Eye Hospital in London. Amazon’s acquisition of the distribution service PillPack is seen by many analysts as a sign of increased disruption in this space.

Despite the appetite, it is not an easy market to navigate. “Major VCs are highly specialised in this area; technical diligence can be complex, time consuming and expensive.” James adds. “We often hear feedback from generalist firms that they would like to participate in rounds but do not feel they have the requisite internal resource to evaluate the opportunity.”

“This is where we can help” Dee interjects. “It is unsurprising vehicles such as Family Offices would like exposure to the healthcare industry given its growth and sustainability… and the need to diversify their portfolios. But due to lack of experience, expertise and networks necessary for successful healthcare investing, most stay on the side-lines.

“We certainly can provide due diligence when evaluating potential healthcare investments as well as post-investment support across and range of areas from medtech, pharma, biotech, consumer health and digital.” We believe that,
with appropriate diligence and advice, it is possible for non-specialist healthcare investors to take an informed view on healthcare investment decisions and participate in a key growth sector. Dr Dee started in medicine, after qualifying at
Oxford, he rose to be a consultant in intensive care in a London teaching hospital and has also practised law. These experiences, as well as executive roles in early and growth stage healthcare companies, mean Dee is in high demand. He currently advises a boutique investment bank, while sitting on the investment committee of a healthcare fund that launches
later this year. “There is scope for Family Offices to gain
exposure to healthcare opportunities that have a different risk profile and timeline to the typical VC investment,” Dee continues. Many smaller companies provide attractive risk/return profiles in a short time frame but are overlooked because of the relatively small investment sizes or are not
considered glamorous and headline grabbing. By being able to access, understand and assess these assets, it is possible for Family Offices to successfully navigate what has traditionally been considered a difficult but lucrative investment sector.

The risks are quantifiable, manageable and similar to tech early stage investing providing the opportunity for substantial returns which cannot be achieved through passive healthcare investing through ETF’s or Index funds. Through our consulting services we keep abreast of major and emerging trends and also advise on companies that could fit well into a balanced portfolio”. Stratal is a London based consultancy working with innovative businesses and global investment funds.

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