A Discussion on the Global Healthcare Landscape
Innovation in healthcare is being driven by two things, says Jenny Chang of GSAM. Government pressure to take costs out of the system and technology-driven advances are transforming an industry that is already focused on rapid innovation, as practitioners, governments and the public monitor vaccine developments in the face of a global pandemic. The current environment may only accelerate trends in healthcare that were emerging pre-COVID-19. Those trends include advancements in medical devices and minimally-invasive procedures like robotics, whose market penetration is only estimated at 5-10%.1
The current pandemic could, however, change other operations. Shifting ambulatory services away from hospitals whose revenue depends on critical elective procedures may help keep infection rates low while keeping other operations going. Companies in the orthodontics space like Invisalign or at-home cancer screening tools like Cologuard may signal a broader cyclical shift to delivering medical outcomes outside of the doctor’s office or hospital.
Developments in the business of healthcare is flush with activity. Jim Sinclair in the Goldman Sachs Investment Banking Division points to record volumes in investment grade credit issuance, record highs in leveraged loans, and still more money on the sidelines. Private equity is largely focused on opportunities within the healthcare industry. M&A activity has been the one area with less activity in recent months, but green shoots are emerging, despite a number of distortions that are making it tougher for buyers and sellers to reach deals.
Beyond the pandemic, notable trends in healthcare include telehealth, the emergence of these more “direct-to-consumer” models of service, along with a shift to lower acuity care environments. Sinclair points to other areas of focus such as strategically leveraging data and suggests that healthcare systems will prioritize spending in software over capex and infrastructure. In the next few months, however, all eyes will be focused on the therapeutics element of healthcare and how a potential coronavirus vaccine impacts market activity.
Investing in Human Performance – The Venture Capital Perspective on Digital Technology and Neuroscience
The traditional US healthcare model has long been a simple one: patients visit doctors when they seek treatment. That model has drawbacks. Among the downsides: It’s not scalable. It’s expensive. And it’s largely “open-loop,” meaning that patients typically return only if their ailment isn’t solved. The future of medicine could look entirely different.
A potent combination of technology and neuroscience could pave the way for major transformations in healthcare delivery. Treatment for adolescent ADHD in the form of a video game, for example, can offer benefits over traditional treatment options. Normal brain neuroplasticity allows for rewiring of pathways to improve certain functions. Drugs like Adderall and Ritalin, according to one VC investor participant, may suppress the problem rather than fix it entirely. Likened to strengthening a muscle, however, a doctor-prescribed video game can enable a child to rewire parts of the brain that are not functioning properly. Played hundreds or thousands of times over a period can modulate problems with attention and focus, thereby conferring real therapeutic benefit.
Innovation in technology and artificial intelligence may usher in a vast opportunity set for investors and healthcare VC alike. Yet the regulatory aspect cannot be overlooked. The importance of responsible investment, self-regulation on behalf of innovators, and careful oversight from the FDA will be key as the industry evolves. “As technology gets more immersive and the richness of the experiences grow, we’ll see impact to the human sensorium. How does this shape us as people?”
CFO and CIO Perspectives: A Strategic Plan for Investments & Debt
What does balance sheet management, liquidity and operational strategy look like for a healthcare organization facing both a pandemic and market volatility? For the CFO of one of the largest Catholic health systems in the US, the crisis warranted a prompt look at four key areas: operations across 21 states with full staff while volumes were down by 40%; liquidity and cash flow generation; debt and covenant agreements; and lastly, management of a $21 billion investment portfolio that saw sharp decline in mid-March. Of greatest concern for this organization was liquidity and how to preserve it. A weekly call was enacted among key leaders. New capex was ceased, and other capital expenditure needed pre-approval, among other measures.
Today, the situation at the organization is not as precarious as it was several months ago. Although it is still behind its baseline earnings, it is generating positive EBITDA. The forward challenge is maintaining revenues as virus resurgence in certain US states has led to a tapering of elective procedures.
Another participant—a co-CIO of a large US nonprofit academic medical center—draws lessons learned from 2008 about having lower reserves. “The balance sheet is an example of something to work on during great times so you can take advantage of it during crisis periods.” At that organization, the approach has involved building up short-term reserves to immunize from a need to draw upon long-term capital. Ensuring access to credit lines and expanding them as needed can also create a buffer.
On the investments side, the general philosophy for this CIO is simple: “long-term returns are more about losing less in down markets than outperforming in up markets.” His takeaways: it’s harder to react after a crisis. Pick your managers and bankers with care, and know, at the portfolio level, where you are playing offense and defense. And eyeing potential opportunities across public and private markets today, equities in select markets still remain undervalued. With private credit, its higher position in the capital structure can look attractive later in the cycle.