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September 2021 | GSAM Investment Outlook

2021 Healthcare Investor Forum Key Takeaways

Our 4th annual Healthcare Investor Forum – “by CIOs, for CIOs” – convened an intimate group of key senior healthcare leaders to engage with peers and industry leaders on healthcare-specific topics. We invite you to read highlights, which cover industry trends and outlook.

Innovation remains the name of the game in the healthcare industry. More than a year after the start of the Covid-19 pandemic, investment in technology and innovative devices and procedures continues to drive advances in the treatment and prevention of diseases and the delivery of care. It is also changing how hospital systems operate and helping practitioners and investors alike connect the dots between more inclusive growth, better healthcare outcomes and attractive investment opportunities.

 

 

Key Takeaways


A Discussion on the Global Healthcare Landscape

The pandemic pushed an unprecedented level of funding into the healthcare sector, turbocharging technological innovation, says Jenny Chang of Goldman Sachs Asset Management. Drugs are being developed faster and timelines are getting shorter. And the pace of that innovation is unlikely to slow. Advancements in medical devices and minimally-invasive procedures like robotics are accelerating, and advances in genomics and gene editing have created enormous opportunities to add to the short list of world diseases (0.2% of roughly 5,000 1) for which we have cures.

Digitization will remain a dominant trend. The sheer number of virtual doctor visits, or telemedicine, may decline from their pandemic peaks during lockdown but are almost certainly here to stay. Goldman Sachs’ Jim Sinclair in Investment Banking notes that both public and private investors have shown interest in opportunities connected to software and other tools to support virtualization. Companies invested around $13 billion to support innovative growth in healthcare and healthcare technology during the first quarter of 2021. In 2012, these sectors received about $1 billion of investment for the entire year.2 Private capital has ebbed and flowed a bit more, but Sinclair said he expects support for innovation from growth equity funds to remain fairly constant.

Other trends to watch include increased demand for mental health care and treating diabetes—two conditions that appear to have proliferated during the pandemic-induced lockdowns. Sinclair said more companies are exploring ways to use technology to reach patients and improve treatment of both conditions. Delivery of long-term health care is evolving as well. COVID-19’s impact on nursing homes has created increased demand for home healthcare models. In the past, there have been questions about the profitability of some home healthcare models, but Sinclair said he expects significant capital investment into this area to support the growth of providers.

The use of artificial intelligence (AI) in delivering health care is also likely to increase, including the use of smart robots to interact with humans. Sinclair called it an “area of opportunity,” particularly for venture capital firms.

 

Approaches to Innovation in Healthcare

The challenge for individual health systems is staying abreast of current trends. One way to do it is by investing in innovation, which requires an effective investment strategy that can respond quickly to opportunities and invest at scale.

For some, that can mean co-investing with private equity firms or seeking to achieve scale by investing alongside venture capital firms. “We usually don’t take a lead position. We’re not resourced to do that effectively,” said a senior vice president for a large healthcare system with operations in 21 states and a $27 billion investment portfolio said. “It takes time and focus to grow a successful company.”

Other healthcare systems have embraced different approaches. One of the larger systems in the US decided to launch its own venture fund focused on early to mid-stage. The objective, according to the system’s chief revenue and growth officer, was to invest in innovation. Efforts to increase non-patient and non-clinical revenue led the group to start acquiring and growing service organizations and other companies that led to efforts to pool resources with other organizations, including partnering with other healthcare systems to launch a data enterprise. “We made a bet here that scale mattered more,” he said. “If (we) had launched a data company, we would have been one of 200 data companies. The main benefit for us was the network effect in creating a large data enterprise that other health systems could benefit from as well.”

 

Machine Learning & Artificial Intelligence in Healthcare

Precision medicine. Drug discovery. Child development. Human fertility. These are just a few of the many areas where machine learning and artificial intelligence (AI) has the potential to improve patient outcomes while also creating new opportunities for investors and healthcare venture capital. What these technologies offer is the ability to analyze large data sets quickly to find patterns that may otherwise not be identified, which can reduce costs, improve accuracy, and reduce the chances of human error. 

Take in-vitro fertilization (IVF): it’s expensive and often doesn’t work, in part because it is vulnerable to human limitations. But when machine learning and robotics is added to the process, the pattern recognition and precision may improve the chances of creating a viable embryo. This type of technology ultimately may make IVF available to a much broader population of people while lowering costs and increasing efficacy.

 AI-powered applications have also proven effective at providing therapeutic care in areas such as mental health. With demand for mental health services outstripping supply, patients can now communicate and with AI-powered agents to provide initial support while waiting for appointments with a live care provider. Other digital companies have received FDA approvals for software applications to treat diseases such as substance abuse disorders and chronic insomnia. 

These types of innovation in AI and machine learning applied to healthcare are likely to create many more attractive opportunities for venture capital funds, though investors should expect a fairly long incubation period, said the managing partner of one venture capital company. “These businesses often take five to seven years to build, and they require collaborative cross-functional teams skilled in both technology and medical disciplines.” But getting involved early and incubating good ideas has its potential advantages, including the opportunity to invest in potentially transformational technologies and applications at appropriately low valuations.

 

Blockchain Technology & Digital Assets in Healthcare

The healthcare industry has been slower to adopt advanced technologies relative to other industries. That’s partly the result of reliance on legacy IT systems as well as concerns about patient confidentiality and regulatory restrictions on sharing patient information. Furthermore, initiatives to improve the healthcare system have driven up administrative complexity.

But Jack Rogoff of Goldman Sachs Asset Management notes that some consortia are beginning to experiment with using Blockchain technology, a secure, immutable ledger for transactions, to simplify tasks in a decentralized way. For now, the focus is on information sharing using non-competitive, non-proprietary information; sensitive data, including patient information, is still being kept off the chain.

One area that’s been ripe for experimentation among insurers has been provider directories. Insurers typically have incomplete information on medical providers, which can expose them to fines and lawsuits. The longer term vision, Rogoff said, would involve using Blockchain to create a system that allows insurers and providers to share patient data using what’s known as a “zero knowledge proof.” This would involve allowing an insurer to ask whether a patient may be pre-diabetic without requiring the provider to reveal any sensitive data such as prevailing risk factors or medical record details. The goal is to enable information sharing without violating proprietary restrictions or running afoul of regulatory restrictions.

Another use for Blockchain involves digitizing the provider credentialing process. Typically, hospitals spend four to six months onboarding physicians via manual background checks into education, work history and board certifications. The process has to be repeated by every hospital—each asking the same questions—and can cost the industry up to $2 billion, Rogoff said. Longer term, this infrastructure may open up opportunities for hospitals to monetize provider data.

 

Inclusive Economic Growth

When more than half of your monthly income goes to cover rent, how much is left to spend on other basic needs—food, child care, health care? Not nearly enough, says Daan Struyven from Goldman Sachs Global Investment Research. Yet this is the problem many Americans face.  And it’s especially acute among Black women, who have long faced dual forms of discrimination—racial and gender. One-third live in unhealthy housing, more than 1/5 are not satisfied with their neighborhood safety and school quality, and 55% spend at least one-third of their monthly income—and often more than half of it—on rent, more than any other demographic group. As a result, black women are more likely than other groups to forego prescription medicines and miss work for health reasons. Average life expectancy is three years shorter than that for white women.3 And certain of these disparities may have widened during the pandemic.

The Goldman Sachs One Million Black Women initiative, launched this year (2021), is attempting to narrow these opportunity gaps and improve black women’s lives by committing $10 billion in direct investment capital and $100 million in philanthropic support to improve black women’s access to healthcare, education, housing and capital. Struyven estimated that addressing the earnings gap alone for black women could create anywhere from 1.2 million to 1.7 million jobs and raise annual US GDP by anywhere from 1.4% to 2.1% each year.

The Goldman Sachs Urban Investment Group, meanwhile, has invested $10 billion to date on real estate as well workforce development and lending facilities to promote economic development to support low, moderate and middle income families and the families of essential workers while delivering strong risk-adjusted returns potential. “The more affordable the housing, the more stable it is, and the more stable the housing, the more stable the family, which leads to inclusive growth,” said Margaret Anadu of Goldman Sachs Asset Management.

The investment case is a strong one, too, said Goldman Sachs Asset Management’s Dan Alger, noting that workforce housing has outperformed over the course of full market cycles compared to the broader housing market, including the luxury market. This is partly because high demand makes vacancies rare. “So this space has real tailwinds,” he said. Interest in these areas has increased over the last year from corporations and other institutional investors looking for a way into impact investing.

1. Source: Jenny Chang, Portfolio Manager, Fundamental Equity, Goldman Sachs Asset Management

2. Source:  Jim Sinclair, Healthcare Services & Technology, Investment Banking, Goldman Sachs

3. Source: CDC, Goldman Sachs Global Investment Research.

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