Identifying growth potential in a complex marketplace

By Permira’s Head of Healthcare, Mubasher Sheikh

In such a complex sector, identifying the most interesting investment opportunities and helping the Permira funds’ portfolio companies grow involves building a team with the experience and credibility to work simultaneously across multiple disciplines including science, medicine, regulation, commercial and financial ideas.

Identifying growth potential in a complex marketplace

The healthcare sector is vast and constantly in flux so we don’t limit our approach to two or three sub-sectors. As the youngest of the five sector teams at Permira, we look at things slightly differently. We take a view on the whole sector and dig deep into themes that in our view have investment potential. At one level, everybody can recite the four or five major global healthcare trends, but for us it is only when you peel back the layers and uncover parts of that ecosystem that that things become interesting from an investment standpoint.

In order to pursue this strategy effectively, we knew from the start we would need to combine investment expertise and financial acumen with the ability to talk credibly to scientists and clinicians on their own terms. So we built a diverse group that is weighted towards clinical expertise, including a transplant physician, a physician and a former leader from Novartis, to name a few.

This team has the knowledge and experience to work across multiple sub-sectors and hold conversations with the scientists and clinicians five levels down and develop a bespoke value creation plan for every partnership.

Our approach in action

A good example of this approach is Pantheon (P5, 2014), a provider of end-to-end products and services for diagnostic imaging and biomedical equipment. The top-level trend is the runaway costs of healthcare across nearly all markets. We looked down the chain at areas where costs could be taken out, and recognised the maintenance of critical machines in hospitals was one such area. These machines are very expensive, get mistreated and need to be recalibrated regularly. Unlike in the US, there was no European player of any scale in the space. This led to the formation of the Pantheon Group, one of the emerging leaders and a platform to consolidate this fragmented European market. To date, we have supported the business to make 13 acquisitions, creating a group that provides a more efficient and cost effective service to hospitals and helps take costs out of shrinking healthcare budgets.

Animal health

Another ongoing focus is animal health, an area that has yielded interesting opportunities. The top-level trend is population growth and rising disposable incomes, which in turn has led to increasing consumption of meat and fish. This has driven up productivity demands on animal farming, an industry that is already struggling to sustain growth with finite environmental resource and space.

In light of this trend, we backed Pharmaq (P4, 2012), a leading fish vaccines manufacturer, on the growth thesis: that fish farming (currently accounting for about half of fish production worldwide) would continue to grow over time.. During the partnership, we supported the company’s growth across new species, new immunologies and new geographies. At exit, the business had successfully grown into a clear world leader in the fish vaccine industry.

Another interesting theme that we are following is long-term structural growth in the pet-care market as ownership of companion animals grows around the world and families lavish more time and money on their pets.

Because of our track record in this sub-sector, we continue to be a proud sponsor of the Animal Health Forum in London and Shanghai this year.

Pharmaceuticals

Another recent area of focus has been pharmaceuticals. Intense price pressure has led to a wave of M&A among the big players, while simultaneously we have seen the quite rapid growth of biotech players to rival big pharma.

This led us to interesting potential opportunities in highly specialised outsourced manufacturing. We looked at the new breed of ‘garage band’ biotech firms that are focused on developing the next generation of complex antibodies. The scientific work being done at this level is very exciting, but these venture-backed biotech firms want to concentrate on research and outsource as much of the manufacturing as possible. This process eventually saw us back Lyophilization Services of New England, Inc (“LSNE”) (P6, 2017), a contract development and manufacturing organisation for the pharmaceutical and medical devices markets.

With a focus on clinical trial and small/medium commercial volumes, LSNE operates in a market benefiting from growth in biologic medicines and a shift to more complex molecules, as well as from increased outsourcing from biotech and pharmaceutical companies. With a highly qualified team and a flexible customer approach, LSNE is ideally placed to address some of the most complex formulations in the pharmaceutical space.

Where next?

This creative investment approach is paying dividends in the quality of the pipeline we are seeing. Over the last couple of years we have applied this approach more systematically to the US market, where we now have a dedicated group of investment professionals supporting our global healthcare franchise. We have already found that the sheer size and depth of the market in the US is creating lots of opportunities for us, as demonstrated with our recent investment in LSNE.

Elsewhere, China will be interesting in the years to come as high-quality biological research continues to shift eastward. Japan has the largest elderly population in a concentrated space anywhere in the world and we are increasingly seeing interesting opportunities. As one of the few global funds in an underpenetrated Japanese market, we are well positioned to take advantage of these trends in the years to come.