What’s your outlook for healthcare deal-making in PE as the U.S. elections approach?
Much of the risk of the election is already priced into the market. In our corner of the healthcare arena (commercial-stage companies that may not yet be cash-flow positive), comments made around drug prices have already made headlines and impacted valuations for companies selling products without differentiated clinical outcomes or beneficial health economics. Companies with differentiated products and technologies continue to attract strategic interest — Raptor/Horizon, Sequenom/LabCorp, etc. The public-market valuations for many smaller life-science companies are painful given the comparison to the peaks achieved in years prior. These valuations reflect, in part, the risks associated with the election and further scrutiny on drug pricing.
Regardless of the election outcome, what macros do healthcare deal-makers face?
[D]ealing with rising healthcare costs will continue to be a high priority and finding a solution will not be quick or easy. The problem is not the pricing of drugs; the problem is the other 90 percent of what we spend [on healthcare]. Managing an aging population that lives longer and has greater access to expensive end-of-life care is going to add to our expanding base of healthcare costs. It’s doubtful either party has the political capital to make serious changes to the system, but it does represent an opportunity for investors. Look for the companies that will play a role in reducing costs; look for the more effective technologies that move procedures outside of a more expensive hospital setting, and look for products that provide better outcomes. This focus may help propel more innovative solutions to cost containment and mitigate potential risks on pricing for investors.
Are your LPs sharing the enthusiasm for private credit investments, and are you working with them on this front?
Our LPs are enthusiastic partners in this pursuit. Through credit investing in high-growth healthcare companies, LPs are gaining exposure to innovative companies while receiving attractive current cash yields and mitigating some of the exposures to volatility in the equity valuations.
Where are you looking for deals and which CRG fund are you investing from?
We look for deals across a spectrum of technologies — biotech, specialty pharma, medical devices, diagnostics, healthcare services, and some healthcare IT. Where we focus is helping companies bridge from the clinic to cash flow. We generally invest when companies begin to commercialize products but before they become cash-flow positive. We focus on companies with strong offerings that provide better outcomes at lower overall costs to the healthcare system. We are investing out of our third fund.
Healthcare firms have been turning to alternative financing solutions in the face of volatility in 2016. Do you expect this trend to continue?
Absolutely. This has been a driving force for the growth and expansion of CRG. The shifting landscape in venture capital and the volatility in the public markets has greatly expanded the market for alternative forms of financing, including our specialty of long-term structured debt. Over the last eight years, we have grown our own AUM by almost 10x, just shy of $3 billion now. That’s being driven by market demand — both from the LP side and the companies seeking capital.
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Photo of Luke Düster courtesy of CRG