Ali Satvat co-head’s KKR’s healthcare industry efforts in the Americas, as well as leads the charge at the firm’s first-ever Healthcare Strategic Growth Fund, a $1.45 billion pool of capital.
HCSG, which closed in November 2017, has invested across 13 businesses to date, with the aim of ultimately backing a total of 15 to 20 portfolio companies.
On the heels of back-to-back November 2020 investments in Argenta, an animal health pharma services firm, and newly-formed medical-device platform Zeus Health, PE Hub “sat down” virtually with Satvat for the latest on the firm’s healthcare playbook.
KKR’s healthcare growth platform has a history of investing in “repeat teams” and “repeat themes” – how does Zeus reflect this strategy, particularly with its prominence on the teams aspect?
When you’re able to invest with somebody that you have this partnership with that’s longstanding, the alignment is just so strong. In a world where diligence has gotten more complicated, obviously, it gives you a lot of comfort when you can partner with someone and finish each other’s sentences.
We’ve backed Duke Rohlen now for the third time in a platform capacity – [originally in 2016] in a company called Spirox. That was one of our pre-fund growth deals before we had a dedicated healthcare growth fund. We invested off our balance sheet to build this strategy around an ear, nose and throat devices company. We sold that to Entellus for stock and then the entirety of Spirox and Entellus was sold to Stryker for cash.
We’d had a second foray in growth with Duke, which was in Ajax Health in 2017. The primary asset was EPIX Therapeutics, which we sold to Medtronic last year.
As part of the first funding that we’ve done [in Zeus], we’ve invested in several companies in which Duke already had a relationship, and so this is a platform where it was pre-wired where we had several investments that we’re going to start with.
Medical devices is a market a lot of growth investors have shied away from given how robust the public markets have been for areas like biopharma. That’s a sector we invest in as well; but what we thought was interesting about medical devices is we can really fill a gap that we think exists in the growth investing part of the market.
Duke we’d actually originally met on the private equity side of our business. We had diligenced some scale assets with him. Those ultimately didn’t materialize for different reasons, but he stayed very closely tethered to the firm.
How does Argenta, an animal health-focused pharma services company, underscore the thematic element of the strategy?
The core business is serving an unmet need that remains strong, and frankly that hasn’t really wavered during covid. This is a very good combination of playing to thematic strengths where we add depth on the animal health side and the pharma space.
We’ve invested in the biopharmaceutical landscape in various companies, including things like Bridgebio, Coherus and other companies that are well-known like Jazz Pharmaceuticals from way back when. We’ve been in that pharma ecosystem with companies like PRA, Capsugel and Walgreens Boots. And then we’ve also invested in veterinary services companies like PetVet [and] Pets at Home in Europe.
So I think we were a very natural buyer for this company.
[Argenta] was a family-held business and we built a relationship with that family. They are co-investing with us to really build something together. That was really the goal here.
Which business models within KKR’s healthcare growth portfolio have been validated through the pandemic, or in fact, seen unanticipated benefits?
If you take a business like Headlands Research – its second-largest business [after CNS (central nervous system)] is in the vaccine clinical trial space. Headlands had run over 200 vaccine trials to date, and then covid came and we shifted that part of the business to be very deep in covid-19 trials. We have served a handful of the major pharma companies – Pfizer, Moderna, AstraZeneca and others.
That obviously has financially done very well, beaten its plan handily, and we see that continuing into next year. We see these pharma companies wanting to optimize what they’re doing and making sure the products they are bringing to market are going to be as safe and efficacious beyond this first wave.
Another example would be a company like Gamma, which is in the purification landscape within bioprocessing. Again, we are basically an enabler of therapeutics coming to market.
How have services-oriented businesses like BlueSprig Pediatrics navigated through uncharted territory resulting from the crisis?
This is a good test for a business like BlueSprig in the autism services space.
That’s a business where we’re serving several thousand children, we’re in 19 states at this point with well over 100 different centers. And the model was a center-based model – you had to take your autistic child to the center to have them get therapy and get reimbursed for that service.
The management team was able to pivot that model to serve certain children in the center format; others in their homes on a one-on-one basis, and others on a remote basis – and still be reimbursed for all three of those. We not only had a good year organically after a dip during the stay at home times, but we also acquired Florida Autism Center, which is the biggest autism services provider in the state of Florida.
We could have found ourselves exposed, but [instead] we saw a validation of the management and the business model. Autistic kids don’t care if Trump is in office or Biden’s in office. They and their families want to get good treatment and services. We are selecting areas within healthcare that we think are frankly quite resilient and quite necessary and investing in businesses providing high-quality care.
How is the growth side of the market positioned amid both the health crisis and incoming change in administration?
The [covid] challenges are real, and so the benefit of the investments that we have in this Healthcare Growth Fund is we haven’t had a lot of exposure to leverage. We didn’t have a bunch of companies that had issues on debt; we didn’t have a bunch of companies that have issues on liquidity.
While we are very mindful of policy and keep a very watchful eye from state and local [perspectives], the vast majority of what we’re doing in growth has a bipartisan element to it. We really are trying to avoid stroke-of-the-pen risk. If we do our job well, we’re looking for secular growth businesses across the healthcare landscape where we think we’re delivering good value and good outcomes to the system. If we do that, we are largely insulated from the vagaries of policy.
That said, we are mindful of the things that could change. For example, it hasn’t happened quickly in the US, but more payment is shifting to value-based payments than volume-based payment. Is that going to happen overnight? No, but are those the kinds of the policy changes we are mindful of? We are.
Covid-19 has led to major disruption across the healthcare industry. What long-term implications does this have?
Frankly, [healthcare] is probably more important in people’s minds now than it used to be, with the highlighting of the biopharmaceutical industry delivering a set of vaccines and therapeutics that hopefully get us to the other side of covid.
There are certain things that might have taken longer to develop; there are certain things that might have taken longer in terms of business model to advance. You’re seeing an acceleration of some of those in terms of how do patients interact with different sites of care, how do patients interact with their physicians differently, how does the supply chain interact differently, and are there certain categories of health that become more prominent?
That doesn’t change the vast majority of what we’re already focused on, but I think it actually adds to the opportunity set as we think about the pipeline and future dealmaking.
We’re not trying to just be a biopharma player, or just be a services player, or just be a player within the payer category or the provider category. The lens for us both from the PE and the growth equity side is: how do we build a diversified portfolio across healthcare?