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The Healthcare Investor Insights on Issues & Trends that Impact Investments in Healthcare & Life Science Businesses

Looking Ahead to New Perspectives in Pharmacy Investing: 5 Key Points

Posted in Healthcare Services Investing

The next in our series of posts sharing key takeaways from panels at the Healthcare & Life Sciences Private Equity and Lending Conference is authored by our colleagues Lauren M. Graff and Richard Grant.

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Looking Ahead to New Perspectives in Pharmacy Investing: 5 Key Points

By Lauren M. Graff and Richard Grant

While the market for middle market investments in pharmacy providers has leveled off, there are plenty of big pharma pain points that leave the door open for new solutions and growth in the industry. According to experts who spoke on a panel at the McGuireWoods 17th Annual Healthcare Private Equity & Finance Conference in Chicago on February 19, investors simply need to be willing to look more broadly to pharma-adjacent companies for new investment opportunities.

The presenting experts included Mike Alberts, Vice President of Cohere Capital Partners, Kent Berkley, Vice President of Frazier Healthcare Partners, and Dexter Braff, President of The Braff Group. The panel was moderated by Richard Grant, a McGuireWoods LLP partner.

Here are five key points from the panel discussion.

1. Pharmacy provider investing has grown too large for mid-level private equity. The wave of deals in the early 2000s has caused a supply issue in the pharmacy investment space. One expert estimated that between 2004 and 2015 there were over 200 transactions involving the purchase of pharmacy providers. The fast-moving market has left very few opportunities for mid-level private equity investing; the issue is not in demand but in supply. Currently, opportunities for direct investing in pharmacy providers are essentially open to only large investors that have the ability to drive provider costs down, i.e. insurance companies. However, these large providers are not without their pain points — including the search for further cost containment — and they are generally open to discussions with anyone that can present a possible solution to their problems. As one expert summarized, it is easy to focus on the overcrowding of the inpatient and outpatient hospital space, but investors should get creative with their perception. It is not the elimination of mid-level private equity investment opportunities, but a new focus on how to help large providers with their pain points.

2. The good news is pharma is a $300 billion medication problem in search of technological solutions. Not surprisingly, the answers to large providers’ problems are tech-based. Pharma encompasses retail space, long-term care, and hospital pharmacy, each with their own individual pain points presenting an opportunity for a new solution. There is already a lot of pharma-related technology on the market, however, and providers are faced with the issue of communication across technologies. Software that can communicate with other software is the gap in the market, particularly software that keeps both patient data and the patient within its purview. Large providers, insurance companies, and hospitals are unwilling to buy numerous applications and software that cannot successfully communicate with one another.

3. Focus on customer service and revenue will follow. Experts on the panel also noted that it is too easy to get caught up in the search for the margin in pharmacy investing, and urged investors to instead focus on the intersection of margin and where one can build a business. They suggested that, in the current market, if one can build a business by focusing on bettering provider and patient engagement, revenue will follow. Patients want convenience, both in obtaining their medication and in getting their questions answered, which seems to suggest a balance between technology efficiency and a people-forward model. Experts noted the new CVS model – bringing its pharmacists up front, out from the back of the store – encourages direct interactions with customers, providing patient care in the same place prescriptions are filled and creating a healthcare hub. This model is on one side of the spectrum while Amazon’s PillPack prescription delivery service may be on the other. Both are trying to meet customer needs with different approaches.

4. Growth in the industry: Central Filling Facilities. While opportunities for direct investing in pharmacy providers are falling, they may not have altogether disappeared. Experts argued central filling facilities is a fast-growing area. The model is centered around a single facility that produces large amounts of scripts that are sent through multiple channels: directly to patients at their homes, to hospitals, or to retailers, focusing on large-scale production at a high efficiency rate. While the typical model is a large facility filling all types of scripts, central filling facilities may also specialize in a particular area of medication or medicine.

5. Pharma-adjacent spaces provide opportunities for pharma-like investing. With the consolidation of pharmacies putting direct investment opportunities out of reach of mid-level private equity, specialty providers may be the answer. The panel suggested that behavioral health may have some roll-up opportunities, and the market may see a growth in this area as pharmacies turn more of their focus towards it. Methadone clinics particularly show a developing interest, but the underlying thesis of such clinics is not pharma but rather therapeutic intervention. Creative partnerships may also be the key; experts cited the recent partnership between Humana and the private equity firm of Welsh, Carson, Anderson & Stowe, which should result in the launching of more primary care centers aimed towards the Medicare Advantage population. Long-term care facilities provide a unique platform that may lend itself well to such partnership opportunities.

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