Category Archives: Investing

Investing In Healthcare

The baby boom cohort has changed the world in which we live and the lens through which we view it. The aging of this cohort (roughly one third of the population) will continue to usher in dramatic changes across most business sectors and areas of our lives in the years to come. The boomer demographic in North America is also presenting unique challenges for government run social programs and presenting unprecedented opportunities for businesses with the right entrepreneurial mindsets and resources. While boomer consumptive patterns have evolved over time, there are still strong correlates between their wants/needs (and the wants/needs of their children) and the flow of capital across virtually all economic sectors. Clearly, as boomers are aging, their spending habits are evolving as well. This re-prioritization of spending has become an area of study for governments and investment organizations alike. One area that surfaces repeatedly and is becoming pre-eminent in the study of boomer consumption patterns is healthcare.

Healthcare is one of the industries that are most acutely impacted by this demographic shift. While many boomers will continue working, many are also retiring or are getting close to retirement. Most boomers are or still view themselves as reasonably young (mentally and physically) – the oldest, born in 1946 one year after the “boys came home” from WWII. For those of you without a calculator handy, the oldest boomers will be 62 years of age in 2008. This small but important factoid is lost on many bullish investors who see the present time as the “halcyon days” in healthcare investment in seniors housing options or Long-term care. Yet it will be 15 to 20 years before the leading edge of the boomers reach the age where these services will be in higher demand.

What many people, including even professional investors, forget or never learned is that much of the the current demand for healthcare is being driven by WWI babies, or what has been coined The Greatest Generation. The Greatest Generation is compromised of those who reached adulthood just before, and served in WWII. Many came from rural areas of Canada and the U.S. and settled in the larger centers after the War. This generation was entirely different than succeeding generations. While the differences are beyond the scope of this article, suffice to say that those who seriously study demographic shifts expect the baby boom generation to have an entirely different set of expectations regarding healthcare service and other services than their parents.

So, to recap thus far, there are a significant number of opportunities in the United States and Canada in healthcare investment; but these opportunities are not limitless and nor are they a sure bet. Demographic shifts are significant drivers of healthcare consumption patterns. It is important to attribute healthcare supply and demand drivers to the market and demographic to which they rightfully belong.

So, while healthcare investment opportunities abound, there is no replacement for sound judgment based on analytical inquiry. This is true of any investment decision. It is also key that current and projected changes across the following domains are reviewed in detail: demographics, finances, macro-economics, geography, consumer attitudes and behaviours, motivating factors (e.g., luxury, fear), urban/rural, SES, educational, cultural, risk orientation, and other personal and group-related factors. While this article zeros in on the effect that the baby boom will have on the healthcare investment market, there are a multiplicity of other factors and population segments that are, and will continue to exert significant pressure on healthcare economics and consumption patterns.

The following businesses related to healthcare delivery are and will continue to be worthy of consideration by individuals, private equity, and venture capital investors. Again, it should be noted that the list is only a starting point, and that investment decisions should be made on the best current and projective information possible. It will be necessary to use an array of analytical tools and methods (e.g., Porter’s Five Forces and other financial and statistical methods and models) to assess the industry/sector/business opportunity prior to making a significant investment into healthcare. Having said this, potential healthcare investment opportunities exist in the following areas:

Integrated Healthcare Centers, i.e., primary care (particularly where physician services, diagnostics (X-ray, CT, MRI), laboratory, and pharmacy are delivered within a short radius)
Providers of products & services for diabetes management, congestive heart failure, COPD, coronary artery disease, and other high incidence chronic diseases
Providers of mobility and other daily living assistive devices for those with a range of impaired gross or fine motor skills or other mobility limitations (e.g., caused by pain, arthritis, joint immobility)
Pharmaceutical and biotechology innovators and providers (care must be exercised due to patent limitations, proliferation of substitutes – generic drugs, lengthy approval processes, and other process and outcome risks such as the Vioxx controversy )
Health and hospitality services outsourcing (again, highly contextual and requires significant demand/supply driver analysis, political, environmental, union/non-union and other forces analysis)
In-home healthcare services (e.g., nursing, physical therapy, occupational therapy, care and support)
Medical or surgical retreats (highly specialized, significant risk)
Assisted Living or Long-term Care (these resources are capital intensive and targeted at the parents of the boomers, i.e., the WWI babies) – it will be 20 years before boomers will require these services in any great volume (be careful)
Major equipment and major/minor supplies providers (e.g., MRI, CT, ultrasound through to re-useable and disposable equipment)
Providers of re-furbished medical equipment to secondary markets, which include more price-sensitive purchasers (e.g. re-furbished CT scanner for a smaller rural hospital)
Alternative medicine centers (e.g., offering Ayurvedic Medicine, acupuncture, traditional Chinese Medicine)

Since information technology is a core function in healthcare, the following is a stand alone list of technology-related opportunities related to data/information collection and transfer:

Devices: quick, simple to use, portable, and ease workflow in high stress healthcare environments (e.g., emergency departments, tele-health)
Devices whose operating systems converge with mainframe of networked systems that admit, track, audit, and generate reports with minimum input and robust rule-based error checking
Devices or system that integrates disparate healthcare network data and traffic
Devices or systems which accurately expedite services
Devices or systems which improve the accuracy and speed of diagnosis
Devices or systems which improve reduce human error and increase the probability of appropriate and targeted treatment options
Translational devices and applications of all sorts, i.e. translating actual “hands-on” data into useable, and interoperable information which can be used for diagnostic, treatment, recovery, and planning purposes
Electronic dashboard technology for strategic decision-makers
Providers of software applications that integrate disparate healthcare value chain and supply chain fragmentation
Providers of software applications that integrate in-hospital processes (e.g., admission, discharge, transfer); care-finance-payments; care-supplies-payments and other A/P and A/R alignment platforms and applications
Providers of software applications which refine, simplify, or facilitate the care planning of patients
Providers of systems integration
Providers of software applications for Human Resources, CRM, Finance, and other corporate functions

These are a few opportunities which currently exist in the healthcare context. As you might guess, many areas are being explored by larger firms. Healthcare IT is particularly attractive to larger, more highly capitalized companies and software developers. The competition amongst these groups is fierce due to the large volumes of funds in healthcare and the market opportunities driven by demographics and the need to constantly improve system performance. To date, there is no one firm with a strategic competitive advantage in any one area, though some healthcare sectors (e.g., diagnostics) have a high concentration of highly capitalized firms (e.g., GE and Siemens competing in the CT, MRI market).

Whatever investment decisions you decide, the amount of money you risk should be in proportion to your risk tolerance. Even “slam dunk” opportunities can turn out to be dogs if the circumstances are not right; or a context specific barrier is not weighed; or social attitudes do an about face.

If you are scanning the healthcare markets for opportunities to invest, be sure to do your due diligence and get help to investigate this complex and ever-expanding area. The due diligence you do prior to investing significant capital is essential to ensuring high double digit returns whilst minimizing your risk.

Healthcare Executive Recruiting – Bet on the Horse or the Jockey?

Experience breeds intuition when it comes to healthcare executive recruiting. Does it work for horse racing too? I will not attempt to prove whether experience improves your outcome at the track. However, healthcare venture capitalists often use horse racing analogies when discussing ideal investments. These venture capitalists prefer to bet on the jockey versus the horse. Their logic, it’s the people that drive the business.

A healthcare venture capital firm’s success is dependent on their ability to recruit and retain a high-performing Jockey, a.k.a. “the CEO.” If it was only so easy to win The Kentucky Derby or deliver a ten-bagger return. My healthcare executive recruiting experience working with healthcare venture capital firms provides intuition in defining the firm’s CEO need. Once understood, identifying and recruiting the CEO and building a solid support team for the CEO requires experience, extensive networks, new and real-time research and a thorough process. The intent of this article is to offer outcome-driven insights for the healthcare venture capital firm that chooses to search internally for a portfolio CEO versus retaining a healthcare executive recruiting firm.

Recent quarters show an increased level of new capital investment from healthcare venture capital firms. The Health Care M&A Monthly reported in March 2008 that healthcare services deal volume in February 2008 totaled thirty completed deals. Looking back to 2007, total funding for healthcare venture capital deals was more than $9 billion across more than 480 deals. Healthcare venture capital investment increases the demand for these firms to conduct a thorough and accurate executive search process in order to identify, recruit and retain the CEO. While a healthcare venture capital firm often retains a healthcare executive recruiting firm to assist in CEO recruiting efforts, healthcare venture capital firms can mimic the search process of the top healthcare executive recruiting firms.

Insights from healthcare executive recruiting firm processes will lead to an improved exit:

1. Healthcare venture capital firms are committed to recruiting a proven CEO for the portfolio business and may occasionally be inclined to conduct an in-house CEO search process. The approach is to put a CEO in place that is known by the healthcare venture capital firm from previous experiences and business dealings. However, many times these healthcare venture capital firms will admit they “don’t know what they don’t know” about the business, the segment, or the pool of available CEO talent. However, if there was any doubt at the onset, it quickly becomes clear they need to bet on the jockey to run an unfamiliar race. It is at this point the firm should consider duplicating the search methodology that healthcare executive recruiting firms utilize for CEO assignments.

Healthcare executive recruiting firms are engaged to identify and recruit leading CEOs for high-growth, venture backed businesses. To reduce the risk of making a hiring mistake, a healthcare venture capital firm’s internal search process should assess those executives the firm knows and trusts in parallel with proven executives who are newly introduced to the healthcare venture capital firm. Ultimately the CEO may be selected from the firm’s personal rolodex. However, the value of benchmarking known CEOs against a broader CEO talent-pool will prove valuable.

2. CEO contingency and succession planning belongs early in the healthcare venture capital firm’s investment. Recruiting strategies to recruit key CEOs, senior leaders and board members are at the foundation for a portfolio company’s success. Common practice is for the healthcare venture capital firm to identify and recruit a seasoned and industry-experienced board member, one capable of leading the business if the current CEO cannot finish the race. The immediate need is fiduciary but both succession and contingency planning should be considered too. While some individuals believe that succession planning should be below the CEO, healthcare venture capital firms are interested in developing concepts and financial carry more so than developing future leadership talent. Therefore, succession and contingency planning belong in the board room for two reasons: one, if the CEO in place is successful the new board member can maintain his or her fiduciary duties. However, if the CEO loses control of the business or the market, this board member is engaged and able to step in immediately. This hedge strategy can be effective to dramatically reduce downside risk.

If the CEO loses control of the business or the market and the healthcare venture capital firm did not plan appropriately, there will be many sleepless nights. It’s during those sleepless nights when the unprepared healthcare venture capital firm will incorrectly pursue one of these three options:

o Retain a healthcare executive recruiting firm. However, the search is often initiated on quick sand as the healthcare venture capital firm needs to recruit a savior. Conversely, the venture capitalist may decide to avoid retaining a healthcare executive recruiting firm as it is perceived to be too cumbersome of a process during this time of panic. Neither scenario leads to a high-multiple exit.

o Turn to someone the healthcare venture capital firm knows from previous dealings. This option is not focused on growth but rather on building a floor to minimize investment loss.

o The healthcare venture capitalist will take over the business and act as CEO. My experiences say that poor planning and a subsequent reactionary jerk will not deliver a positive cash outcome.

The success of a risk-taking healthcare venture capital firm is based on hiring and recruiting the right Jockey for the business. While healthcare executive recruiting firms are often critical resources to venture firms, there are occasions when a healthcare venture capital firm chooses to conduct their CEO search internally. In those occasions, healthcare venture capital firms should mimic the proven search process of the top healthcare executive recruiting firms. Healthcare venture capital firms will benefit by conducting an unbiased and thorough executive search process tied to board level contingency and succession plans. This will develop strong businesses and deliver solid returns.