Key to easing the burden on public healthcare?

BLOG: Private Capital: Key to easing the burden on public healthcare?

7th Aug 15

Author: Dr Kar Mei Tang, Head of Policy and Research, AVCAL

Private equity (PE) and venture capital (VC) are major investors in the healthcare sector globally. It is exactly this kind of private capital that is needed to help the healthcare sector substantially innovate and grow fast enough to meet ever-increasing community demands.

Meeting that challenge is, in part, why PE and VC funds have invested over $3b in healthcare in Australia alone over the last five years.

PE investments in healthcare have included, for example:

• Australia’s leading pathology services provider and second largest private hospital operator (Healthscope)

• Australia’s largest private provider of cancer care (ICON Cancer Care)

• Australia’s largest assisted reproductive services provider (Virtus Health)

• Australia’s largest provider of radiation oncology, cardiology and sleep treatments (GenesisCare)

• Australia’s largest independent provider of clinical trials for new drugs (Novotech)

• Australia’s leading mobile allied healthcare services provider (Healthstrong)

The value that this kind of targeted investment brings to Australian healthcare far exceeds the actual dollars invested.

In addition to PE investment in the larger healthcare providers, hundreds of healthcare innovations and startups have benefited from VC investment over the years. The evidence consistently shows that professional VC investment, coupled with the management expertise and commercialisation experience that VC managers bring to their investments, is an important enabler for Australian medical research to progress beyond the laboratory.

This combination of investment and commercialisation experience has helped Australian VC-backed biotech companies punch above their weight, despite significant underfunding for commercialisation activity in this sector.[1] For example:

• One in four ASX-listed healthcare companies received VC backing at some stage of early development.

• Of the top 50 healthcare and biotech stocks on the ASX, one-third have been backed by VC.

• Breakthrough medical innovations that are being commercialised with the help of VC backing include the ReCell spray-on skin for burns victims, the ground-breaking L-Dex lymphedema diagnostic device for cancer patients, and Picato, the world’s first effective topical treatment for actinic keratosis (sunspots).

• Most major global pharmaceutical companies get only a single drug approved by the US FDA in a given year. But of the 39 new medicines approved in 2012, two came from Australian VC portfolios: Picato (see above) and Synribo, a new treatment for chronic myelogenous leukemia.

• The reopening of exit opportunities in the last couple of years has had a strong impact on returns being distributed back to investors. For the 12 months ending 31 March 2015 (the most recent period reported by Cambridge Associates benchmarks), the Australian VC industry posted a net-of-fee IRR of 22%, outperforming even the US VC industry which returned 20%. More recent successful exits such as Novo’s $200m cash acquisition of drug developer Spinifex Pharmaceuticals from a consortium of VC investors augurs well for the year ahead.

However, Australia now finds itself at a crossroads.

The results of earlier investments in medical innovation are now finally being realised, but funding shortages for translating medical research into viable treatments is more acute than it has ever been.

Biotech commercialisation can be particularly time- and capital-intensive relative to other parts of the technology sector. Biotech startups can often take 10 to 15 years to bring a new product to the market, costing an average of US$1.2b for a new drug and US$92m for a novel medical device.[2]

The high risk and long investment periods discourage early-stage investment by corporates and public markets, making VC one of the few viable sources of funding available for such investments.

VCs help mitigate the investment risk by pooling capital into diversified portfolios, and applying their sectoral expertise to make targeted investments in treatments and devices that can be used to cure diseases and treat public healthcare needs.

However, with institutional investors generally preferring lower-risk and more liquid asset classes, and the cessation of the Government’s Innovation Investment Fund programme, only a single later-stage Australian life sciences VC fund (of $200m) has been raised in the last few years.

For a sophisticated and developed market economy such Australia, with an enviable track record of success in life sciences research, this should be a cause of deep concern.

For medical businesses beyond the commercialisation stage, PE investment plays an important role in Australia. With the demographic shift towards an ageing population and lower natural birth rates, PE has been a major investor into many areas of healthcare that will increasingly be more and more dependent on private sector funding in the coming years, such as aged care, reproductive health services and private hospitals.

PE investment also helps close the current treatment gap in the two biggest causes of death in Australia – cancer and heart disease (see graphic).

The PE and VC industry stands ready to lift the quantum of invested capital above current levels, but this requires a degree of policy reform to free up current inconsistencies in the way investors are taxed on their private equity investment (compared to, say, investment in listed equities).

It also calls for long-term bipartisan policy commitment to building up the early stage investment ecosystem to bridge the current “valley of death”: the funding gap startups face after seed stage funding runs out but before they are sufficiently mature to access traditional sources of business capital.

By unlocking barriers to private investment, this commitment to the needed reforms would help generate growth and productivity gains in precisely the areas of the economy that need it the most.

ENDS

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