Written By Aaron Sonshine
The one-and-only Bloom Burton & Co. Healthcare Investor Conference (BBHIC) took place in Toronto last week. Investors and healthcare companies from around the world gathered to discuss the state of the market, meet one-on-one and hear from Canada's premier companies in the healthcare industry.
A stellar day two panel shared their insights on investing in commercial-stage healthcare companies in Canada—with perspectives from MVM Partners in Boston, Quark Venture in Vancouver, ONCAP in Toronto and Sixth Street in New York.
Here is a recap of the key insights from panel members.
What Interest Rates and Inflation Mean for Investors in Healthcare
Debt financing has increased with the higher cost of capital. Canadian banks are more open to debt financing than banks in the U.S. Banks in Canada are better capitalized and there is more relationship-based lending.
The cost of capital has led to much more bridge financing for private companies in the past 18 months. Insider capital is covering much of this (for now).
Inflation is having the biggest impact on companies with high labour cost exposure. Investors can look at companies and sectors where labour is less of a factor.
Product-driven companies are of course feeling the consequences of inflation too with the increased costs of goods. Some companies can mitigate this if they deal in volume-based contracts and get discounts as volumes go up.
Opportunities in Healthcare Investing
The bar has been raised for future investment. Many companies in the healthcare market have been in a growth-first mode and returns have come from revenue growth and multiple expansions. Investors today are increasingly looking for profitable companies.
Potential acquirers and investors are drilling down on the earlier-stage data that companies are generating, or waiting for more conclusive data and successful trials prior to investing.
Specialty pharmaceuticals is once again an area of opportunity. These are product-driven, and in some cases already profitable with lesser needs for capital. There is also increasing consolidation in the sector and trading multiples are attractive.
Consumers want value-based health care, meaning, increasingly, health care that is digital and data-driven.
Telehealth and remote care is here to stay, but it has slowed markedly since its sharp increase during the pandemic.
Financing can be a challenge in digital health, so investors can start by looking at sub-sectors and the trends that are driving them. Some areas are faring better than others.
There is a long tail of companies in digital health that are "feature focused." These address a specific problem, do not scale to the point of profitability, and are looking to be acquired. This can lead to opportunities for investors to combine the right assets.
The U.S. View of Investing in Canadian Healthcare Companies
Investors remain eager to invest in Canada. But there are hurdles.
One significant hurdle is public reimbursements. Over the past five years, they have become more complicated in Canada in certainty and speed. Outcomes are hard to predict, public reimbursements are administered on a province-by-province basis, and costs are higher than in the United States.
Other challenges for inbound U.S. investment are scalability—there are not as many scalable opportunities in Canada to invest in—and access to capital.
On a more encouraging note, big pharma is sitting on substantial cash reserves, existing patents are expiring, and the decline in valuations for growth-stage pharma is creating buying opportunities. GSK's agreement to acquire BELLUS for $2 billion, Merck's $10.8-billion acquisition of Prometheus and Pfizer's $43-billion acquisition of Seagen—all announced in the past two months—may be signs of more transactional activity to come.