Michael Liang Sees the Global Investment Environment Heating Up
Perhaps more than any other industry, healthcare has undergone and continues to undergo transformational changes with respect to policy, population demographics, and discoveries on disease and technologies, all within the undercurrent of unsustainably rising costs.
These changes represent challenges and opportunities. And when viewed from a global perspective, sometimes the former in one country can create the latter in another. Due to constraints imposed by U.S. political and regulatory policies, many of Baird Capital’s U.S.-based portfolio companies have been able to commercialize outside of the United States well before receiving approval in the United States. Similarly, population dynamics and the increased importance of Asian and Latin American markets have forced our companies to manufacture and commercialize beyond U.S. borders to be competitive. We continue to believe that companies and investors with the experience and understanding of international markets will have a much better chance of success than those simply focusing on the U.S. market.
The first article in this series looked at recent trends influencing the Healthcare sector in the United States – including an aging baby boomer population with increased need for access to service. China has seen similar growth in demand for quality healthcare as its population ages and as the nation’s middle class continues to grow. The United Nations Population Fund report released last October estimated more than 220 million people in China would reach age 60 by 2015. As the population ages, chronic conditions that are more complex to treat – including cancer, diabetes and hypertension – are proliferating rapidly.
In addition to demographic changes, increasing incomes and more extensive insurance coverage are steadily improving patients’ ability to pay. The urban middle-class population (defined by MGI as households with annual disposable income ranging from $7,000 to $27,000) is projected to increase from 29 percent of urban households in 2005 to 75 percent in 2020, and the upper-class group is expected to grow from 1 percent to 7 percent of the population.
The Chinese government has responded by making healthcare a priority. Recent U.S. healthcare reform seems minuscule in scope relative to what the Chinese government is now tackling. Since 2005, China has undertaken a massive effort to reform its healthcare system to make it more affordable and to make its citizens healthier. One major goal is to provide universal health insurance, particularly for the rural poor but also with the savings habits of the emerging middle class in mind. In a few short years, China’s government insurance programs have extended coverage to more than 95 percent of the population, although coverage remains basic. The government is making a significant investment in the Healthcare sector, which should create many opportunities for investors in the industry. Chinese government policies have already led to the construction of 20,000 new hospitals. To put this figure in perspective, in the United States there are 5,724 registered hospitals.
These reforms also represent a significant opportunity for private companies to enter the market by identifying niches for private players and making operating environments more transparent. From an investment perspective, foreign ventures are now allowed to hold a 70 percent stake in private healthcare facilities, and there are rumors that the Chinese government will soon allow 100 percent foreign ownership. We continue to believe significant opportunities for private companies remain in China and, more broadly, Asia. Baird Capital has a number of Healthcare investments in China that are capitalizing on the recent changes in the region and the proven business models that just needed to be replicated in that market.
Looking at the evolution of other emerging economies, similar growth trends can be observed. For example, Brazil is currently the fifth-largest largest country in the world in terms of both size and population. Over the past 30 years, Brazil’s economy has enjoyed a compound annual growth rate of 6 percent with only three years of significant decline. Average purchasing power has tripled in that time.
The healthcare industry in Brazil has grown substantially over the last 25 years. In that time, Brazil has implemented one of the largest universal healthcare systems in the world, with impressive results (McKinsey, Sept 2011 study):
- The infant mortality rate dropped 60%
- Healthcare is now accessible in even in most remote areas of the country
- There has been relative success combating debilitating diseases such as tuberculosis and AIDS compared to other developing countries
- Innovative management tools, like the outsourcing of back-office functions to nonprofit organizations, have consistently increased hospital productivity
The continued growth of Brazil’s middle class presents challenges for the healthcare industry. Brazil has an overcrowded insurance market, with 30 out of a total 600 insurance companies accounting for 80% of all insured people in Brazil. This is expected to put upward pressure on healthcare costs, potentially causing them to grow at a rate faster than overall GDP growth.
At the same time, Brazil’s aging population has increasing healthcare needs, which are expected to increase waiting times for access. Addressing this issue while capping cost growth could increase pressure on the country’s growing and relatively unstable middle class. Access to healthcare services represents possibly the biggest challenge ahead for Brazil and other emerging markets, but it is also a clear opportunity for a private sector company that can leverage global-scale and specific technology breakthroughs to improve that access.
What Companies Need to Succeed
Baird Capital sees emerging markets as high-risk/high-potential-reward propositions for Healthcare companies with viable technology solutions to issues of access. Given differences in regulatory environments, it may take a few years before such products are fully available through a country’s healthcare system. Managing through that kind of uncertainty is challenging for any company, but especially those with resource constraints. If there is a manufacturing component to the solution, the company may also need to evaluate the possibility of moving that process into the country. In Brazil, for example, the path to approval from ANVISA (Agencia Nacional de Vigilancia Sanitaria, the equivalent of the FDA in Brazil) is faster for locally produced products. In such a scenario, managing intellectual property risk and establishing a trusted local partnership to navigate local bureaucracy are critical. It is important for management teams to think strategically about international expansion, often even before entering the U.S. market, and also the skill set and expertise required to wade through the complexities of foreign registrations, regulatory agencies and differences in sales distribution and product pricings. We understand that many management teams do not have this experience in-house, but our global presence and years of experience helping portfolio companies develop and execute international growth strategies makes this an area of strength for Baird Capital.