Private equity is increasingly part of today’s healthcare’s framework. As a $4+ trillion industry teeming with innovation, healthcare is a seedbed for new ideas and, thus, investments from private equity streams. But as a relatively new trend, at least at this scale, private capital partnerships tend to be shrouded in some mystique.
This week, we continue our Nashville Health Care Council Sessions podcast series with a conversation featuring Brian Regan, Head of Healthcare Group at WCAS (Welsh Carson), a renowned private equity firm specializing in healthcare and technology. In it, we discuss the role of private equity in healthcare, as well as some of Regan’s insights on the industry at large – including the importance of building companies by focusing on people.
Key points:
- Method matters, and each is unique. Faced with the healthcare industry’s outsized scope and complexity, Regan has a methodical process for identifying possible value amid its myriad subsectors. His approach: analyze trends in each vertical, from IT to biopharma to care delivery, independently, then use those insights to identify possible targets for investment.
- No matter what sector you’re in, put your data where your mouth is. Top-down, the ability to measure performance is valued just about as highly as financial performance itself. As both a differentiator and an indicator of future value, strong metrics are key to earning the trust of stakeholders, growing the business and discerning what is – and isn’t – working.
- Of all the historic developments unfolding in healthcare, biopharma might be the most exciting one today. Meaningful investments and discoveries in areas like monoclonal antibodies, antibody drug conjugates and gene therapy over the past several decades have laid the foundation for a momentous inflection point not just in new treatments but curative therapies. As Regan put it with some understatement, “The potential is enormous.”
- “Healthcare is evolving” seems to be the strapline of our industry. However, Regan points out that significant change will come slower than we think. The industry is just too vast and partitioned for a swift, clean turn of the page. That said, real progress will be built on micro steps forward, rather than a few giant leaps.
Read the Transcript
David Shifrin: So, Brian Regan welcome. Thanks so much for your time. You are head of healthcare at Welsh Carson.
Brian Regan: Yep. Thanks for having me.
David Shifrin: You’ve got, in your role, a unique vantage point to witness the evolution, not just witness, but to influence and to partner in the evolution of our industry.
And so, I’m curious, just to start off with, it’s so easy for us to look at any given moment as an inflection point, a sliding doors moment, whatever your favorite trope is. And maybe it’s just the conference vibe, but it does feel like in the last couple of years coming out of the pandemic we are moving into a moment where it’s some kind of inflection point.
What’s your read on change in healthcare today?
Brian Regan: Yeah, I’ve been doing this for 21 years. Welsh Carson’s been doing it for 45. And I think our expectations should be realistic. Healthcare is a four plus trillion-dollar industry. It’s comprised of dozens and dozens of segments, large and small. And the rate of change of something that large will necessarily probably not be as rapid as people would like.
And healthcare does represent this really complex kind of confluence of business economics with government funding and regulation with social expectations, ethical expectations, scientific discovery, all those things. And so, I do think that as a macro matter change probably always occurs when you look in the rear view slower than you expected at any given point in time.
That being said, there’s some really exciting things happening in terms of partnerships between capital providers and health systems, between capital providers and strategics that we see a lot. There’s tremendous innovation in the biopharma space right now that we think is really exciting. I think the opportunity for traditional healthcare firms of many types to leverage technology, and I think over time to responsibly harness the power of generative AI, is really interesting. And I do think there’s been a reconsideration of many business models through the pandemic and a response to that in terms of building out lower cost networks and acceleration of value-based care and things around that.
So, we certainly see a lot of activity around that. And again, don’t be pessimistic. Healthcare has tended to evolve slower than people would like, but we’re certainly seeing indications of lots of great work across multiple sectors that I think will have the aggregate effect of making it better.
David Shifrin: Brian, I’m going to, take a point of interviewer’s privilege here I’m a biomedical scientist by training, and so I’m really intrigued by what you just said about the advances in biopharma right now. Throughout this conference and in a lot of the conversations around care delivery, we are looking at, administration and process. Certainly, as you said, generative AI, so many areas, but I feel like the pharma and biotech have been a little bit on the outskirts of this conversation. So, what are you seeing and how is that going to influence delivery of care and hopefully taking costs out of care as we move forward?
Brian Regan: Yeah, so, I think the kind of foundational discovery science in areas like monoclonal antibodies, antibody drug conjugates, gene therapy, and now especially cell therapy over the past couple of decades have laid the foundation where the development pipeline is much more weighted to novel and sometimes curative therapies. And that’s going to create a whole set of other considerations and challenges for the industry in terms of how those are reimbursed, how they’re delivered, but their potential is enormous.
And we have seen, I think an organization of the biopharma pipeline around some really exciting things. And, we have a number of companies that we’ve invested in that provide services to those innovators. Companies that don’t have a ton of infrastructure, that would outsource some of the research and development and clinical scale manufacturing and those type of things. So, enabling technologies. At Welsh Carson, we don’t invest in the technology ourselves, but it does give us a really interesting viewpoint into how people are innovating in that space. And I personally think the next ten years are kind of the golden age of biopharma based on the advances that we’re seeing, building on the foundation of some of that discovery science that are now making their way through the pipeline and now starting to go into humans. And it’s really exciting.
David Shifrin: So, thinking about how each sector of healthcare has a unique role to play, of course, we have to have folks who are hyper-specialized. We need expertise in very narrow areas, but then we have to integrate that across the care continuum.
So, from, again, from your vantage point, looking at the industry as a whole and then all these different verticals and different sectors within it. How do you think about bringing the pieces together when you’re looking at companies that you’re either considering or that you have invested in? I don’t know, this question is maybe too simplistic, but say you are here and need to go talk to this person over here and put these things together.
Brian Regan: So, we have a fairly methodical process where we look at the major sectors in healthcare: IT, payer and related healthcare delivery and the pharma value chain. And then within each of those, some of those have 60 sub-sectors attached to them. And we have a process where we look at the secular trends within each of those. Is it stable from a regulatory and reimbursement environment? Is that growing? Is it serving a need? And then we look at actionability. So can we as an investor put capital to work there? Can we be efficient with our time? There’s a sufficient number of targets in that particular sector where we can deploy, call it $200 to a billion dollars of capital.
Where we have that intersection and we’ve gained consensus that’s an area of interest for us, then we’re going to go out and look for logical partners. And most things that happen in healthcare don’t happen in isolation or in a vacuum. You’ve got multiple parties involved. The surgery is going to involve the surgeon, the facility that hosted it, the patient, obviously, the payer, maybe the device manufacturer. It’s a confluence of people coming together.
And so, we’re going to look for, are there natural partners to go pursue that? And then you need a process to go identify those partners. And if you’re going to partner on an investment, you probably need to have a relationship. It’s hard to form a productive partnership from a standing start, particularly in the context of a deal coming to market or potential investment coming to market.
So, you know, we have a process where we talk to 50-plus health systems every quarter. We talk to 50 strategic partners and we’re exchanging ideas, we’re talking about where our interests might intersect with their needs. And so, then we bring those together and we do that in a deliberate way so that we’ve mapped who could the key constituents for a particular company or particular investment opportunity be. And hopefully we’ve developed a relationship with one or more of those logical constituents such that we can make that phone call and talk about how could this work. And so, we, and we’ve been really productive doing that. We have a number of investments with health systems syndicates. We’ve done probably a dozen deals with large strategics. People like Elevance and Humana and Select Medical and Walgreens and Tenet over time. But it takes real work to identify the right partner for the right situation and have put in the legwork to have the relationship such you can structure a productive partnership.
David Shifrin: Yeah, our chairman has this line about, buy your umbrella before it starts raining or something to that effect. And that’s, it’s something that we talk about all the time, which is if you are going into a conversation or if you’re anticipating a conversation, whether that is a payer-provider negotiation to re-up your network contract or pick anything or an investment, you need to know the people on the other side of the table so that the other side of the table isn’t oppositional, it’s collaborative. And so what you’re talking about here really sounds like just knowing the people who might be involved, so when you are ready.
Brian Regan: Correct. And you know, signing the partnership and making the initial investment is one thing, but then making it successful is another. And that generally isn’t a reference to a piece of paper. That’s a collaboration that’s iterative. You’re talking all the time. You’re building a business over a period of, four or five, ten years in some instances. And so, you have to put that relationship into practice every day as your fellow board members. And you’re looking at, management decisions, and strategy decisions, and capital allocation decisions and operating issues that inevitably arise. And so there’s a longitudinal element to the partnership that if you’re not confident… it’s one thing to get to a deal and a partnership on paper. It’s another thing to put those things into effect.
David Shifrin: Yeah. What about the folks doing the work day to day – the employees, the staff, potentially the patients. How do you think about and how do you advise your companies to sort of engage all stakeholders and, I guess the question would be, how do you think about culture within an organization in order to make that transition from signing the paper to actually building the thing and making it sustainable?
Brian Regan: Yeah. So I think doing the right thing for your stakeholders is ultimately the path to long term success. And it’s not about margin optimization. It’s not about all those things. Those margins will come. Growth is particularly important to us and the manner in which we exit. What is some, how does somebody value this business in five years? If you haven’t made all the predicate investments in systems and technology and have a great leadership team. And if you have a great leadership team, they’re going to hire great people and those people are going to hire great people. And so, you have a cascading effect of that culture. It starts with the board making sure that your CEO and your executive leadership team is committed to that. And then you measure that objectively over time.
So, our companies all, who are healthcare, in the healthcare delivery space, routinely survey patients. They routinely survey their own employees, their own clinical partners. We use objective criteria to say, are we doing this the right way? Do people in the company feel empowered? Do we feel like we’re delivering good care? I think one of the things that technology has done, and we’ve been able to invest through our companies and use our capital to create the systems and the processes to manage that and to optimize that. And so, we’ve built the electronic data warehouse and the clinical quality capture systems. And that requires, money, but it also requires know-how, requires business leadership.
And so, if you want to have a high-quality healthcare delivery organization, for example, or a really high-quality pharma services, a clinical development manufacturing organization. You ultimately have to be able to prove it. And you have to be able to prove it to your employees, to your clinicians, maybe your health system partners, to your potential customers, current customers. And so that requires infrastructure and infrastructure requires investment, but it also requires people who know how to put that all together.
And so I think increasingly one of the big evolutions we’ve seen is it’s not enough just to have a great reputation, but you have to prove it. And to prove it with data. And then you have to have processes in place to continually improve on that. And ultimately, I think with those investments lead to greater value creation at the end because you can distinguish yourself from people who haven’t made those investments.
David Shifrin: Yeah, I think it’s such a great point. It just showcases that business and the core of the company, the organization, is not separate from the people. Those things run in parallel and have to be addressed in parallel.
Brian Regan: Yeah, we see a really high degree of correlation between companies that have strong retention that develop their people. One of the best metrics I think is, how many of your new hires come from referrals from existing employees? And one of our highest growth businesses that we ever had, Shields, they were hiring 40 plus percent of their new employees were coming from recommendations by existing employees.
David Shifrin: People saying, I work here, it’s awesome, you should work here too.
Brian Regan: Yeah, we measure in, we use Net Promoter Score to measure customer satisfaction. We also use it to measure employee satisfaction and engagement. And so, we’re trying to combine really high-quality leadership within an objective framework so that we on the board, who aren’t in the company every day, make sure that we have at least some objective indicia of how is the company performing on a bunch of these key metrics. It’s not just about looking at a P&L. P&Ls in healthcare, particularly when your assets are generally people who leave every day and you want to come back and you want, it’s hard to have a great patient experience if your clinicians are upset or your front desk staff are upset or your revenue cycle folks are disengaged.
And so, you know, we try to have tripwires at each of those points to say, are we doing objectively a good job on these things and we’re collecting external and feedback to make sure it’s not just… culture is easy to put on a PowerPoint slide, but you need to make sure that you have all of the indicators of that. And you’re routinely measuring and monitoring it.
David Shifrin: Brian, thanks so much for your time. Last question. And I’ve been telling folks today that it’s an admittedly cliche question, we’re here at a conference, we’re backstage, we’re talking about this whole vibe and where we’re going next. So, what has you excited? What are you looking at?
At the intersection between your interests personally as well as the work that you’re doing that you’re just like, this is really cool let’s see where it is in five to ten years.
Brian Regan: I think advances in biopharma technology, like I said. I’ve had friends and family members who unfortunately have recently had cancer and in one instance, a frontline traditional therapy failed. And that person has hope and they’re still alive because of a cell therapy and a really unique monoclonal antibody combo that is prolonging their life and hopefully could be curative. And that wouldn’t have been available five years ago. And there’s more of that coming.
And so that part’s personal to me. I see it like in a kind of an academic sense in my job. But then when you actually have a really close friend who’s going through something like that and you see the benefit of innovation in that area and all the things that led up to that.
And I do think COVID has helped bio companies figure out how to get drugs to market faster, how to lean out development processes. And I’m really encouraged by the progress that we’re seeing in our portfolio as a lens into that world across multiple innovators. But then to see that kind of reflected, you know, friend, is uh, is powerful.
David Shifrin: It’s incredible. Brian, thanks so much for your time.
Brian Regan: Thanks for having me.
