This article is sponsored by EQT
What are the main drivers behind the development of Europe’s healthcare market?
Geraldine O’Keeffe: I have been working in this industry for over 20 years, first in a medical diagnostics company and then in investment banking, before moving into the investment side. When I started investing, there were a lot of small sub-scale companies scattered across Europe. We have fantastic science and innovation in Europe, with top universities and high-level research in each country, but we were lagging behind in terms of company creation and attracting investors.
Traditionally, European investors have been quite conservative, but that funding landscape has changed in the last five years, with more capital flowing into venture investing in Europe. I began my career with Life Sciences Partners, which was the first European venture firm to raise a dedicated €1 billion life sciences fund, but several others have since followed. LSP combined with EQT in 2022 and was renamed EQT Life Sciences.
Early-stage companies are now much better funded and no longer need to run clinical trials, innovate and develop technology on a shoestring. That means there are better companies coming through the ecosystem delivering better products.
Those dynamics transformed venture investing in European healthcare, but once companies reached commercial stage there were still relatively few specialist healthcare investors to follow up. LSP did not have the scale to target those commercial-stage enterprises, but EQT recognised a real opportunity in those mid-market buyouts and nascent commercial-stage businesses. That is a segment we are now focused on, which includes opportunities across pharma services, contract development and manufacturing organisations (CDMO), life sciences trials, diagnostics, medtech and speciality pharma across Europe.
Mark Braganza: The healthcare market has always been global from a product perspective and European companies have always played a critical part in that ecosystem. In addition to the scientific community there was also an incredible heritage in Europe in sectors such as industrial chemicals and high-performance engineering, which are core to medical products.
While the regulatory landscape has historically been fragmented across Europe, now the European Medicines Agency is embedded with a consistent cross-border structure for taking products forward. The recent implementation of the new Medical Devices Regulation also helps. There is still some jujitsu around pricing and strategy to launch products, but Europe has become more of a cross-border opportunity.
As the global industry has looked to increase efficiencies and access expertise, so supply chains and value chains have transformed. Given the innovation and strong management teams present in Europe, plus the support functions you need to bring products to market, we have seen an explosion of opportunity. The capital side used to be more difficult, but that has changed significantly in the last decade.
How is the need for capital, as well as the challenges around financing innovation, fuelling that opportunity set?
MB: Part of the challenge is that in Europe we have been very good at innovation, but what is just as valuable and has been missing is the support for developing new products. That is not a venture capital problem but a growth capital problem, and that segment has not grown meaningfully across Europe. We haven’t historically had people that understand the technical complexity of the healthcare space and pair that with the business-building capital that is required to build these healthcare services companies.
In the US, instead of having generalist investors supporting the growth of these services businesses, there is a growing crop of sector specialists that can help those businesses to scale. Companies often have real revenues and real profitability but need scaling support to figure out how to build their commercial infrastructure, geographical footprint and supply chain. That has been slow to develop in Europe.
GOK: Obviously, scientific advances lead to whole new treatment modalities, such as cell and gene therapy. There is a need for new technologies, and new manufacturing processes, new diagnostics and new tools to scale that up, and that is all gaining momentum.
At the same time, there is also a need for more near-shoring of component supplies and manufacturing, which is all going to help build this industry in Europe. As the technology matures, the costs of labour as a proportion of production costs come down, which shifts where people seek to source from.
The complexity of supply chains was highlighted during covid, and as concerns around supply chains continue, that creates more opportunities for the industry in Europe.
Additionally, some of the shifts in technology fundamentally change the way manufacturing is done. The historical scalability of manufacturing, where it was better to have one or two very large manufacturing facilities, doesn’t necessarily work with new product sets. Where you manufacture, how close you are to the patient, how you move those products around the globe and how you ensure quality and traceability across the supply chain has all changed. That feeds into new opportunities for smaller companies, because personalised medicine is less about large manufacturing facilities and more about addressing complexity and quality on a smaller scale.
Are there any other dynamics that are creating investment opportunities, and how do those vary across Europe?
GOK: Another example would be pharma services, because as clinical trials have become more complicated and our understanding of diseases has improved, we have seen consolidation in the contract research organisation (CRO) space and more specialist service providers cropping up. We have also seen huge advances in healthcare IT, moving from lots of ideas a few years ago to the emergence of robust companies today.
CROs are popping up across Europe because it no longer matters where a company is headquartered, and the same is true of healthcare IT. It is a whole new business model and one that we are seeing opportunities in.
MB: There have been waves of industries across Europe. We had these very strong engineering services businesses in the DACH region and great industrial chemistry across DACH, Northern Europe and the UK, with waves of scientific support services in Benelux. Those have now generated ecosystems of entrepreneurs that have had successful businesses and exits and have started services businesses to support others. There are pockets of expertise across Europe, but those services cross borders really easily.
It is worth noting that half of the healthcare market is about care provision, but that is not what we are talking about when we talk about healthcare investing. We view that part of the market as very local; we focus on products and services and getting those into people’s hands, because those businesses scale across borders.
How do you see Europe’s healthcare landscape evolving in the coming years?
MB: There may be a relatively immature ecosystem in Europe today, but market participants understand that things are maturing quickly. While a small number of parties have so far gone on to be global winners, the barriers have now come down.
Over the next five to 10 years, assuming there is capital to match the opportunity, we should see a growing number of European winners providing global services. They will become interesting to strategic acquirers and will exit to multinationals, but we will have this new engine of businesses with the freedom and capital to mature and become globally relevant assets.
Private equity doesn’t run businesses, but we can enable management teams, and there is now a phenomenal bench of experienced healthcare executives in Europe who have seen success. If we can match them to specific companies, we can help accelerate their growth trajectory. If we can help grease the engine for those companies, that experience is a win-win for everyone.
GOK: We believe Europe is finally coming to an inflection point. We have had the science and technology and the innovation, but we now have the capital sources to bring this forward so the industry can flourish. We can help those companies mature and get to the next stage.
What are the key challenges for European healthcare investors today?
GOK: Europe has always struggled with a fragmented market on the public side, where the focus is on local support for local companies. We have been waiting for markets to mature, but there have been scenarios where biotech companies would go public first in a local market and then do a secondary listing on the Nasdaq. If anything, that situation has worsened, because now companies list on the Nasdaq first and it has become even more difficult for European companies to IPO. That makes private capital even more important today.
MB: The other issue for the companies that we are investing in, where we need to be solving problems for management teams, is the fact that they need to scale cross-border if they are going to be able to continue to grow and compete effectively. Regulations have become clearer but there is more for management teams to do, with an element of cost that requires scale, and a significant element of complexity.
We spend a huge amount of time looking for niche leaders, which tends to mean talented management teams with experience in the industry who have found a solution for something that people have been struggling with. That may be selecting compounds, manufacturing them, moving them around or commercially launching them. But they have typically done that on a relatively small scale and to expand they need corporate infrastructure, with top-notch regulatory and compliance, and that can be a challenge.
Geraldine O’Keeffe and Dr Mark Braganza are partners in the EQT Healthcare Growth advisory team