The Long View

Damien Conover and Rebecca Springer: ‘We Are in a Healthcare Consumerization Moment Right Now’

Episode Summary

Investing in healthcare across public and private markets.

Episode Notes

We have two guests this week on The Long View, our colleagues, Damien Conover and Rebecca Springer, who both focus on healthcare investing—Damien on the public equity side and Rebecca focusing on private markets for Morningstar PitchBook. Damien is director of healthcare research and director of equity strategy for Morningstar Research Services. Before joining Morningstar in 2007, Damien covered healthcare for Raymond James, Bank of Montreal, and Tucker Anthony. He holds bachelor’s and master’s degrees in finance from the University of Wisconsin, where he was a member of its applied security analysis program, and he holds the CFA designation. Rebecca Springer is lead healthcare analyst for Morningstar PitchBook, where she directs coverage of private market investing across healthcare and the life sciences. She has written extensively on P/E investing in healthcare providers, the growing role of retailers in healthcare, and value-based care. She has worked in nonprofit consulting and as a college lecturer. Rebecca holds a bachelor’s from Yale, a master’s from Cambridge, and a doctorate from Oxford.


Damien Conover bio

Rebecca Springer bio

Anti-Obesity Drugs and Healthcare

Obesity Drug Stocks: Where to Invest Now,” by Diana Anghel,, Dec. 7, 2023.

Eli Lilly Earnings: Pipeline Gains and Great Diabetes and Weight-Loss Sales,” by Damien Conover,, Feb. 6, 2024.

Eli Lilly’s Strong Position in GLP-1 Drugs and Powerful Pipeline Support Industry-Leading Growth,” by Damien Conover,, Feb. 6, 2024.

Walmart, Amazon and CVS Want to Disrupt Healthcare Services. Here’s How PE and VC Could Benefit,” by Rebecca Springer,, Sept. 13, 2022.

Q2 2023: Healthcare IT Report,”, Sept. 12, 2023.

Investment Opportunities in the Biopharma Industry,” by Karen Andersen and Damien Conover,, April 5, 2024.

Research & Development Is Driving Medical Breakthroughs and Exponential Growth Opportunities,” by Damien Conover,, April 7, 2022.

Healthcare Stocks: Valuations Look Attractive Across Almost All Industries,” by Damien Conover,, April 3, 2024.

Pfizer Highlights Pipeline to Address Post-2025 Patent Cliff, as Long-Term Growth Concerns Linger,” by Damien Conover,, Dec. 12, 2022.

Can Innovation Offset Biopharma Firms’ Losses From Patent Expiration?” by Damien Conover and Karen Andersen,, March 21, 2023.

A Wide-Moat Dividend Stock to Buy That’s 35% Undervalued,” by Damien Conover,, Aug. 2, 2023.

AbbVie: Cerevel Acquisition Brings High-Risk/High-Reward Neuroscience Pipeline Drugs at a Fair Price,” by Damien Conover,, Dec. 7, 2023.

How Weight Loss Drugs Will Reshape Healthcare,” by Rebecca Springer,, Nov. 16, 2023.

Healthcare Funds Report,”, Feb. 26, 2024.

Q3 2023: Healthcare Future Report: Weight Loss Drugs,”, Sept. 29, 2023.

Covid Vaccines

Pfizer Earnings: Cost-Cutting Remains on Track to Adapt to COVID-19 Product Sale Declines,” by Damien Conover,, Jan. 30, 2024.

Focus: Drug Companies Face Covid Cliff in 2023 as Sales Set to Plummet,” by Michael Erman and Patrick Wingrove,, Feb. 6, 2023.

Value-Based Care

PitchBook Analyst Note: The Value-Based Care Enabler Landscape: 2024 Update,”, March 14, 2024.

Enablement Companies Are Key to the Future of Value-Based Care,” by Rebecca Springer,, March 16, 2024.

Our Value-Based Care Crystal Ball,” by Rebecca Springer,, July 22, 2023.

Healthcare Market Underperformance

Healthcare Service Report,”, May 7, 2024.

Healthcare Is a Frontier Not Even Walmart Could Conquer—And It’s Not Looking Great for Others Either,” by Katie Adams,, May 1, 2024.



Amazon Clinic


Episode Transcription

Dan Lefkovitz: Hi, and welcome to The Long View. I’m Dan Lefkovitz, strategist for Morningstar Indexes.

Christine Benz: And I’m Christine Benz, director of personal finance and retirement planning for Morningstar.

Lefkovitz: We have two guests this week on The Long View, our colleagues, Damien Conover and Rebecca Springer, who both focus on healthcare investing—Damien on the public equity side and Rebecca focusing on private markets for Morningstar PitchBook. Damien is director of healthcare research and director of equity strategy for Morningstar Research Services. Before joining Morningstar in 2007, Damien covered healthcare for Raymond James, Bank of Montreal, and Tucker Anthony. He holds bachelor’s and master’s degrees in finance from the University of Wisconsin, where he was a member of its applied security analysis program, and he holds the CFA designation. Rebecca Springer is lead healthcare analyst for Morningstar PitchBook, where she directs coverage of private-market investing across healthcare and the life sciences. She has written extensively on P/E investing in healthcare providers, the growing role of retailers in healthcare, and value-based care. She has worked in nonprofit consulting and as a college lecturer. Rebecca holds a bachelor’s from Yale, a master’s from Cambridge, and a doctorate from Oxford.

Damien, Rebecca, welcome to The Long View.

Damien Conover: Thanks, Dan. Great to be on the show with you.

Rebecca Springer: Thanks so much for having me. Great to be here.

Lefkovitz: Absolutely. Damien, let’s start with you. Maybe by way of background, you can describe the healthcare coverage that you oversee for Morningstar, you can talk about the industries that your team follows, and maybe the geographic scope as well.

Conover: At Morningstar, we cover a whole host of different industries within the healthcare sector. We focus on pharmaceuticals, biotechnology, tool companies, service companies, device companies, a whole host of public equities. And it’s pretty well reflective of the overall healthcare landscape with the exception of a lot of private entities. When you think about overall spending, you’ll see a lot of spending on drugs and devices, but you don’t see that really reflected in all of the total coverage. So, there will be a lot of names like hospitals and a lot of other names that we don’t cover, but we’re really focused on all those industries that we think are really represented in the public equity space, as well as firms that have economic moats, folks that we think are really well competitively advantaged. And I know we’ll talk a little bit more about that as we go forward, but we really want to cover all names that have economic moats.

Lefkovitz: And you’re covering US healthcare as well as European?

Conover: Yeah, we will cover global healthcare. Really, most of the names that will be in the European, Japanese, and other Asian markets that have developed economies. Generally speaking, you have to have a developed economy to have some of the names that we’re going to cover.

Lefkovitz: And Rebecca, many of our listeners will be less familiar with the private-market side, how PitchBook approaches them. You’re tracking private companies, activity related to private equity and venture capital funds. Could you give us a sense of your coverage and what you call verticals or segments related to healthcare?

Springer: PitchBook, just to start out, is the leading research and data provider to private capital markets. We’re a Morningstar subsidiary. And what that means is that we provide data on private capital markets transactions, which are often a little bit more difficult to find information on. So private equity, venture capital, M &A transactions, debt transactions, as well as personnel, fund performance, industry data, and a whole lot more.

On top of that, we have an institutional research group, which is where I sit, built to be analogous to an equity research group like the one that Damien is a part of, but for private markets. So, our client base includes private equity and venture capital firms, investment banks, institutional investors, service providers, corporates in the ecosystem. And they are interested in authoritative data on deal flow and what transactions are happening, what the financials look like for those, as well as industry views, where opportunities are, especially in the emerging technology side of things, what private equity is interested in, what the risks are.

So, in our research group, we have about 35 analysts in total. For healthcare, we’re covering everything from venture investment into biotech and pharma tech and med tech to digital health to private equity investment in healthcare services and healthcare IT. So, we really try to cover the core verticals for private investment across both asset classes.

Benz: That’s a helpful overview from both of you. Damien, we wanted to start by getting your thoughts on anti-obesity drugs, which seem to be the main healthcare topic these days. They’ve been a huge story. Can you talk about the impact of those drugs and also, who you see as the winners and losers in that area?

Conover: This is probably one of the most important innovation themes we’ve seen in healthcare in a long time. Targeting therapies to help people with obesity have been an effort for a long period of time. And it’s really just been a recent innovation where we’ve seen a major step change. Before the step change, we really saw most of the obesity drugs enabling about 5% weight loss. With this next wave of drugs, we’re seeing that weight loss go up to about 20%. So that’s a massive step change in efficacy. And the side effects are manageable.

And so, when we think about this major step change and the high prevalence of obesity, we think this is going to be a very, very large market. In the next decade, we think annual sales from this class of drugs, GLP-1 drugs, will reach close to $175 billion a year. So that’s a huge number, and that’s an annual number. And the winners here we see taking the leadership are really Novo Nordisk and Eli Lilly. These are first to market with these GLP-1s, with these very strong efficacy rates, and we think these two firms will do quite well.

Benz: And then how about the losers, Damien? It seems like if we are able to combat some of these other diseases related to obesity, that there will be fewer drugs to sell in some of those areas, right?

Conover: It’s a great question because a lot of times if you bring down obesity, you don’t have as many other healthcare issues. And there will be some challenges. What we’ve already seen is people need less insulin, for example. So, if you’re able to control your obesity better, a lot of times you can control the need for insulin. So, we’ve seen a delayed progression into needing insulin as some of these GLP-1 drugs have already been used in the diabetes setting. And as they expand into obesity, not only will likely demand for insulin come down a little bit, but there will be other step changes in some of the demands for other treatments as well.

I want to be a little careful about this as well because this will probably lead to a slight delay in some of these other therapeutic areas, but still probably a need for things like hip and knee replacements, things like cardiovascular drugs, things where bringing down the obesity is important and usually delays progression, but there’s still going to be a lot of demand for these other products. So, there will be some minor losers, but for the most part, it will probably be just a slight slowing of demand for a lot of products. And on the insulin side, the big losers here are actually the companies that are making the GLP-1 drugs. So, Lilly and Novo are the biggest insulin makers out there, so they’re going to way offset the lost insulin sales by selling these GLP-1 drugs.

Lefkovitz: That’s fascinating. So, Novo Nordisk, which is from Denmark—last time I checked, I think it’s the largest public company in Europe now—seems to have a really unique culture. Can you discuss the extent to which you think that culture contributed to the breakthrough on the weight-loss front?

Conover: It’s pretty interesting. So, Novo’s history is really focused on cardiometabolic diseases, really focused on diabetes, and that was the foundation’s origins, and over the years has continued to develop the next-generation drugs. And one of the drugs it developed for diabetes were these GLP-1 drugs. And interestingly, it was almost a side effect of these GLP-1 drugs that caused this massive weight loss and basically transitioned them into not only being able to treat diabetes, but also treat weight loss. And importantly, over the last couple of decades, the pharmaceutical industry has really pivoted away from cardiometabolic disease. And that largely has to do with pricing pressures. There’s been a lot of pricing pressures there. And really the only firms that stuck around were Novo Nordisk and Eli Lilly. And that’s why they have this first-mover advantage that’s so much stronger than the next generation of drugs coming out. But Novo’s history in focused on diabetes, cardiometabolic, I think really set them up well to be this one of the first-mover advantages in treating obesity.

Benz: Rebecca, you’re tracking the anti-obesity drugs too. What are the implications that you’re watching for the broader healthcare ecosystem?

Springer: We really think that this new obesity drug class is one of the biggest forces shaping healthcare right now. To put it in perspective, we have clinical evidence that GLP-1s can be effective at treating heart disease, diabetes, and early evidence for chronic kidney disease as well. So that’s the number-one, number-eight, and number-nine leading causes of death in the US, which is pretty extraordinary. So, we think that this is really just getting started. One of the questions that my team, looking at the private-market side of things, has been asking is, with the dominance of Lilly and Novo in this space, is there room for early stage biotechs and for venture capital investors to make a play here? And coming out of JPMorgan, we’re tracking a couple of different approaches that investors are taking to that.

So, the first one is to develop drugs that actually treat the side effects of GLP-1s. The muscle loss, bone density, facial aesthetics issues are all known side effects, and there are the biotechs working on that. Second approach is to evolve the existing GLP-1 science, so improving dosing or user friendliness, looking at small molecule drugs that can target the GLP-1 receptor, and those are easier to manufacture crucially, and then entirely new science, so metabolic accelerators or gene therapy for weight loss. So, we do see a lot of opportunity for second- and third-wave therapeutics that are being developed by earlier-stage companies.

A couple of other big impacts that we’re tracking for the healthcare system more broadly. First is answering the question, how are people going to get the prescriptions that they want and need for GLP-1s? There’s a huge consumer-demand push for these drugs. People know about them, and they’re motivated to seek them out. So, we are seeing a lot of the telehealth and e-pharmacy companies pushing into connecting people with doctors virtually in order to fill prescriptions. So, Ro is a key example. Costco just announced the other day that they’re going to be offering with a partner, Sesame, which is a privately held company, $29 telehealth visits, which can then be used to get your GLP-1 prescription and fill it at Costco pharmacy. Amazon Clinic also has a deal with Lilly. So, we’re seeing a lot of movement in that space.

Second big impact is that employers who are often the ones footing the bills for these drugs at this point are really looking carefully at virtual treatment options that are going to wrap lifestyle modifications around the drug itself. And we know that this is really crucial for keeping weight off and for doing so in a healthy way long term. And so, we’re seeing a lot of investment into digital condition management, medication management, and lifestyle programs as well.

Benz: So, Rebecca or Damien, can you address the injectable aspect of this? It seems like that’s obviously suboptimal. People would rather not have to have an injectable drug. They’d probably rather take a pill in most cases. Is that on the horizon at all or is injectable just for the foreseeable future? Are you hearing anything about that evolution?

Conover: Great question. And Christine, I think you’re right. Folks would prefer an oral to an injectable and that technology is in the works. Both Novo and Lilly have drugs that are in the pipeline that can be taken orally. And in Novo’s case, they already have an oral approved for administration on the diabetes side. And we would anticipate that as these drugs get through the FDA and other regulatory agencies’ cycle in the oral form, it probably expands the market. And there are other firms that are also looking at injectables, but at longer durations. So, you could see things that could be dosed as long as monthly or even longer than that. So, at a certain point, oral daily versus injectable month or even longer, starts to become a bit of a toss-up. But directionally, I think more convenient dosing is likely to come.

Lefkovitz: And then the insurance angle, we’ve heard that some insurers are beginning to cover the anti-obesity drugs. How does that affect Morningstar’s view of the companies?

Conover: I think that’s really important. When we think about insurance coverage for drugs, it’s really critical because drug prices are so expensive. And to pay these out of pocket is pretty much cost prohibitive for most people. And we are seeing a lot of private payers cover the obesity drugs already. In the United States, for Medicare, when Medicare was set up to have drug coverage, it was explicitly stated to not have obesity drugs covered. I think that’s going to evolve. As Rebecca said, there is a lot of ability of these drugs to treat things beyond obesity. And I think that’s going to be the mechanism for wide insurance coverage as these drugs continue to show benefits in cardiovascular disease, renal disease, and then probably eventually show benefits in NASH and sleep apnea. The more and more things these drugs can show efficacy in outside of obesity, the increased likelihood that you have more and more insurance coverage.

Springer: That’s really interesting. Typically, Medicare leads the way in coverage for new treatments or therapeutics and then commercial insurers follow. We really think that you’re going to see things the other way around in this case because of that Medicare law that Damien mentioned. But we are hearing more and more employers and healthcare companies that work directly with employers talking about increasing coverage of these drugs simply because there’s a ton of pressure from employees. If you have this level of clinical efficacy, it’s hard to say no at some point. So, we do think the coverage is going to continue to expand.

Benz: We know markets can sometimes get overexcited about new technologies that might be happening with the AI space right now. Damien, do you see any signs of froth in the anti-obesity space?

Conover: Yeah, we’re starting to see some signs of froth with the public markets. The leaders here, Eli Lilly and Novo Nordisk, we view both of those stocks as overvalued. They’re names that we think are going to be performing exceptionally well from a fundamental standpoint. Their earnings growth should be remarkably strong over the next several years. They have a first-mover advantage over the next generation of drugs by at least two, and in some cases three, years. So fundamentally, this is something where we really like the management teams. We like the portfolios. But from a valuation standpoint, I think the market has gotten a little bit ahead of itself and it’s probably ascribing too much value into these two public equity names that really are the leaders in the space.

Lefkovitz: Rebecca, from your side, do you see signs of froth on the private-market side related to anti-obesity?

Springer: Some, yeah. The venture life sciences investment ecosystem has really contracted over the last year and a half, I’d say, with the exception of two key themes, obesity and AI. And so those are the areas where we’re still seeing pretty big deals at more aggressive valuations, and it’s really in contrast to the rest of the market right now.

Lefkovitz: And following up on AI, you’ve been thinking about the impact of AI on healthcare. Can you talk about that?

Springer: It’s been the key theme at all the major conferences this year and certainly something that we’re spending a lot of time thinking about. I can’t count the number of casual conversations I’ve had recently where someone says, oh, I typed my symptoms into ChatGPT, and it gave me a diagnosis. This is going to change healthcare forever. I sympathize with the sentiment. In reality, of course, as with everything in healthcare, it’s much more complicated than that. So, we think that the impact of AI is both going to be very significant and also incremental from a full system perspective.

I’ll give you a couple of examples of that. On the drug-development side, AI is really exciting. AI allows you to do science much more quickly. It gets you to a drug candidate faster but doesn’t necessarily prove that that candidate is going to work. You still need to go through a decadelong, potentially billion-dollar clinical trials process in order to get that drug to market. So, there are other parts of the system that also need to be rightsized.

Another example, if you think about the clinical care delivery side, one of the biggest areas for venture investment in healthcare AI over the past nine months or so has been in ambient clinical documentation. So, what that means is, you go into a doctor’s office. You’re talking organically with your physician about what you’re feeling. There is a recording device using natural language processing to transcribe the conversation and then AI on top of that to interpret what’s being said and translate it into a structured clinical note that’s being directly written into the electronic medical record for you as the patient, and then the physician is going to go back and review and approve it later. This is really exciting for many physicians. It saves them hours of time in the evenings after hours working on notetaking, but there are some challenges too.

In many cases, if you make a clinician’s workflow more efficient, the result is within a healthcare organization that has labor shortages and has tight margins anyway, they’re just going to expect that clinician to see more patients. That doesn’t help you too much with the clinician burnout piece of things. And the other challenge is that you’re building an enormous volume of documentation now that the next person who needs to review that patient’s medical history or the insurance company that needs to review a prior authorization request now has a huge body of documentation that they need to work through. And so, you’re going to need another AI on top of that to pull relevant information out and feed it to the provider or the reviewer to make a clinical determination. And that requires a little bit more judgment.

So again, I think we’re going to see a lot of progress in streamlining discrete parts of the healthcare system where there is a huge need for better efficiency. But all of those parts also need to link together. And so, there’s a lot of work to be done, I would say, in terms of deploying AI in healthcare. But it is an exciting time.

Benz: Rebecca, another trend that you’ve been watching relates to what you call the consumerization of the healthcare space with wellness apps, fitness wearables. We’re seeing retailers like Amazon getting involved with healthcare. What are you seeing related to this trend?

Springer: It’s a really interesting one. I think we are in a healthcare consumerization moment right now. Obesity drugs, we were talking about earlier, are in many ways a consumer trend. They existed for a long time and then there was this enormous demand wave that came in many cases organically. So, there’s a lot of opportunity here.

I think, in general, people want two things with their healthcare. They want easy access to care when they need it, and they want to feel like they’re in control of their health. And a lot of the push toward more consumer-focused healthcare gets at those two things. We’re seeing a lot of opportunities just to improve the front door process for patients when they’re seeking out the right physician for them, trying to figure out what their insurance is going to cover and what their out-of-pocket cost is going to be upfront. Can that be seamless and instantaneous? Can they book an appointment without having to jump through a bunch of hoops? The basic blocking and tackling of digital interfaces with the healthcare system.

More profound changes like moving care out of hospitals and into ambulatory clinics and even into retail locations and into the home virtually, which consumers generally prefer because it’s more accessible, it’s closer to where they live and work. We’re seeing a lot of interest in wearables. So, Apple Watch has pushed into the medical device arena. The Apple Watch is now FDA cleared. But you’re also seeing med-tech device makers push into the consumer arena. So, for instance, Abbott and Dexcom, which are the two major manufacturers of continuous glucose monitors used by people with diabetes, now are both moving into consumer-grade glucose monitors because people want to, even if they don’t have diabetes, they want to track the nutrition decisions that they’re making in a more, I don’t know, seemingly scientific or real-time way. There are debates about what the medical effects of this are going to be. But lots of consumer interest.

One other trend that I’ll mention on the private equity side that is interesting to me is looking at areas that are healthcare and aesthetics adjacent. So, one of the biggest areas of investment for private equity right now is actually in med spas. I don’t know if you guys know what a med spa is.

Benz: I do.

Springer: OK, there you go. So, you find them in shopping areas, and then in the street malls. You walk in and it feels like a spa. It’s actually a medical institution that has to be overseen by a physician. You can get your Botox or laser hair removal or chemical peels or what have you. And these things are growing—the market is growing like crazy. And so, we are seeing investors just expand their view of what healthcare is and to follow consumers into different corners of the market that way.

Lefkovitz: Damien, back to you. Wanted to revisit an older story in the healthcare space, which was the covid vaccines a couple of years ago. That was what everyone was talking about. Do you think it had lasting effects? How did the covid vaccines and their rapid release of change the landscape in healthcare?

Conover: It’s a good question. I think the general society’s perception of big pharmaceutical firms has been increasingly negative over the last few decades. So, if you go back to the early ‘90s and you look at the Fortune most admired firms, at the top of the list, you’d see Merck, you’d see J&J. These firms, everybody was thinking the best of. And then, over the following decades, a lot of these firms lost some of that admiration. And I think partly due to making some consumers pay more for drugs over that time period, and there’s also been a few litigation issues. So, this industry, I think, was under some pressure from just the general perception of the overall landscape of consumers.

And then covid comes around. And it’s this horrible pandemic. And one of the groups that steps up and limits the damage of it is the large pharmaceutical firms. And it’s something where I think you start to get some of that admiration back. Now we’re through the pandemic and I don’t get a sense that a ton of that admiration has stuck. I think it’s probably reset a little bit. I think people like the pharmaceutical industry more than they did in the past. But keep in mind, there’s a lot of negative political rhetoric out there against the pharmaceutical firms, saying, oh, they charge so much for drugs, they’re not creating innovation. I think it’s difficult for the general public to see the innovation that’s happening. But I would say the covid pandemic and the response by Pfizer, Moderna, and several other firms bringing a vaccine out in remarkable speed I think did help reset the view of the biopharma landscape.

Benz: So, Damien, you put out a research piece looking at exponential growth in healthcare innovation and that piece focused on two areas. One was innovative therapies, and the other one was innovative devices and diagnostics. I wonder if you can discuss that research generally but also through the lens of moats? And maybe you can talk a little bit about how you and your team think about moats in the healthcare space and maybe talk about how innovation might influence your moat ratings when you assign them to companies that you cover.

Conover: Economic moats are really foundational when we think about healthcare companies. An economic moat in its basic sense is just a structural advantage that stops competition. Because in most markets, if you have a business that’s generating excess returns, competitors are going to come in and they’re going to squeeze those margins. However, in certain cases, there are structural advantages or economic moats that keep the competition at bay.

In healthcare, one of those structural advantages is innovation and that innovation can be monetized heavily through patents. A patent is typically about 20 years. So, it’s really incredibly important to continue to innovate, because as a key product loses exclusivity, you have to bringing out the next generation of drugs. So, that innovation in healthcare is amplified in its importance. And because of that importance, we do see these firms spend a lot more on research and development. In the biopharma landscape area, they spend close to 20% of sales on R&D. So, it’s one of the most heavily funded R&D industries really across all industries even outside of healthcare.

When we think about innovation of the past, we’ve seen some incredible advancements over the last couple of decades. In the device space, I’d point to coronary stents over the last couple of decades. Firms like Medtronic, Abbott, Boston Scientific, J&J about two decades ago revolutionized that area, and that enabled them to continue to innovate and drive high-margin product sales. We’ve also seen massive innovation in the biopharma area. One of the things we see a lot more of now is targeted drugs, drugs that focus on what we call biomarkers.

So, just to play that out a little bit, several decades ago, you’d have lung cancer and then it got to be non-small cell lung cancer and then it got to be nonsquamous, non-small cell lung cancer and then it got to be KRAS-mutated. So, it kept going layer and layer and layer deeper. Why that’s important for innovation is that drug firms can then focus on those particular biomarkers and enable higher efficacy. So, as the scientific advancement improved, we saw next generation of drugs launch.

And then, one last example I’d say in the historical past is robotics. We’re seeing a lot of advancements in robotics. Intuitive Surgical as well as Stryker, these are two firms that are really leading in robotics and were the first movers in some of their areas. Now we’re seeing some followers happen, but keep in mind, some of the patents keep some of the firms at bay and then also some of the intellectual know-how also keeps firms at bay, and that innovation cycle is just really critical to enable the intangible assets that create that structure of moat protection and enable a lot of these firms to have excess returns for quite some time.

Lefkovitz: Can I ask on the flip side, Damien, are there certain firms or areas where you’re worried about a patent cliff?

Conover: So, what’s interesting is, if you look at patents in the pharmaceutical landscape, we saw our last patent cliff really around the 2010 to 2012 time period. At that time period, most of these stocks were trading at around 10 times forward earnings. Just to give you a reference point, on average this group tends to trade at about 16 times. We do all our valuation work with the discounted cash flow model. However, we think it’s important to keep in mind those valuation metrics.

Looking ahead, when is the next patent cliff? We don’t have a major patent cliff of the magnitude that we had in the 2010 to 2012 time period. However, by 2028, there will be what we’re starting to reference, call a patent hill or a slope. It’s going to be a challenge for the industry, but it probably won’t be as bad as what we saw in 2010 to 2012. So, a lot of the firms are really focusing on next-generation innovation to be able to go through that patent pressure that will become more elevated in the 2028 time period.

Benz: So, Rebecca, one of the trends your team is watching is the push to real-line incentives in the care delivery system so that the focus is more on keeping people healthy through preventative care or what’s known as value-based care. What kind of innovations are you seeing there?

Springer: So, this is a really important trend for the care delivery part of healthcare. And the backdrop of all of this is that healthcare spending in the US is on an unsustainable path. We have about $4.5 trillion currently, close to 20% of GDP. Medicare alone is going to cost $1.7 trillion by the end of 2030. We pay more than twice the OECD average per capita for healthcare for generally worse outcomes. So, this is a problem that we’re trying to solve.

To break it down in the traditional way that healthcare is paid for in the US, a healthcare provider, so your doctor, gets paid on a fee-for-service basis. So, every time they provide some sort of care to you, they get paid for that unit of care. If you think about it, that really incentivizes care providers to provide more care economically and really to have people be sicker. I’m not saying that your doctor wants you to be sicker, but economically, the sicker patients are, the more care is going to be provided. So, the goal of value-based care is actually to flip that on its head and to financially incentivize providers to deliver preventative care, deliver care earlier, deliver care in a coordinated and patient-centric way so that people stay healthy and that provides better patient outcomes, better patient experiences, and also reduces costs throughout the healthcare system.

It’s a really tight concept conceptually and really complicated in practice. A lot of the work in value-based care that’s been done in the past five or 10 years has been enabled by improvements in technology to track patient journeys across different care providers, to use AI to predict which patients may be at risk of developing more severe conditions, to use AI to nudge providers in specific directions that are going to put patients on the right evidence-based care path, get them to the right specialist at the right time. So, there’s a lot of technology innovation that’s happening in value-based care right now.

In the market, there’s also a lot of—should we said there’s a market correction in value-based care—a lot of the companies that went public, that were healthcare-delivery companies in 2021 did so at pretty frothy valuations. There was a lot of excitement around value-based care and in many cases, those stocks are down, and those companies are not scaling as fast as they thought they would. But we still are talking with private equity and venture investors on a weekly basis about trying to figure out how to play this value-based care space because these investors know that this is the future of healthcare.

So, I’m excited about the technology piece. I’m excited about the potential for AI to improve value-based care. I’m also excited about movement that I’m seeing in the employer market where employers as the largest payers in the healthcare system are figuring out that if they partner with companies that can in an innovative way help their employees manage through the healthcare system get to the right care at the right time and get the preventative care that they need. Again, it creates a happier, healthier workforce, and it also lowers cost. So, I’m seeing lots of exciting work in that space as well.

Benz: Sticking with preventative care, one jump-ball question I have for you two relates to cancer. There was a study article that I read maybe a year or so ago that pointed to advances in preventative care and screening as responsible for most of the reduction in cancer deaths over the past couple decades. Can you address that and whether that gets lost in the shuffle because we do hear so much about exciting new drugs and treatments coming online? Can you talk about the prevention piece and the screening piece with respect to cancer?

Springer: This is the heart of what value-based care is trying to do. Again, risk stratify a patient population to see who is probably at risk and then get them engaged with their provider to get the right screenings at the right time and catch things earlier.

Conover: The only thing I might layer on is how important that is, because, Christine, like you mentioned, we do hear about these drug advancements, which are pretty meaningful, but a lot of times these drugs are used in the metastatic setting where the cancer has spread so substantially. And so, a lot of times these drugs help but they’re not curative and they usually just delay progression of the disease. So, by being able to find cancer earlier, you have a lot more options of treatment that can have much, much better outcomes.

Lefkovitz: I wanted to turn to investment performance. We’ve talked a lot about exciting advances in healthcare, but healthcare has broadly underperformed the market. If you look at one, three, five, 10 year; if you look at our sector indexes, healthcare is behind the US equity market, the global equity market. Damien, maybe we can start with you from a public market perspective. Why do you think healthcare has lagged?

Conover: I think that’s a really interesting question. I think when you look at healthcare overall, you almost have to pull out the pieces a little bit. What I mean by that is, there are industries within healthcare that have done fairly well over some of those time periods, so companies like managed-care organizations, tool companies, a lot of device companies. A lot of those subsectors have actually done reasonably well. But one of the biggest subsector industries of biopharma, that’s been the space that is weighing down the performance. And because biopharma tends to represent over 50% of most indexes, the way those stocks trade tends to really impact the performance.

And I think part of the reason why biopharma has done so poorly over the last decade is I’d say a couple of factors. One there’s been a lot of pressure on these names about potential drug pricing reform and as the market sees the drug prices potentially under pressure in the United States, that has led to the market to be less willing to put higher valuations on these names. So, I think that’s part of the issue. The other issue is, I think over the last decade, the major buyers of drugs in the United States are pharmacy benefit managers and they have consolidated over the last couple of decades, and they’ve become very strong in their ability to push back against prices. And so, you see these different shapes and you see the market reacting and not wanting to ascribe a higher valuation to a lot of biopharma firms.

I think that’s going to shift, and I think what we’re anticipating is better performance for biopharma going forward. There’s a lot of next-generation innovation that I think is going to start to get unlocked over the next few years and some of the prices go up. Just to highlight a couple of innovation themes that we’re seeing that we think are underappreciated. First mRNA technology. This is the technology that really unlocked the covid vaccine. We think that’s going to start to pivot and be able to treat things like cancer. A firm like Moderna we see as undervalued and would be a name that we think has a lot of potential in that next innovation cycle.

Neurology, this is another area of a lot of innovation that we think will help the biopharma industry perform well. We think neurology could be the next oncology. What I mean by that is the last decade has really been about oncology innovation. The decade ahead looks like neurology, and a firm that’s really well-positioned there is Biogen. Then last innovation theme— and I started talking about it a little bit earlier—is that targeted drugs focused on really finding the disease very specifically. One name that we like there is Pfizer, and its recent acquisition of Seagen really pulls in these ADCs, these targeted drugs that we think will help accelerate the growth for that particular firm. So, in general, yes, healthcare has done mediocre over the last decade. But again, I think that’s partly due to the biopharma group weighing down the overall performance and that has a lot to do with concerns around drug prices.

Benz: Damien, I have to ask about a topic near and dear to my heart, which is the Alzheimer’s drugs. What’s the state of the state there?

Conover: Great question. This is probably the tip of the iceberg of the shift into neurology that I was talking about. Biogen and Eli Lilly are leading the charge here with Alzheimer’s disease drugs, and I would say we’re at the beginning. So right now, we’re starting to understand Alzheimer’s disease much better. We’re being able to use some biomarkers that will be able to subdivide the disease so that we can really have drugs that target the right targets. But right now, these drugs that are approved, they have shown good efficacy. But I’d say we’re just at—if I were to use a baseball analogy, I think we’re in the first inning of a game that I think will accelerate the speed of play and the next-generation Alzheimer’s disease drugs that are sort of in phase 1 and 2, that’s where I think we’re going to see a major step change in Alzheimer’s disease treatment. Now that being said, the drugs from Biogen and Lilly I think are important innovations and will start to help, one, patients and two, increased funding into the area so that we can really have more of those drugs financed in the earlier stage of development so we can have that next step change.

Lefkovitz: Rebecca, wanted to get you to weigh in on the investment performance from a private-market perspective. How has healthcare fared relative to other areas?

Springer: We put out a healthcare funds report that comes out twice a year looking at specifically healthcare specialist private equity and venture capital funds, and we’ve looked at historical performance for those funds. The breakdown is that private equity healthcare specialists have lightly outperformed the rest of the asset class historically. Venture capital life sciences-focused investors have met the market or slightly underperformed depending on what metrics you look at. And then other healthcare-focused venture funds have actually underperformed the market with the caveat there being that we do have lower data counts for that group. So, take that with a grain or two of salt.

At the same time, it’s really interesting. The fundraising dynamics are relatively positive for healthcare specialist managers. So, we’re seeing both private equity and venture capital specialist firms have greater fundraising success relative to their respective asset classes. And in fact, 2023 was the strongest fundraising year ever for private equity healthcare specialist managers.

So, a couple of things are going on here. The institutional investors that commit to private equity and venture capital funds–so think insurance, pensions, endowments, sovereign wealth funds, and so on—they think of healthcare as an acyclic or defensive sector, so they’re interested in healthcare right now, and they also think of it as a sector that’s complex enough that it lends itself to specialist investing. The latter point has some data to support it. The former about acyclicality, as Damien pointed out, really isn’t true in this current economic cycle. And I think healthcare has been particularly hard-hit by the covid boom/bust cycle that we’ve seen over the past couple of years.

We do think that healthcare is going to continue to be a key part of venture and private equity investing and see some good opportunities. To put things in perspective, in the US, about 25% of venture dollars go into healthcare, about 14% of private equity dollars. We expect that that might be down over the next couple of years as the industry in a couple of different areas continues to work out the post-covid era, but it is going to remain resilient overall. There are, on the private equity side, too many fragmented parts of the market that can benefit from scale and operational sophistication that private equity can bring. On the venture side of the market, the science continues to be very promising, and there’s a lot of room to really move the needle on both drug development and AI side. So, we’re positive overall, but the historical performance, again, has in many cases not been quite what some institutional investors have expected.

Benz: I wanted to discuss politics and regulation a little bit. This is an election year. So, Damien, I’m hoping you can tackle what you see as the implications of the election for the healthcare landscape? And Rebecca, similarly, regulatory scrutiny of healthcare is a key issue for private equity and maybe you can talk about what you’re watching there? But Damien you go first.

Conover: So, on the public equity side, generally speaking, elections of recent past have been a little bit more negative on the biopharma landscape and a little bit more indifferent to most of the other industries with the exception of managed care. Managed care can also be under pressure as well during election cycles and that largely has to do with different new regulations and laws that potentially could be enacted with the next wave of politicians coming into office.

I think when we look at this upcoming election cycle, we don’t anticipate much pressure for really any of healthcare and that has to do with maybe two factors. One, the managed care organizations are probably not going to see major change. The concept of going to a one-payer system in the United States that is common in Europe and other developed markets, that seems largely off the table. So, that sort of pressure on managed care firms I think is not going to be there; there’s just not enough buy-in with the current political parties to have that go forward. And then on the biopharma side, there still is going to be likely rhetoric against, pricing against drug firms. However, and this is important, the passage of the Inflation Reduction Act about two years ago, that really reduced the out-of-pocket spending by Medicare patients and so that big voter group has largely been appeased. And then, beyond that, that act also reduced a lot of the payment by the government for drugs for the Medicare patient population. So, I think the ability for major change on drug prices going forward is going to be reduced. That being said, there’s still going to be some rhetoric and I’d still expect some volatility, but the bigger pressure that we’ve seen on biopharma and managed care stocks in the past, we’re not expecting that this time around.

Springer: I’ll jump in on the regulatory side. Specifically for healthcare and private equity, there’s been a lot of activity recently. So, we have a current FTC lawsuit against a private equity-backed anesthesia group in Texas. We have an FTC DOJ investigation into what the investigation terms corporate greed in healthcare with private equity named as one of the key players there. We have a new piece of draft legislation out from the senator from Massachusetts just this morning looking at private equity in healthcare and asking for greater transparency. A lot of this has been driven by Lina Khan’s FTC really putting a priority on looking at this space.

A couple of things to say about this. Do you think a lot of the emphasis has been a little bit off base in relation to what we see in our data in terms of where private equity is actually investing in healthcare? There’s a lot of political hay being made of this right now focused on private equity investment in hospitals and to a lesser extent nursing homes, and these are two areas that actually if you look at our data-tracking private equity transactions have really fallen off the radar of the vast majority of private equity firms over the past couple of decades. A lot of activity in the early 2000s in these areas. Really, the last major private equity hospital deal was in 2018 and we don’t expect any more going forward. The largest healthcare provider categories that private equity is invested in are dental, home-based care, mental health, musculoskeletal, orthopedics and physical therapy, dermatology, and the list goes on—really focused on outpatient care settings and providing growth in those fragmented industries.

In terms of how this antitrust and regulatory scrutiny is affecting investors in the market, the investors that I’m talking to are watching this quite carefully. I think the private equities industry needs to get better about communications and PR. Its strategy has generally been to, I don’t know, bury its head in the sand and that’s probably not going to work in this environment. But for the vast majority of deals that are being done—these are middle-market deals often physician-owned practices selling to private equity in highly fragmented spaces—there’s not a direct antitrust risk.

The main effect that we think that we’re seeing is that the larger private equity firms that are maybe household names so Blackstone, KTR, and so on, are probably going to be less likely to invest in providers in this environment just because they have a little bit more public profile, they tend to be a little bit more in the crosshairs and there will be some trickle-down effects into the rest of the industry as these larger firms are buyers of middle-market private equity-backed platforms in some cases. But other than that, we’re not going to see private equity pull out of healthcare anytime soon. A lot of firms that are operating in the space right now are sector specialists, they’re operationally focused, and they’ve built theses around supporting growth and financial sustainability for healthcare practices. So, we expect that to continue.

Lefkovitz: Well, unfortunately, we’re out of time. We have to wrap there. I think we can go another hour with both of you. Damien, Rebecca, thanks so much for joining us on The Long View.

Conover: Thanks for having me.

Springer: Thanks. This was fun.

Benz: It was great. Thank you so much.

Lefkovitz: Thank you for joining us on The Long View. If you could, please take a moment to subscribe to and rate the podcast on Apple, Spotify, or wherever you get your podcasts.

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Benz: And @Christine_Benz on X or Christine Benz on LinkedIn.

Lefkovitz: George Castady is our engineer for the podcast and Kari Greczek produces the show notes each week.

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