Episode 10: Sam Gray on healthcare investment

Sam Gray, Managing Partner at specialist healthcare investor Apposite Capital, chats with Candesic about the forces reshaping healthcare investment and the future of the sector. In a wide-ranging and candid discussion, he explores topics including:

• Why specialist healthcare investors approach businesses differently from traditional private equity, and the role private capital should play alongside the NHS
• Where investors and operators can make the biggest difference as healthcare demand outstrips available funding
• What the latest wave of international capital means for UK healthcare investors
• Apposite’s latest fund, what sets it apart and where Sam sees the biggest investment opportunities
• What is holding the NHS back from adopting proven technologies
• The barriers facing healthtech businesses selling into the NHS, and what needs to change
• Why AI adoption remains surprisingly slow despite the growing number of approved tools
• The investment implications of GLP-1 drugs, including where the biggest opportunities and risks lie

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Transcript

SPEAKER_00 0:05

Welcome to Candesk in Conversation, a podcast series explaining the big innovations, opportunities, and challenges in health and social care, life sciences, and medtech. Today, Candesic is in conversation with Sam Gray, managing partner of APIC Capital. Sam, welcome to the podcast.

SPEAKER_01 0:24

Hi, thank you very much for having me.

SPEAKER_00 0:26

It's good to see you again. Let's start by talking about APICIT, what's its remit. Tell us about your role there.

SPEAKER_01 0:33

So APICIT Capital is a specialist private equity investor in healthcare and life sciences businesses. That means that we identify and invest in high-growth and high potential businesses that are creating solutions in the healthcare area or for life sciences. Those may be products, those may be services, but we're really looking for businesses that have a very high positive impact on human health. And that may be in terms of improving patient outcomes and experience, that may be in terms of improving access to healthcare or promoting innovation in that area. But all of our businesses are united in that goal, and then we look for high growth and high commercial return as you would expect from a private equity investor.

SPEAKER_00 1:18

And you're the managing partner?

SPEAKER_01 1:19

I'm the managing partner. I've actually been at Apposite for almost 20 years. I joined the deal team on the first fund. And around six years ago, I became managing partner and have raised the last two funds that we have raised.

SPEAKER_00 1:33

Is there a difference between a business that focuses on healthcare and life sciences compared to a typical private equity firm?

SPEAKER_01 1:42

Yeah, I think it's absolutely core to our identity, and I think it's very key to sort of have that focus. We really think of ourselves more as health and life sciences professionals rather than sort of financial services people. We get very involved in the day-to-day operations and strategies, business development of our portfolio. We have large Rollodex, and that Rollodex is largely in sort of the healthcare and the life sciences world. So we're sort of steeped in that sector. And I think healthcare is so unique compared to other areas of business. You really have to think about everything from the point of view of patients, from the point of view of doctors, from the point of view of regulators. Sometimes those things are aligned, sometimes those things are not aligned. You have to understand those different competing incentives, and of course understand the science and the technology and the other drivers in the sector. So it really is a specialist field.

SPEAKER_00 2:41

So you need an investor that knows what they're doing.

SPEAKER_01 2:44

Hopefully.

SPEAKER_00 2:44

And it because it's not like retail.

SPEAKER_01 2:54

Yeah, we often joke that our team is filled with sort of failed scientists and medics. Most of the team did study science or or or medicine or have been in healthcare for their entire career. So this is not sort of a passing phase, and they're going to go off and do investment in the energy grid, you know, in a next job. This is these are people within the team who have a real passion and real love for healthcare.

SPEAKER_00 3:21

And having said that, of course, and let's get the elephant in the room out of the way early doors. Investing in healthcare, private equity investing in healthcare in particular, can be controversial. Does private equity, private money, private capital have any place in healthcare systems? And if so, why?

SPEAKER_01 3:40

Yeah, well I I I understand that the sensitivity, first of all. I mean, healthcare is a very, very personal and sensitive topic. Um, and you know, people rightly will question the involvement of whoever is is involved in in care. Uh, and there are always going to be questions and controversies whether the care is provided by the state, a private company, a charity. Um, to me, at the end of the day, what is important is the quality of that care, uh the outcomes for the patient, you know, the health economic uh status of the intervention, whether it makes the lives of doctors and nurses and healthcare clinicians easier. Um, I think if you can achieve those things, then you've had a positive health impact. Um, and really that's what's important to people.

SPEAKER_00 4:29

And if you have done that and benefited the patient, then it's okay to make profits.

SPEAKER_01 4:35

Yeah, I think that health impact is a driver of returns. It's not a sort of force that is contrary to generating returns. The businesses that are most successful are those that have the most profound positive benefits on the health system.

SPEAKER_00 4:50

And there is, of course, a gap between healthcare demand and the limited funding that is available. So the first question is how do you plug it? And one way to do that would be with private equity. And when you're looking at the options available, where can you make the difference the fastest? Where can investors make the greatest impact? Is it with people, is it with technology, is it with something else?

SPEAKER_01 5:12

Yes, I mean I I agree that healthcare in the West is reaching a almost a crisis point where the demand is increasing so much more rapidly than the supply of resources. And those resources are funding, but they're also doctors, nurses, dentists, people. Um, and on the other side, I think not only are we living longer, we're living longer with more diseases. Uh we we we live with diseases rather than dying from them. Um and at the same time, people's expectations are increasing as well. Um so you've really got two very contradictory demographic forces that are colliding. Um so the status quo is not a solution. We can't just incrementally put more funding into existing models. It doesn't work. And I think So what do you target? Well, we we we have to target change and innovation, and we can ask ourselves how that's best achieved. The state, state-run systems, large incumbent bureaucratic hospital systems and businesses I'm sensing slow to turn, slow to adopt in that are often not the best adopters of technology. Um, and that's for very understandable reasons. It's like trying to uh rebuild an aeroplane while it's flying. Um, often the trailblazers in innovation and adopting of new technologies can be those smaller businesses like the ones we back, um, and you know they may be able to either start from scratch or or or retrofit technology much more easily than a behemoth can. Um and that's good in a number of ways. They can partner with public systems, they can address uh private demand for those services, or they can just trailblaze innovation and demonstrate how it can be achieved and different models of care.

SPEAKER_00 6:56

Got it. Smaller, agile, tech focused. Anything in your portfolio or on the horizon in and around that you can see that's that's achieving this? Any shining examples?

SPEAKER_01 7:07

Um there are examples all over our portfolio. Um, and uh you know, I think if you're not trying to innovate and adapt and use technology and AI, you know, you're you're you're gonna be left behind. Um so one example in our portfolio, we have a specialist residential care business in Denmark called Habitus that looks after people with very profound autism and learning difficulties, and they have developed their own AI um software that can identify where stresses are arriving in the system, um, where where there is a risk of an escalation, um, and they are then able to step in and uh uh prevent that happening. Um, and they use sort of uh AI-based tools for interrogating the care systems and records that they keep.

SPEAKER_00 7:55

Got it. I should just uh take a moment to say that we are discussing some of the themes that are inspired by a piece that you wrote. Uh it was called The Future of Healthcare Systems. I don't think that's the complete title. I think it had a global um context as well. Uh I'll try to remember to link to your research when we when we put this live. We are seeing more investment from the Middle East and other geographies. Is that a competitive threat? Is that a partnership opportunity for firms like Apposit? And what geographies have you got your eyes on?

SPEAKER_01 8:24

Well, we invest in businesses that aspire to grow. And very often the larger markets are international markets. And in healthcare, even now, the US is always the critical market for, particularly for medical technology type businesses, medical device type businesses. Um, so utilizing our network and our experience of helping businesses grow into the US is key. Um but of course there are also many other international markets now of scale. And depending on the particular healthcare business and model of constructing the right distribution relationships in in the right markets is a key part of growing and internationalizing a healthcare life sciences business.

SPEAKER_00 9:10

Being a little Jeremy Paxman, I'm thinking any any geographies that you want to single out as being particularly exciting, or do you want to keep those cards close to your chest as you don't know who else is watching this?

SPEAKER_01 9:20

Um one thing that I find quite interesting is that there are really interesting companies in small countries. So I think if you're based in a smaller economy, you are from the very beginning that you set up your company or found it, you are thinking internationally and you're thinking about how do I get into a big market? Because it's obvious to you that your domestic market is going to be too small. And that's a a benefit. You you set up the company in the right way, you enter new markets more quickly. Um whereas I do think possibly in the UK as well as in other sort of medium-sized markets, businesses can get a little bit too fixated on how do I address my home market, and that becomes the be all and end all, um, and they don't necessarily set themselves up for that international success from the very beginning.

SPEAKER_00 10:07

So you can pick up some gems and the outliers if you know where to look.

SPEAKER_01 10:10

Yeah. So we we're looking at businesses in you know Austria, Denmark, Ireland, just to give a few examples, that that that you know can be very international from the very start.

SPEAKER_00 10:21

Has fundraising been tougher recently?

SPEAKER_01 10:23

Fundraising has always been tough. People have always said fundraising is tough. Um, I think it's it's well known that post-COVID um there was a little bit of a boom in healthcare investing. A lot of uh funds were raised, a lot of businesses were capitalized, valuations got very, very high, uh, and there's consequently been a bit of a bust since then where we have to work through those uh those effects. Uh and I think that's overlaid with a sort of general slowdown in private equity fundraising in the private equity market, driven more by macroeconomics, interest rates, uh, and other factors. So I think when you when you couple the two things on top of each other, it's not easy. But what investors are looking for are uh strategies that actually create value rather than strategies that utilize financial engineering. Um, so any strategy that is around building businesses that create healthcare impact that have a real value add in the real world, and crucially can exit, and that's key for private TLPs at the moment. So you need businesses that have a very clear selection of potential acquirers, but those strategies are in vogue, and we have seen quite a lot of LP money coming into sort of lower mid-market uh strategies within Europe, um, US money, other money, um, because people are looking for those strategies that can still create value in today's world with its macroeconomic uncertainty uh and uh higher interest rates.

SPEAKER_00 11:56

Got it, and and that's the sell there. You've got a relatively new fund. Tell us about the fund, how you found raising the money there and plans going forward.

SPEAKER_01 12:05

Yeah, so no, 20 years ago when APAZIT was set up, it was a very, very flexible investment mandate, and we invested in everything from venture to growth to buy out. Uh, over the ensuing two decades, investors have got a lot more disciplined in looking for strategies that are coherent and and uh discrete. Um and so in in 2022 we raised a for the first time a buyout-only fund, um, which only did buy-out structured deals. Um, and then this year um we've announced uh a close on a growth-only fund that only does growth capital deals. Um now we've always done both. We used to do the same vehicle.

SPEAKER_00 12:47

I just want to jump in and say which was the easiest sell.

SPEAKER_01 12:49

The easiest sell is always buyouts. Why? These are businesses that have profits that are more established, they are perceived as lower risk, um, and certainly, and particularly in Europe, a lot of investors are more comfortable investing in in small buyouts. In the US, it's a bit different. There's a bit more risk appetite, there's a bit more tolerance for growth investments in commercializing uh new products, new technologies in businesses that aren't yet profitable. Um, so growth investing is is much more established in the US. Um, I think we need more of it in Europe and particularly in the UK if we're going to have the sort of growth levels that we aspire to. Um and the British Business Bank agreed with me and agreed with our strategy for targeting sort of healthcare businesses in areas like life science tools and consumables, medical devices, medical technologies, sort of basically technologies that aren't drugs. Um and we set up a fund cornerstone by them that they committed 100 million to that to really focus on identifying businesses that could be global champions in those niches and need further capital to achieve that, to commercialise, to scale up, perhaps to build manufacturing. Um so that that's the fund we're we're currently raising. Um it's going to have a strong UK bias because the British Business Bank's obviously a UK investor, but we're also looking at opportunities across Europe.

SPEAKER_00 14:21

Fantastic. You touched on pharma there. You you have a background in big pharma, I think, don't you? If we we look at your CV and investment banking before that. Now, of course, you're in specialist private equity. What did you take from your previous roles, if anything, into your current role when it comes to how to build a healthcare business today, say?

SPEAKER_01 14:40

Yeah, so I I guess you know the skills you learn in investment banking are sort of generic financial skills, um, which which is a good foundation for for investing. Um but I think when you operate in healthcare markets specifically, the key thing is around identifying sort of how how the business is adding value, is is is impacting patients, doctors, health economics, payers. Um, and that's true for pharmaceuticals, and obviously there's a lot of very specific clinical trials and evidence gathered for for any pharmaceutical product, but I think it's then also important, but in a different way, for other areas of healthcare to be able to evidence in the appropriate way how they're effective, how they're safe, how they add value.

SPEAKER_00 15:31

And presumably it helps you in in certain discussions have a credible background that you can bring to the table and say, Well, actually, I understand this.

SPEAKER_01 15:38

Yeah, I think founders of health and life science businesses very often have a healthcare background, a science background, they may be doctors, they they they they they like relating to people who have a similar background. Uh, and obviously it can help with some terminology. Um, I wouldn't profess to remember very much of uh my scientific training, but it it it's certainly useful.

SPEAKER_00 16:01

You you mentioned in your article, and yes, I have read it all, that innovation is a necessity, not a luxury. Do you want to expand on that slightly and tell me how you see the frontiers being pushed back and why we need to look into this area, particularly now?

SPEAKER_01 16:14

Yeah, I think it comes back to what we talked about before, which is that uh that collision between the aging population and demographic forces and the supply side constraints of funding doctors, clinicians, nurses. It just doesn't work. And so there has to be a change. And I think we're we're very, very fortunate in terms of timing because there's a confluence of technologies that have been developing for decades. I think about things like wearables, I'm thinking about things like AI, I'm thinking about sort of apps and and and wireless sensors and technologies. These things actually do provide a basis for changing the paradigm for a lot of healthcare, um particularly thinking about getting people with long-term conditions out of hospital settings, able to look after themselves better at home or in the community. And these technologies are are ultimately going to be cheap and efficient enablers of that. But of course, there has to be change. And that is a huge hurdle to overcome, but one that we will have to overcome by necessity.

SPEAKER_00 17:21

Which drags us back to an earlier part of the conversation. Take the NHS, large organization, slow to adapt, slow to turn, not necessarily inherently its fault. It's just so large and covers such geography and has so many people that it's difficult really to take new ideas on board quickly. What's the answer to that? Because I know that there are examples of proposals that were made and successful businesses that could have done so much more. I think Medihome is a missed opportunity. I think that's how you've described it previously. How do we get these exciting innovations adopted quicker?

SPEAKER_01 18:01

Yeah, so I think the NHS is universally perceived as a poor customer for emerging technologies for all the reasons that you you've you've said. Um and um often that has meant small companies in the UK end up moving overseas. They relocate to the US or to other markets where they see it as easier to scale, um, and um they you know they they they ignore the home market, which is a real shame for the UK. Um, and our patients and our population don't always benefit from the innovations that the rest of the world uh do. And that's true for drugs, and we hear about that quite often, but it's also true for almost any area of of healthcare innovation. Um, you know, you you gave the example of of Medihome. Um that is the idea of caring for patients in virtual wards at home.

SPEAKER_00 18:54

Yeah, it was a hospital-at-home idea, absolutely.

SPEAKER_01 18:56

It was a hospital-at-home idea um that um was developed some 20 years ago. Uh, and we're still talking about that now. I'm talking about you know, pilots and pioneers and and virtual wards, and and the NHS has adopted that a little bit more widely. Um, but you know, 20 years ago uh this was being done in the UK and before that in the US. Um so it's it is a missed opportunity to take decades to adopt things that uh uh you know really could be adopted much more quickly.

SPEAKER_00 19:24

Can we look abroad at what's happening in the US or elsewhere and learn from how they've decided to deal with this problem?

SPEAKER_01 19:31

Yeah, I mean every market is different, it's important to understand the incentives. Incentives in the US market may be driven by concerns around litigation, they may be driven by financial incentives. So it is different, um, but it does adopt technologies quicker for good reasons and for bad reasons. Um, European markets can be quicker to reimburse new technologies with their insurance-driven models. Um, so I I I think there is a need to look at this. I think it's a key aspect of what we need to change if we really want to drive economic growth through the life sciences sector. Um, and you know, the government has done quite a lot of work in that area, but procurement at the NHS level still hasn't really been solved.

SPEAKER_00 20:17

Aaron Powell Yes, and it's not just about approval, is it? There are a number of AI tools, for example, that have been approved for use, but they haven't been adopted widely. Is this a funding issue? Is it a trust issue? Is there an inherent cohort of clinicians that just don't want to go down that path?

SPEAKER_01 20:36

I I'm not sure. I think sometimes it's a business model issue. So there are thousands, probably literally thousands, of AI companies offering sort of point solutions, an app for this indication, that indication, another indication. You know, they all cost $25,000 or pounds, I don't know why. Um but literally a hospital would have to buy one for each and every condition and indication, and they don't have the budget. You know, their budgets are fixed. So even if they want to buy them, you know, do they have the bandwidth to assess them all? Do they have the budget to buy them all? The answer is no, really.

SPEAKER_00 21:12

And I guess you could back the wrong horse if you did that.

SPEAKER_01 21:14

Yeah, and there is concern and valid concern about new technologies, AI and hallucinations and the role of the human, you know, in or out of the loop. Um so these these are all barriers. Um, and I think the the business models do have to change somewhat to allow AI to be adopted more at scale, um, but also the hospital hospital systems need to be more nimble in decommissioning other things. If you're going to spend a lot of money on AI and technology, that's coming from fixed budget. So there's going to be something else you have to decommission. And I don't mean get rid of a lot of people, but you may have to change your pathways and do other things. So you're using those people. More efficiently, so you can actually realize the benefits of these technologies.

SPEAKER_00 22:04

And talking of new products, new technologies, et cetera, we have GLP1 drugs as the latest hot buzz phrase. They're everywhere. Everyone's talking about them. They've gone not just from celebrities to being prescribed now for normal patients. Where do you see the biggest opportunities and the biggest risks in this particular part of the sector?

SPEAKER_01 22:28

Yeah, it's interesting because in one way you could think of it as a huge shift of investment into prevention. And we've often talked about prevention over the decades. I've been involved in healthcare, and it's always been really difficult to create an investment case around prevention and to shift dollars into investing in improving uh the wellness of a nation rather than treating the sickness of a nation. And here we have something that is ultimately about preventing the downstream effects of obesity being funded and often out of pocket, which is a real paradigm shift and potentially a positive one. If we see a decrease in illness and time off work and MSK issues, that's a real benefit for the economy. If we see reduced diabetes and downstream complications, you know, that's a real cost saving for the NHS. But we still have to see that play out. This is a little bit hypothetical. Clinical trials would suggest that we should be seeing these things, or we will see these things in due course. So, you know, I guess watch this space. As an investor, there are obviously opportunities to support people who need wraparound care with GLPs. It's often much more effective as a treatment modality and something that will persist if you provide support rather than just a pill or a jab in the post. So that's an opportunity. I think there's probably other opportunities around the sort of wellness mindset and consumerization of wellness that may be investment opportunities. And maybe you need to be a little bit thoughtful, certainly long-term, in terms of investing in things that I don't know, renal dialysis or something that is related to downstream complications from obesity and diabetes, because in theory, those things should reduce.

SPEAKER_00 24:28

So we've got a new man at number 10. What do you make of Andy Burnham? Are you expecting any particular new change of direction, anything from a new health secretary, or is it business as usual? And I know that it's very early days when we're recording this.

SPEAKER_01 24:42

Well, the interesting thing about Andy Burnham is that he was obviously health secretary, so he he does know and understand the topic that we're we're discussing. Um and I think he's very passionate about it as well, particularly passionate about social care. And I think that's really important because it is often overlooked in favour of the NHS and and healthcare. And I don't think Andy Burnham is going to let that happen now. Um so it will be really interesting to see what he does in terms of you know his review of social care and how it's funded and how it's delivered. Um but I think from a sort of national perspective, you know, looking after people in the community, allowing them to stay at home is going to be really important if we're going to be able to afford the NHS. So I I I I'm cautiously optimistic that but a focus on social care is long overdue and may deliver some welcome change.

SPEAKER_00 25:39

I I think I'm cynical because the last seven or eight prime ministers have kind of kicked the issue down the line, but we are hopeful that he might look at it in a in a different light because of his experience with this.

SPEAKER_01 25:49

Well he's very vocal about his family experience um using the social care system. He's come out and said he you know that's where he wants to expend his political capital. Yes, you know, we have lots of examples of of politicians not following through, but um at this point, let's be cautiously optimistic.

SPEAKER_00 26:07

Why not be optimistic? It costs nothing. Um biggest challenge over the next few years and the biggest opportunity, what do you think uh what do you need to be concerned about? Investors need to be concerned about, and uh where do you look and think, wow, we we need to be we need to be on this?

SPEAKER_01 26:22

Well, I think that the the biggest challenge is is the pace of change that we've talked about. How quickly can healthcare systems adopt innovation, new technologies, in order to be able to cope with the sort of tidal wave of demand that they have and the paucity of funding. That that that is the challenge for everyone involved in healthcare. Um but it is also the opportunity, um, the other side of that coin. Um so I I think you know things like AI are going to be really, really critical in healthcare. Um and and maybe it's just on the sort of back office side of things, maybe it is processing referrals, um, generating bookings and appointments, streamlining those pathways, making sure that patients turn up to appointments on time by giving them better information and communications. I think that is really, really important and quite easy to do relatively compared to sort of clinical solutions.

SPEAKER_00 27:21

So something as simple as a booking system that works can be immeasurably useful. And putting the right people in the right place at the right time in the right in the right ward, for example.

SPEAKER_01 27:31

Yeah, yeah. And I think I think you know, we we see lots of uh lots of companies offering these solutions and that the the the power of these solutions is getting more and more um leveraging AI and the ability to sort of implement them and integrate them with existing systems and pathways is easier, getting easier.

SPEAKER_00 27:50

Getting them to talk to each other, interoperability is is often the big problem, particularly with when we're talking about new products there um earlier. How in I mean I'm picking a random figure here, in five years, in ten years, will you look at your time and think that was a success? How do you personally measure success?

SPEAKER_01 28:10

Well, I think the next five to ten years are going to be absolutely fascinating in healthcare because I think change is going to happen much quicker than it has over the last 25 years that I've been in the sector. Uh it's the confluence of these technologies, it's the necessity for change. Um, I think everybody is now on that page and understands that. And there's a sort of appetite for innovation and change that I don't think I've seen before. Um so I'm very excited about the next five to ten years. Um, but it so if I can invest in businesses that help with that, that deliver the sort of health impact that we we talked about, but also leverage these new technologies in in interesting ways, I think that will be a success. And you know, what I would really like to see is a sort of leveraging AI, genetic data, um, advanced imaging to create individual care plans and treatment paradigms for each and every person that's that's perhaps different, uh, and leveraging that into preventative care as well as you know treating things once they've gone wrong. And you could have a totally different approach to health and care, maybe 10 years is optimistic, but you know, within my lifetime.

SPEAKER_00 29:25

Personalized medicine, truly personalised medicine. And if you walked away from APISIT and it had been at the forefront of some of those businesses, then you would view that as a success.

SPEAKER_01 29:35

Yeah, it's all incremental. Um when you work in in science, um, unless you're Einstein, usually uh everything you do is building on what others have done before you, and at Aposit we're a small fund and we invest in small businesses, but they all have an impact and it and it adds up, and that's what we want to do.

SPEAKER_00 29:52

And if I dare ask the question personally, where would you like to be, a tropical island or going on to new adventures in in healthcare?

SPEAKER_01 29:59

Um I have no plans to be anywhere different. I find investing in healthcare endlessly fascinating. Um I enjoy learning about new science, I enjoy thinking through the sort of the the politics, the ethics, the regulations. Um so you know, for me it's it's I'm always learning, I'm always stimulated, and uh that that's that's where I am.

SPEAKER_00 30:22

And as long as you have those in your in your role, you're happy. Yes. Sam Gray, thank you for your time today. Thank you. And thank you to everyone who listened all the way to the end of this podcast. My name is David Farbrother, and I am the director of content and communication at Candesic. We are a London based consultancy. Feel free to link in with me or drop me an email. I'd love to hear from you. New podcasts in this series are available regularly on YouTube, Amazon Music, Apple Podcasts, and Spotify.