The future of healthcare: Investment trends to watch

Lynn Norris:

Welcome to Navigating Beyond The Expected, a new podcast from Truist Securities.

Healthcare is one of the most complicated industries to navigate, both for investors looking for opportunities and companies seeking to grow, but it can also be one of the most rewarding. I'm your host, Lynn Norris, and today, I'm talking to two Truist colleagues who know well how markets, technology, and policy are changing the healthcare industry. Pat Stevens is head of Healthcare Investment Banking, and Jefferson Rives leads the healthcare technology team. Hi, Pat and Jefferson.

Pat Stevens:

Hi, Lynn. Good morning. Thank you for having us.

Jefferson Rives:

Hi, Lynn. Happy to be here. Looking forward to the conversation.

Lynn Norris:

You both have roles at Truist Securities that sit near the intersection of healthcare, finance, and technology. Can you each tell us a little bit about your particular focus?

Pat Stevens:

Hey, Lynn, it's Pat. I'm happy to kick it off. I have the pleasure of leading an awesome healthcare team here at Truist. I spend my time day-to-day covering what I call or consider the payer and payer services side of the world. That also includes the entire pharmacy supply chain, so think about large health insurance companies, employers, and other managed care entities. That also includes those companies that work on behalf of those payers to reduce the cost of the delivery of care while also improving outcomes, so tend to be technology-enabled, network-oriented businesses.

Jefferson Rives:

I lead our efforts around healthcare technology companies, so those are companies that focus on all the different healthcare and markets. That includes provider, that includes pharma, that includes employer, also includes payer, and the companies are largely focused on software solutions or heavily technology-enabled solutions to provide services to their clients. It is a large and fast-growing market of healthcare that touches every aspect of the industry.

Lynn Norris:

Pat, you've been in healthcare investment banking for 25 plus years now, and of course you've seen the industry change a lot in that span.

Pat Stevens:

Thanks, Lynn. Yeah, thanks for the reminder on 25 years plus. A lot has happened over the last 25 years.

Lynn Norris:

But focusing on more recent history, what changes in healthcare operations are most significant for the growth opportunities in the industry?

Pat Stevens:

I would say as we sit here today, there are a number of key themes that the market and investors are focused on. I would say, in no particular order, we continue to see a shift from fee-for-service to value-based, outcomes-based care. I think another topic that many would argue is maybe the biggest step function as we think about changes in evolution healthcare over the last decade and that continues today is really coming through the pharmaceutical industry, biotech, new drug, new molecule development.

I would say along those lines, it's impossible to turn on the TV these days and not see a TV ad advertising a prescription drug medication that we all should be considering or taking, and so consumer medicine is really a new theme that touches a lot of areas of healthcare, from pharmaceuticals to wearable devices to online self-diagnostic tools. I would say we're also really at an interesting point where people are living longer and managing through multiple comorbidities, arguably ever than better before, which is fantastic, but at the same time, it puts added pressure on utilization of healthcare, and how do we pay for everything?

I'm pretty sure that everybody listening to this is experiencing real-time inflation in their health insurance costs. I would say health tech, AI, super intelligence, and I know Jefferson will touch on these as we spend more time together today, are really just super strong fundamental currents, right? In many ways, I still feel like we're in early innings of this, but this impacts all areas of healthcare, from revenue cycle management to predictive analytics, wellness diagnostics. It's really touching everything.

Lynn Norris:

Jefferson, you focus on healthcare technology, and digitization of health information has really transformed the industry. The term digitization, even as Pat mentioned, covers a lot of ground—health records, telemedicine, even the wristwatch that records my pulse—but what digital innovations are most interesting to you right now?

Jefferson Rives:

Well, you've seen over the last 15 or so years since probably the HITECH Act the digitization of all of healthcare, and when you say digitization, it's come across different areas. One, the digitization of our records, so that was started by the government to pay doctors to go from paper records to electronic records. And with that, fast-forward to today, there's a lot of opportunity, as you mentioned, in an Apple Watch or otherwise to track and focus on personal healthcare. But then with all of that information out there, we've created a lot of data, and so things that we're really focused on and things that are really exciting is, how do you use that data? The first thing you have to do is make sure you have the data, you can structure it. Can you create better outcomes? Can you create lower costs? Can you operate or run your business more efficiently? Can you get more throughput or workflow capabilities through your people? And how can you use all of this data and information effectively, proactively to help lower cost of care and raise the quality of care?

Lynn Norris:

Pat, labor shortages and rising costs are top concerns for providers, so how are companies trying to navigate those pressures? Are they having any success?

Pat Stevens:

Yeah, that's a great question, and labor shortages are real, probably most acute in the nurse staffing sector. Contingent labor organizations are definitely part of the solutions. I would say most healthcare systems these days are now embracing that contingent labor. Contract labor is just going to represent a certain percentage of their full-time employed nurse base, and for years, they fought it. Now they are using it as an optimization tool.

I would say tech and AI are without a doubt part of the solution. We are not yet to a point where hands-on interactions between a physician and the patient has been fully disintermediated, but there is a lot of leverage being built into the system from tech and AI. Virtual care is real and impactful, and it does also create some leverage here in the system, and I think we're arming more and more people. We talk about consumer medicine with tools that keep them out of the emergency room in these highest costs, highest-touch setting. So I think there's lots that goes into it, Lynn. It's definitely an issue that that's out there, but I think people are focused on managing it.

Jefferson Rives:

From a healthcare technology perspective, a couple of themes that we see and are really focused on, one, directly to what Pat was saying and on labor shortages is provider productivity. These are software solutions that allow providers to run their business more efficiently because of these shortages he just mentioned, and so there are a lot of businesses out there that make sure that the right people are at the right place at the right time so that they can care for the patient appropriately.

And then you mentioned virtual care and/or consumer wellness or consumer medicine. We're focused on digital first, so the consumer interacts with the website so that they can choose their care. Then you have asynchronous care. Think of it as them interacting via text or some sort of chat communication. You have synchronous care, you're directly talking to somebody, and then maybe you go in person, and I think that that's a shift that we're seeing in the healthcare end market is, are there ways where people can care for themselves? And then as you go down the spectrum of how acute and whatever your needs are, you can then get into in-person care, which then circles all the way back to this labor shortage question of how can we care for more people at scale and give people much more access to healthcare by using digital tools or technology?

Lynn Norris:

There's also a lot of consolidation going on in the healthcare industry. What's driving M&A activity right now?

Pat Stevens:

I would say a few things. I'd start by saying 2021 was a record year for M&A, and a lot of that was private equity sponsor-based activity. And if you fast-forward to today, those companies have now seasoned four to five plus years in sponsors' portfolios and that's a pretty natural matriculation cycle, and so I think that is driving a lot of it. Further, I would say there's a lot of cash out there. Generally, most corporate balance sheets are very well-positioned to be acquisitive and there is also a lot of private equity and VC capital eager to be put to work.

Lynn Norris:

Let's talk about what investors are really focusing on and how they're deciding what companies have staying power. So, Pat, when you're evaluating a healthcare company, what are the must-have traits that make it truly investible, and has that mix of traits changed in recent years?

Pat Stevens:

As we look across the board, healthcare continues to be a space that attracts a lot of investor interest for a lot of reasons. As we're thinking about optimizing value and outcomes here, for scaled, mature companies where we spend a lot of our time, it's sustainable growth, it's strong, durable margins, it's ability to generate free cash flow. One that sometimes people overlook is just a really strong management team with depth. I think those are really core tenets for any company. Beyond that, I think two traits that Jefferson and I would both agree on that are the true north for a lot of healthcare investors these days are, one, the ability to improve outcomes, and two, the ability to reduce costs.

Lynn Norris:

So looking at subsectors of the healthcare industry, so anything from providers to pharmaceuticals to IT, where is capital flowing most freely right now and why? And are any subsectors showing signs of investor fatigue?

Pat Stevens:

I think if a company can demonstrate an ability to improve outcomes and reduce costs, there's going to be investor appetite. Frankly, I think we see bright spots and opportunities across most of the sectors we cover. There are always exceptions. Is health tech broadly in favor? Are there pockets in health tech that are more in and out of favor today? Absolutely. As I look at our healthcare franchise, our biotech business has been a little bit slower of late for lots of reasons, including what's been a tougher equity tape and changes of the FDA that everyone is trying to figure out how to navigate.

Lynn Norris:

Jefferson, lots of companies claim to be using or developing transformative technologies. How can investors tell the difference between the hype and the real value when they're looking at health tech?

Jefferson Rives:

Yeah, that's a great question. Healthcare as an industry is an industry that doesn't typically lend itself, at least in the services and market of healthcare technology, to truly disruptive technologies. Now, they can be transformative, they can change the way that you provide cost containment; they can change the way very effectively how you provide the quality of care. And so what investors really look for, one, do you have a repeatable business model? Is it something that people are buying? Is it something that you have true clients? Is it true long-term contracts?

The other thing that folks are looking for is, does it fit into the system or the current system in the way that healthcare is delivered today? You can transform that, and you can make that more efficient. You can give more market access to patients, you can provide better qualities of care, but you don't typically see huge step functions and change in healthcare technology to a totally different model that you've never seen before. It's typically on the margin, and it can be a big margin and make a big difference, but it's not totally changing how you get the care.

Lynn Norris:

Pat, company leadership is important in every industry, and every good company has or needs good executives, but what advice would you offer to corporate leaders of companies who want to get deals done in the IPO or M&A arenas in the current environment?

Pat Stevens:

M&A has evolved. Rarely are we introducing a CEO, an executive management team to a prospective buyer for the very first time over a table at a management presentation during a live M&A process and getting to a successful outcome. Does it happen? Can it happen? Sure, of course, but it's more rare these days. And so what is the takeaway there? I would say that when an investor knows a management team and has built that relationship, has followed that story, has been discussing it amongst their partners and their investment committee, it allows buyers and sponsors to lean in to those opportunities, because I think they're more apt to do it when they know a story and they know a team and they've been following it. And so it does require a little bit more work on the front end, but I think those interactions on the front end and building those relationships are really important to achieving the best outcome.

Lynn Norris:

Are there common red flags that are affecting valuations or outright killing deals these days? Things that investors are particularly sensitive to?

Jefferson Rives:

There's always something that happens in an M&A deal that's unexpected. There's always something out there in every deal I've worked on that I didn't expect, and you've just got to be prepared for it. The prep upfront allows you to hopefully discover any potholes and be prepared to answer it appropriately, quickly, and effectively, so that the other side and the counterparty knows that you have a grasp on your business, and then, therefore, you can from our side drive value, drive optionality, and control the messaging that's out there in the market.

Pat Stevens:

When we're representing a company, preparing that company for a sale, one of the things that Jefferson and I, we spend time with people on is take as much time as you need on the front end to prepare for that event, but as we get into market, let's get it out of market as quickly as we can. Let's get our house in order and be prepared to have a really perfect, crisp, clean interaction with the marketplace.

As we think about preparing to go to market, we want that interaction with buyers to be representative of the business itself. We want it to feel tight and crisp and perfect at every point of interaction, so we think about market studies and quality of earnings, we think about building a data room and building offering materials. We want that to be really crisp and precise, and if you think about building all that in a room, you want to be ready to flip the light switch and shine a bright light on it and have it all be ready to go before you go to market.

When you're in market and you're answering questions from a prospective buyer and it takes you a couple of days to answer a question or something doesn't foot from initial offering materials to information we find in the data room, it just causes question marks to come and people to dig deeper in the information, and it doesn't inspire confidence.

Lynn Norris:

Fundamentals and leadership are always critical, but technology will be a key driver of the future of healthcare, as you said, so let's take a closer look at some of those trends. Jefferson, AI seems to be everywhere these days, including uses throughout the healthcare system, but where do you see it creating the clearest near-term value for healthcare companies?

Jefferson Rives:

AI is the discussion of the day, clearly. All clients want AI, all clients are focused on AI, all clients are using AI in some form or fashion. They're focused on making their own workflows and capabilities more effective, they're making their people more effective, providing the services and solutions that they otherwise already were in a better manner. We have limited examples right now as I see the whole waterfront of healthcare technology and healthcare of where they're just directly selling AI to a client, for example, selling AI directly to the provider organization or selling AI directly to the payer. Usually, my clients are using it for themselves to provide that service to them, but they're controlling the AI.

It's so broad on where it's going to be effective in the claims workflow on both of the provider and payer side, making sure that the right amount is being paid or getting paid on both sides. It's going to revolutionize that, doctor's notes, clinical notes. Can you have ambient scribing and have folks listening to what you're talking about with your doctor and going ahead and putting that into the EMR and making sure that you're tracking what the conversation was about? Can you develop drugs faster? Can you get to the end points of clinical trials better? You save one month in a clinical trial, that's millions and millions of dollars to those pharmaceutical manufacturers and those companies, and then content creation for healthcare information. It's just everywhere.

Lynn Norris:

Are there any particular subsectors beyond payments in pharmaceuticals that are doing it more effectively than others? Are there examples of that yet?

Pat Stevens:

We're seeing interactions with patients, as I talked about earlier, the digital interaction initially with the patient or the person who's seeking care. You can interact with a AI chatbot that allows you to triage your care, and then you can go from that to finding a doctor, and then you can go from finding a doctor to what type of care. Patients are coming into their visits already having looked up their symptoms and really done a deep dive into what they think it is, which it's better than the old Google Search. Then the doctors on the back end are using it the same way, to make sure that that's right to get better care. So that's from a clinical perspective, from an administrative perspective, making sure you have the right people at the right place at the right time. Well, how can you optimize that?

You have all these data sets that AI can look through. You've got businesses out there that have reviewed every single one of the medical journals and research out there since the beginning of time. So can doctors diagnose better? Yes. Can you read a image or a scan better through AI? Yes. What we're really looking for from an investor perspective and from an investment banking perspective is who are the companies that have the interesting AI technologies, but who are really building a business around it? Sometimes you have a cool technology, but the scientist or doctor or whoever made that company hasn't really built a business that they can sell into the system. That's the next step, and that's what we're looking for, those companies that truly have a durable and recurring business model that's desired in the industry.

Lynn Norris:

So when technologies develop quickly, like AI is right now, there can be a bit of corporate paralysis that sets in, like should I commit to this particular platform now or should I wait and see if something better is going to come out next week? What's your advice to companies about how to avoid making premature decisions, but also to make sure they're not getting left behind?

Pat Stevens:

Yeah, that's a great question, and in healthcare, you see it. There's more paralysis than probably other industries, because at the end of the day, you are dealing with patients and care, and in some instances, life-or-death decisions. How we look at it from the AI decision is everybody's investing in it. That today is table stakes. You can't shy away from it. You have to be leaning forward into AI, and the executives that know their businesses, as they all do very well, are focused on where it can help them and where it can help their clients. And so that's what we're really looking for is businesses that have effectively used it in ways to circling all the way back to higher-quality care and lowering the cost of care and bending that cost curve down.

Lynn Norris:

Well, considering how important healthcare is to all of us personally and how critical the healthcare industry is to the economy and to investors, this has been an important conversation, so I appreciate all your insights, both of you. But before I let you go, I've got just a few more questions for both of you, and I want you to answer them rapid-fire style. So we'll go back and forth, and we'll start with you, Pat. Are you ready?

Pat Stevens:

I guess so.

Lynn Norris:

What is your dream vacation spot?

Pat Stevens:

As a family, so home for us is Atlanta, Georgia, and we love a good beach vacation, so we've gotten into a habit of taking some beach vacations to the Bahamas, and that's definitely my favorite go-to spot.

Lynn Norris:

That sounds lovely. Jefferson, if you could instantly master one hobby, what would it be?

Jefferson Rives:

The first thing that pops to mind, I like to fish a lot, so if I could be an expert saltwater fisherman, I would master that today.

Lynn Norris:

That's great. All right, Pat, what's one way you reset under pressure?

Pat Stevens:

We have a little family farm about an hour away, and the best way I can reset is getting on the tractor and driving it on the farm, and so tractor therapy is a real thing.

Lynn Norris:

That's great. And Jefferson, what motivates you when you're having a tough day?

Jefferson Rives:

Interestingly, I put in my headphones and probably turn on some heavy rock ’n’ roll music. That usually gets my juices flowing.

Lynn Norris:

I love that. I do that too. All right, and I have one more question, and you can both take a little more time with this if you like. We'll start with you, Pat. What's one way you try to go beyond the expected in work or in life?

Pat Stevens:

My family, and I hope in the best way, claims that I'm generally an overdoer in most things. And so, whether that's expectations of the kids cleaning up their room or packing to go on a trip or drafting offering materials, my bar for success and perfection is high, and I hope that's in a healthy way and I hope that benefits those around me.

Lynn Norris:

Jefferson?

Jefferson Rives:

I try to think about things, if you do it right the first time, then you don't have to do it again. Throughout my career and life and everything I've done, whether it's high school sports, whether it's my job today, anytime you try to take the shortcut, it doesn't work out. So you’ve got to do the work and focus on doing things right the first time, and so that's one of the ways that I try to ground myself in going beyond the expected.

Lynn Norris:

Well, that was great, Jefferson and Pat. Thank you both for being here on Navigating Beyond the Expected, and I hope we'll get to have you back soon.

Pat Stevens:

Thank you, Lynn.

Jefferson Rives:

Thanks, Lynn.

Lynn Norris:

Listeners, thanks for joining us on Navigating Beyond The Expected. Each month, we bring you new conversations with Truist Securities experts on the issues shaping corporate and investment banking. Subscribe today so you never miss an episode, and check out more Beyond the Expected insights, videos, and articles on the Truist website. You can also subscribe to I've Been Meaning To Do That, the podcast from Truist Wealth. I'm Lynn Norris, and we'll see you next time.

Truist Securities is the full-service corporate and investment banking arm of Truist Financial Corporation. With a rich history extending back more than 125 years, Truist Securities offers a robust capital markets and investment banking platform that includes a comprehensive array of strategic advisory, mergers and acquisition, and capital markets capabilities for corporate and institutional clients, including sales, trading and research services in both fixed income and equity. The firm also provides corporate finance, asset finance, risk management, liquidity, and treasury management solutions to meet clients' full spectrum of financial needs. Securities and strategic advisory services are provided by Truist Securities, Inc., member FINRA and SIPC. Lending, financial risk management, and treasury management and payment services are offered by Truist Bank. Deposit products are offered by Truist Bank, Member FDIC. Headquartered in Atlanta, Truist Securities has offices located across the U.S. Learn more at www.truistsecurities.com. This podcast is for informational purposes only. Opinions expressed in the podcast are current opinions only as of the date of recording.