The importance of automation
- The rise of the internet, AI and advancements in areas like genomics have fundamentally changed healthcare operations and possibilities.
- Apposite Capital’s core objective is to professionalise every aspect of portfolio companies.
- Automation across the healthcare spectrum will be the next big wave for increased efficiency, cost reduction and better quality.
There have been huge changes even in the last two or three years. How has the healthcare investment landscape changed since you started?
David Porter: The healthcare sector has undergone a significant transformation since I began working in this field. While always important for the economy and individual well-being, it wasn’t necessarily a major focus for private equity or venture capital firms in the past. Today, there has been a surge of interest, with healthcare specialists and multi-sector firms incorporating dedicated healthcare teams into their offerings.
Several external factors are significantly impacting healthcare. The internet’s ubiquity, the dramatic decrease in computing costs, and the emergence of machine learning and artificial intelligence (AI) are fundamentally changing the operational landscape. Within healthcare itself, the sequencing revolution has made whole genome sequencing readily accessible which has enabled preventative medicine and improved treatments. Additionally, our growing understanding of molecular biology is leading to advancements in disease treatment, vaccine development, and countless other areas. The healthcare technology landscape has undeniably changed, as has the number of players in the field.
Interestingly, some core challenges remain. Governments and payers still struggle to keep pace with the financial burden of lifestyle and chronic diseases. There are, however, promising developments. For example, the emergence of new drugs like GLP-1 agonists have the potential to be game-changers, which could significantly impact health outcomes in the mid-term. Overall, the healthcare sector is experiencing a period of immense change and activity.
What excites you and where are the investment opportunities?
David Porter: What excites me most is the potential for healthcare finally to catch up to sectors like finance and technology in terms of automation. It’s frankly embarrassing how far behind healthcare was in using technology before the Covid-19 pandemic. We were essentially operating in the dark ages. Covid-19 forced the industry’s hand and has accelerated the adoption of practices we have been discussing for decades. This momentum is building, and I believe that automation across the entire healthcare spectrum is the next big wave. The potential for increased efficiency, cost reduction and improved quality is tremendous, which is always a positive development. However, this requires investment, changing legacy systems, getting complex systems to talk to one another and envisaging redundancy is not free even though it is more accessible for small firms now with the rise of ChatGPT and other AI tools.
The human brain is fantastic, but its ability to focus on a single issue day in and day out just can’t compete with what an AI-powered camera, or any other AI system, can do.
Are large language models really the game-changers that they appear to be in healthcare?
David Porter: Absolutely. The human brain is fantastic, but its ability to focus on a single issue day in and day out just can’t compete with what an AI-powered camera, or any other AI system, can do. We’re seeing this automation trend across all our businesses. In fact, we started a group within our portfolio companies called the RPA and AI group. Its purpose? To share use cases to enable as much automation as possible everywhere. It’s working! Across the portfolio, we’re seeing benefits like 24/7 appointment booking, advanced analysis of patient interactions with large language models, and automated lab processing. We can even do radiopharmaceutical medicine dosimetry in a way that’s healthier, with fewer side effects and better results. Automation is improving everything in healthcare.
How do you separate the wheat from the chaff when you look at investment pitches?
David Porter: It’s important to remember that we function as a private equity investor, not a venture capitalist. We focus on companies with existing revenue streams. They’ve ideally moved beyond the initial discovery phase and are now commercialising and growing their products or services. The approach is different from venture capital, where innovation and IP are key investment criteria.
For us, the focus is on whether a company represents a good investment opportunity, has a strong management team, and possesses a defensible market position. Innovation is certainly present in many of our portfolio companies, but it’s a more nuanced picture than simply having a great drug, new device, or idea. Execution is paramount. For example, we have a company called Kelso Pharma, a pharmaceutical company that doesn’t chase after breakthrough molecules. Instead, it focuses on revitalising under-loved, late-stage products, essentially giving them the attention they deserve and unlocking their sales potential. This approach is a stark contrast to companies which might be developing a revolutionary new drug with the potential to change the world.
To an outside observer, you appear agnostic as an investor with stakes in digital health, medical products, pharma, life sciences, and healthcare services. What unites them?
David Porter: The common thread across our portfolio companies is their exceptional growth potential within their specific niches. Our role is to support them in achieving this growth through improved governance, automation, operational excellence, strategic talent acquisition, and market-leading strategies. Ultimately, we aim to propel them to a point where they disrupt their sectors, attracting significant interest from potential acquirers.
CrestOptics, a supplier of microscopy system components, serves as a prime example. We believe it offers a superior product at a competitive price, with a robust pipeline of future innovations at an attractive cost point. This combination has fuelled its rapid growth and a surge of inbound interest. It is disrupting its market. This market disruption is precisely the outcome we strive for in all our investments.
Previously, Crest Optics might have had minimal presence at a trade show. Today, its products are showcased prominently across the exhibition floor, either directly by Crest or through partnerships with other vendors. This is the kind of market influence we aim to cultivate in all our companies.
At what stage of a company’s growth do you typically come in?
David Porter: Our investment focus goes beyond traditional Series A or venture capital rounds. While CrestOptics had some prior venture capital involvement, it was looking for a partner with expertise in growing its business globally. We entered the picture advised by a titan in the microscopy systems industry. CrestOptics already had established revenue streams, positive earnings before interest, taxes, depreciation and amortization (EBITDA), and a founder keen to cash out and no longer actively leading the company. This presented an ideal opportunity for a management buyout.
Typically, our portfolio companies are ultimately acquired by strategic players, either returning to private ownership or being integrated into a larger public company. We’ve occasionally pursued dual-track exits involving both an initial public offering (IPO) and a potential acquisition. While we have experience with IPOs from previous ventures as an investor, it’s not our primary focus. We are flexible and can adapt to various exit strategies.
Our core objective is to professionalise every aspect of every company we invest in. This isn’t a short-term endeavour; it’s an ongoing process that extends beyond the typical 100-day plan and continues until the company exits our portfolio. Think of it as a total quality management (TQM) approach, where continuous improvement is the driving force. Every month should see the company in a better position than the previous one. That’s the ultimate goal.
What is going to be the theme of the next few years?
David Porter: Automation and operational excellence are my current areas of primary focus. The business landscape has become more competitive in recent years, demanding heightened efficiency. To achieve this, I strongly believe in the power of digital solutions like robotic process automation and AI, combined with operational improvement methodologies like Agile and Lean Six Sigma implemented by strong committed management teams. These approaches are crucial in today’s environment.
