Bet on the longevity

Expenditures of Americans on health care is astronomical $3.3 trillion, equivalent to 17% of GDP in 2016. For comparison, the same indicator for the 28 EU countries to $1.5 trillion, or about 10% of GDP in Japan is $0.5 trillion, or 11% of GDP. In Russia in 2016, health spending was only about $60 billion, or 5% of GDP.

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The reason for the US leadership is simple: it is the only developed market of health care with minimal government regulation. Other countries that are located “on the floor below,” selected other model: nonprofit-model (Germany), nationalization (Britain), a strong presence of the state and strictly regulated (France).

Strict regulation, with all its advantages, in practice, restricts the generation of innovations in the sector and hinders the inflow of investments into it. This means that in coming decades the U.S. will be the main provider of breakthrough medical technologies and drugs.

Club

Inside the American market of particular interest is the segment of venture capital investment in healthcare.

In the U.S., has developed a unique ecological environment, the real factory for the production of pharmaceutical innovation, based on dozens of very experienced specialized venture capital funds and Mature, efficient stock market. It allows us to develop concepts for new drugs from early stage, to conduct them through the whole cycle of clinical trials and to market.

The us market of venture investments at early stages so developed that the founders of the companies do not spend a lot of time searching for funding. If the idea is good, the money for her “run”. Often the company even before the completion of clinical trials several times manages to change the composition of shareholders, and sometimes to enter the public market.

Of course, it is an investment with a high degree of risk. Ideas require checking numerous tests, their effectiveness and safety need to prove. Hence the only possible approach to investing in health: the maximum diversification of investments and a thorough analysis of the features offered.

But the benefits if successful are considerable. For example, a pharmaceutical Corporation Allergan in 2016, has acquired a startup Tobira Therapeutics, a company among the investors of which were U.S. venture capital funds Domain Associates and Frazier Healthcare for $1.7 billion. This amount is 19 times higher than the capitalization of Tobira on the NASDAQ prior to the announcement of the deal. The yield of venture capital funds from this transaction was even higher — after all, they went to the capital to host the Tobira shares on the stock exchange.

For all the appeal of the American sector of venture capital investments in the health sector to get into it easy. In fact, this “club” market: it requires many years of accumulation of experience and knowledge, working confidence and contacts to become a true specialist and an active participant in the investment process.

Pent-up demand

In 2000-ies in the Russian stock market has finally emerged in the health sector — to exchange out of the company “Pharmstandard” (2007), PROTEK (2010), “Mother and child” (2012). Unfortunately, this trend was interrupted with the beginning of growth of geopolitical tensions in 2014. Some companies left the market as “Pharmstandard”, others are victims of the General downturn on the stock exchange.

In dollar terms the sector has at best remained at the same place relative to the IPO price. For example, the group of companies “Mother and child” with good operating performance shows the dollar cap of two times less than that at the primary offering of $450 million to $900 million IPO.

The choice of the Russian projects in the health sector is very scarce. Often the first violin is played by companies and investors from neighboring industries. For example, AFK “System” vigorously developing the network of clinics “Medsi”, a billionaire Alexey Mordashov in 2017 acquired clinics “Ava-Peter” and “Scandinavia”.

In the future the Russian market may grow significantly, talking about it and the fundamentals. In 2016, health spending in Russia amounted to about $1,300 per capita is 7.5 times less than in the US (about $9800), and three times less than the average for the OECD countries (about $3900). The population is aging, life expectancy is increasing, a notable behavioral shift towards healthy lifestyle. The state program and may orders is also known to provide support for the growth of this sector.

While the consumption of medicines in Russia is practically not growing. This is due to including falling real incomes, and reduced overall consumer spending because of the crisis. Played a role and the fact that only a quarter of the Russian market of consumption of drugs accounts for public (hospital) sector — everything else we buy for your account in pharmacies. For comparison, in OECD countries the state’s share is 50-60%.

However, in Russia annually is run on 6-8 pharmaceutical plants. Many of them use various measures of state support — for example, limiting access of drugs produced abroad, the system of public procurement. This measure has stimulated the transfer of production of medicines in Russia, which means the construction of new plants according to foreign standards and the establishment of a number of high-tech companies in the country in the coming years.

Need to wait

With the right approach and diversification of investments in health can become one of the key themes in the management of large private wealth. While there are a few examples of investments of wealthy Russians in the development of new drugs and biotechnologies. Russian family offices tend to invest in a more clear idea clinics where they can see a relatively quick return.

However, there is a risk of overheating of the market because effective demand for paid medical services is limited, and the number of qualified doctors, almost not growing. Therefore, we need discipline, strategic planning, finding the right partners. A time when you could just buy a private clinic, to invest much money and expect quick growth in the value passed.

Interesting are the attempts to create clusters of hospitals and clinics with the transfer here of foreign experience, such as the international medical cluster at SKOLKOVO. It’s attractive, but before investing, you need to understand the regulatory regime.

Overall perspective of the history of healthcare in the Russian market can appear in 2-3 years, when indicated by the obvious leaders, who managed to find the correct format and to generate a client base and sales.

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