Riding the Disruption Wave in Healthcare

This article originally appeared on Forbes.com.

When it comes to innovation, healthcare presents a paradox. It is both a hare and a tortoise. While life-altering breakthroughs in medical treatments can come at a rapid pace, improvements to the way healthcare is actually delivered often happen very slowly.

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The forces that have disrupted other service industries—from retail to travel to media—have so far made only tentative inroads into healthcare. Anyone who has had to wrestle with the frustration of deciphering a hospital bill knows how far healthcare has to go before it reaches the levels of customer experience and user-friendly technology that we have come to expect in other areas of our lives.

Nonetheless, change is coming to healthcare, and providers, pharmaceutical companies, medical device makers, insurers and patients all stand to benefit. Among the biggest winners may be those investors that figure out how to prepare for, navigate and profit from disruption.

Major players from outside the industry have grasped the magnitude of the opportunity. Amazon, JPMorgan Chase and Berkshire Hathaway caused a stir in January when they announced plans to form a company to deliver healthcare to their employees in new and as-yet-unspecified ways. Amazon, which has quietly acquired wholesale pharmaceutical distribution licenses in several US states, is also reportedly planning to grow its medical supplies business. Other nontraditional healthcare players around the world, including Alibaba, Tencent, Apple and Samsung, have already entered the industry.

When evaluating the disruptive potential of these nonhealthcare players, what can investors learn from the approaches taken by private equity? PE funds carefully assess the scale and technological expertise these companies can bring to bear when challenging entrenched competitors in areas as diverse as pharma distribution, retail clinics and insurance. They temper their research with skepticism, keeping in mind how challenging and time consuming it will be to truly disrupt an industry as complex, fragmented and regulated as healthcare. PE funds also see opportunities to sell healthcare assets to nonhealthcare companies as those firms seek to develop their presence in the industry. Companies that are category leaders in critical market segments are likely to command a premium.

PE funds know that category leaders are also well positioned to invest in, and benefit from, their industry's own embrace of digital technology. Partly in response to the pressure from outsiders, healthcare companies are increasingly employing tools such as advanced analytics, machine learning and smart devices. Investors can find choice assets among the medtech and healthcare IT (HCIT) companies that supply the devices and systems that make digitalized care possible. There are also consolidation opportunities. Small companies anxious to avoid missing out on digitalization can make attractive acquisition targets.

Among the most important players in healthcare's disruption story are patients. After years of contending with limited options regarding where, when, how and from whom they get their care, healthcare consumers now have choices. They can pick among a variety of delivery models, including telemedicine, home health, concierge care and online self-help. While healthcare has a long way to go before it can be considered consistently customer centric, these new channels offer consumers qualities they look for from other service providers, including convenience, attentiveness, timeliness, value and price transparency.

PE funds are taking advantage of this newfound healthcare consumerism by investing in HCIT and medical device companies that enable remote care and home care delivery. Investors are also changing the way they value hospitals, recognizing that these institutions will need to revamp their delivery models to meet the evolving demands of consumers while at the same time trimming their costs to sustain profitability in the face of new competition.

As consumers gain more choices over the way their healthcare is delivered, they will also increasingly be able to access treatments that are specifically tailored to their genetic makeup and health history. Investors are closely watching the pharma and medtech companies that are developing these personalized therapies as well as the contract research organizations that can test patients for biomarkers and the HCIT companies that can integrate and analyze patient data from disparate sources. As is the case with hospitals that are slow to adapt to technological change, investors are reevaluating pharma companies that don't have the ability to develop customized medications.

As investors analyze the forces roiling healthcare there is one ever-present and often inscrutable disrupter of which they must also be aware: regulation. From the contentious debate over the Affordable Care Act in the US to the introduction of new rules covering medical devices in the EU to global concerns about the use and protection of medical data, legislative and regulatory changes can upend healthcare in unpredictable ways. Many PE funds run a robust due diligence process that allows them to quantify the impact of different scenarios so that they can better understand the effects of potential regulatory changes.

Disruption, by its very nature, isn't linear. In healthcare, it has moved in fits and starts—sometimes a tortoise, sometimes a hare. Overall, though, the pace of change is accelerating. In an industry this big, this important and this expansive, investors that are thorough in their research can find and profit from leading-edge innovations that providers are ready to try, patients are prepared to embrace and insurers are willing to pay for.

Kara Murphy and Nirad Jain are partners in Bain & Company's Global Healthcare Private Equity practice and are based, respectively, in Boston and New York.