Daniel Agroskin is a managing director at JLL Partners, where he leads the New York private equity firm’s healthcare efforts and is a member of the management committee.
How would you describe JLL’s broader approach to healthcare investing?
The way we think about healthcare is where the big dollars get spent. And that’s pharma, that’s payers, and that’s providers — in particular, hospitals — and each of those subsectors are facing their own set of challenges. If we can be an outsourced provider to those big buckets of spend — whether it’s a variable of their cost base, a best-in-class service provider, or driving efficiency — that’s where we want to be.
Historically, you could do deals that kind of arbitrage the system a little bit. Today, the only deals in healthcare we’re going to do are ones that actually increase outcomes to the patient or drive efficiency and drive down costs.
Having made a number of investments in pharma services, how do you find and win deals in such a competitive environment?
In pharma services, in particular, I think we’ve been very good at staying ahead of others.
One of our first forays into the sector was through our investment in PharmaNet, a clinical research organization, which we completed during the most recent economic downturn.
We were also early into the outsourced development and manufacturing space when we combined Patheon with a division of DSM, a large Dutch conglomerate. The strategic fit was excellent. From there, we built the company into the industry leader with more than $2 billion of revenues and a broad service offering, including biologics. We recently sold that business to Thermo Fisher for over $7 billion and generated a great return for JLL.
I believe the underlying fundamentals of pharma services remain attractive given the growing R&D spend by pharma and increased level of outsourcing. We focus on subsectors where there is not a clear leader and we can build a business that has a unique set of assets.
If you look at our past deals, BioClinica is a perfect example. We started with a small public company that was a good business, but subscale, and we were able to combine it with a competitor in a simultaneous transaction out of the gate. As a result, we created a company with a leadership position in clinical imaging, realized synergies and positioned the company to be a platform to which we added seven more acquisitions over time. So we created a real player in the eClinical space, a term that got very little play when we did the initial transaction.
What’s driving deal activity in pharma services?
It’s tougher to find blockbuster drugs, and so companies are really trying to figure out how to be efficient. Today, [drugmakers are] really trying to focus on their core strengths and capabilities, and outsource the rest of their functions. And they’re not just outsourcing for cost [purposes], but also because some outsourced vendors have really become best in class, and their capabilities are better than the pharmaceutical companies.
I think that tailwind from a macro standpoint will be there for a long time, which is why I think people are paying the prices that they’re paying.
How are you adjusting your strategy to justify today’s high prices?
Valuations are up because there’s a lot of PE money chasing deals, strategics have entered the fray, and the macro tailwinds continue to be favorable.
Just because the market is up three turns or four turns, we really try to stick to fundamental value. We try to be disciplined even in the high-price environment. The days of financially engineering your way to returns — buying a company and letting it run — that’s become much more challenging. That helps, but that can’t be the driver for returns.
Having themes and working those themes will help you get conviction, so we try to be very theme-focused. There are a couple other themes [in pharma services] that I think have still been under-looked that we’re trying to chase down.
What are some common red flags when you’re doing diligence work on a potential investment?
It’s people-driven. If you don’t feel there’s good transparency coming from the team that you’re potentially investing with, that, to me, is the biggest red flag. When people limit access to people on the team, when you see the top two executives and you don’t see the rest of the team, that’s always worrying.
It’s as simple as not being able to make sense of the numbers. It’s a game of imperfect information to a degree. If you put all the pieces together and at the end of the day it just doesn’t make sense, then you move on.
Action Item: Read about JLL’s Patheon exit here: oldpehub.test/buyouts/jll-partners-poised-for-60-plus-pct-irr-on-patheon-exit/
Daniel Agroskin, managing director at JLL Partners. Photo courtesy of the firm.