An interview with Ezra Perlman and Chris Adams, two senior and pioneering healthcare information technology (“health IT”) investors with technology private equity firm Francisco Partners.

Healthcare is a dynamic industry. Market forces, politics, and demographics combine to create a challenging and potentially rewarding environment for entrepreneurs and investors alike. Senior Francisco Partners investors Ezra Perlman (Co-President and Co-head of healthcare) and Chris Adams (Partner and Co-head of healthcare) shared their perspective and outlook on health IT investing. In the theme of this year’s conference, Ezra and Chris also provide their thoughts on collaboration vs. competition in health IT.

Pulse: From an investment perspective, what aspects of health IT drew you to the industry? What do you look for when evaluating new investments or markets?

Ezra: Number one is right place, right time, or right market, right time. The last 15 years have been a time of great growth and expansion in the adoption of technology within providers, really across the whole spectrum of care. And a rising tide lifts all boats and is a great place to be. Some of that was driven by government subsidies and government programs, but a lot of it was just a natural adoption wave.

Number two has been a focus on execution and operational excellence. Healthcare IT, for a long time, was a cottage industry where there were a lot of mission-driven companies and mission-driven people. There were a lot of doctor-driven companies. There were a lot of people trying to solve great problems in healthcare.

But there weren’t a lot of people with professional management skills and real operational execution capabilities. One of the things that we did from the very beginning was try to find businesses where we could bring on some of those mindsets and experiences to help drive companies to a different level of performance than they had achieved before we came along.

Chris: What led us to, as technology investors, think about and focus on healthcare were really two things, two observations. One was the observation that even though healthcare is a huge part of our overall economy, technology is still fairly underpenetrated within healthcare. That’s less so today than it might have been a decade or so ago, but tech is still pretty underpenetrated in healthcare.

The second thing that led us to spend more time in healthcare as technology investors is just that it’s complicated and it’s not an area where kind of dabbling really makes sense or tends to lead to a lot of productivity or success. Our investment model is really all around deep specialization. We thought there’s a good tailwind in technology in healthcare and an area where specialization makes sense, and that led us to healthcare in general.

I would say if you kind of play that out again in pharmacy, healthcare pharmacy is one of the areas that is both most complicated and hard to really understand, and also where IT is very underpenetrated.

Pulse: Generally speaking, do you believe health IT remains an attractive area to invest?

Ezra: Yes, it definitely still holds, just a little bit less. It’s the natural evolution of any segment or sector. Healthcare technology today probably isn’t growing as fast as it was seven to ten years ago, and it’s probably not as much a cottage industry that’s ripe for professionalization and improvement, but there’s definitely still pockets and places where one can do that.

The other thing about healthcare that has made an attractive investment place for us that is still very much a reality is just the sheer complexity and the dynamics of the market. When you look at the regulatory, political, and reimbursement backdrop, and how quickly all of those change, it creates a tremendous amount of complexity and uncertainty that scares some people away, makes other people want to jump in, but really rewards focus, patience, and specialization, and creates interesting new opportunities all the time. That hasn’t changed at all and is unlikely to change anytime soon.

Pulse: Where are you seeing opportunity today?

Ezra: Provider IT is very much where we started and where we honed our knowledge, but more recently we have branched out to a lot of additional areas. We’ve made three investments in companies that sell primarily to payers, health insurance companies, Blues plans, other folks in the payer ecosystem. We’ve made four or five investments that have really targeted the pharma value chain, either selling technology to big pharma companies, retail pharmacies and pharmacy distribution, hospital-based pharmacists and pharmacy departments, or retail based pharmacists and pharmacy departments.

We have learned about the value chain for drugs from the R&D process, to the go-to-market, sales and marketing, distribution and pricing, specialty drugs, the model for generics, and the impact of PBMs on prices. There’s just an overwhelming amount of complexity and amount of opportunity. That ecosystem has been a very productive hunting ground for us.

Chris: The runway in pharmacy technology is quite long. Around all the parts of pharmacy that are still paper or fax or phone centric, you have to think about something like drug pricing, or what it costs you to buy a drug at a pharmacy. You probably don’t know your best hope, which still probably doesn’t work, is actually calling the pharmacist to ask them what it might cost you to buy a drug.

You think about so many aspects of both healthcare in general, but pharmacy specifically. They haven’t even gotten to that first layer of technology, where in other parts of the economy, technology is often about upgrading from older technology to newer technology. There’s still a huge green field opportunity where lots of what happens day to day in the pharma world is still paper centric. It feels like a long runway of opportunity still ahead of the market.

I would say that in addition to that kind of end market perspective, where we’ve seen a lot of opportunity are businesses that really combine technology and services. Businesses that really integrate software and services well and provide value propositions to health plans, providers, and pharmacies, where really it’s a kind of combined value proposition that they find very compelling.

There’s a lot of talk about healthcare consumerism. That’s certainly an area that’s gotten a lot of both press and attention, as well as venture capital investment.

We have seen that in our portfolio and have started to do a couple of things where a lot of what we invested in three, five, seven years ago in healthcare was very much behind the scenes, but some of our companies have become a bit more consumer facing and centric and visible. That’s another trend that we’ll probably see more of.

Pulse: Do you see pharmacy IT becoming more of a focus for investors and entrepreneurs?

Chris: There is more capital. It’s a market where there’s probably a growing appreciation for just how big and fragmented the overall kind of pharma prescription drug spending, and thus opportunity, is in the U.S.

For some commercial health plans recently, I heard the stat that recently prescription drug spending actually exceeded hospital spending. I do think there is a growing recognition that there are more dollars that move through this part of the healthcare market. With that comes more attention and focus, not just from investors, but from everyone too. It remains a big opportunity.

Pulse: In the theme of the healthcare conference, how have your portfolio companies balanced the tension between collaboration and competition?

Ezra: I would say historically it’s been an ecosystem that has been marked by greater collaboration than most. And it gets back to the mission-driven nature of a lot of the entrepreneurs and early companies. If what you’re trying to do is improve the healthcare system, medical outcomes, and take costs out of the system, then of course you want to work with other folks in the ecosystem that you can partner with or collaborate with.

That was the mindset of a lot of the early companies and that spirit still imbues a lot of companies. I do think as the segment matures and as you get more companies that are more simply driven either primarily or more by a profit or corporate motives, you do lose a little bit of that. When you look today at companies like Epic that want to do everything themselves, or companies like Cerner that more and more want to do everything themselves, and you look at the dollars involved and lobbyists involved, I do feel like we’re losing at least a little bit of that spirit of brotherhood and spirit of collaboration. But we still have a fair bit of it.

In the end, many of the buyers of healthcare technology are nonprofit health systems, or hospitals, or academic medical centers. It’s people where the motivations are not just dollars and cents and profit. That spills over into the industry as a whole, at least to a certain extent.

Chris: Yeah, it’s a great question. I can see why it’s the topic of the conference, because it isn’t an easy one. There are a lot of parts of healthcare where collaboration is just a must. If you think about the whole EHR world in a health system, there’s a lot of things that those vendors do, but there’s also a whole lot of things those vendors will never do. The need for interoperability and integration, not just in things you might think of, but even extending all the way to pharmacy automation, are companies that often feel far afield, do need to have relationships with and collaborate with lots of other constituents in the healthcare IT ecosystem.

Specifically, we probably have seen that most in our portfolio with CoverMyMeds. They help facilitate electronic prior authorizations for prescription drugs. Essentially, they integrate with almost all of the pharmacy dispensing systems in the retail pharmacy, almost all of the EHRs and the hospital health system or physician practice base, and then almost all the payers or pharmacy benefit managers as well, and really connect all those constituents electronically over an electronic and web-based network, as opposed to historically phone calls and faxes to communicate between one another.

So, their very business is all about driving collaboration and partnering. I’d say the couple of ways that we thought about that are really around aligning interests and being clear about what you’re doing and what you’re not doing.

To build on each of those points, on the alignment side, one of the reasons that’s led CoverMyMeds to be so successful is that they understand and align what they’re trying to do. Really, in each of those channels on the retail pharmacy, it’s aligning with the vendors, retail pharmacies, and the patient experience.

It’s the same thing with the physician practice or hospital side of the business and the PBM side of the business. So often in healthcare, it’s somebody wins and somebody loses. And you’re trying to convince a payer to pay for a drug that’s more expensive, so pharma wins, but the payer loses. Or a physician — you’re trying to get them to change their behavior so that they make more money for the hospital, but that costs the payers more or vice versa.

When you can really align a business model around all the constituents, both whoever you’re trying to collaborate with, who your customer is, and the patient, that’s a powerful combination, and really, a necessary combination to make collaboration really work.

I’d say that’s probably the single biggest thing that we’ve looked for and thought about around that topic. I also think that being very clear about here are the things that we are never going to do, so that you can be comfortable that we’re not going to compete with you someday, and really sticking to that.

Pulse: What are the implications of the impending administration change? As an investor, are you excited or nervous about the potential disruption about to hit the market?

Ezra: Well, the short answer is there’s a lot that makes me nervous. It’s not just tied to the administration, though, because if you look even back at the history of Obamacare or all of the discussions we’ve had about healthcare in this country, since I’ve been paying attention, I just feel like we as a country can’t really decide how we want to think about healthcare. Do we think of healthcare as a basic human right and something that should be guaranteed and provided for everybody, or do we think about it as just another consumer marketplace where the more money you have, the more and better healthcare you can choose to buy?

One of the great contradictions and challenges of America is that we try to get the best of both and wind up with the worst of both. And there’s a lot of people who say, “Hey, I don’t want anybody to die because they can’t access healthcare. I don’t want kids that are not able to go to the doctor — I don’t want families going bankrupt because they can’t pay their medical bills.” Nobody wants that. Everybody wants some basic guarantee of health coverage.

But then everybody says, well, the government doesn’t really know how to provide it, or we don’t want a single system. We still want patients and doctors to be able to make the right decisions for them. We still want people to be able to choose. People really want a safety net and something that provides the basic coverage for everybody, but then have legitimate and real reasons why they want to put restrictions on what that looks like, and they want to have something that looks more like a market.

Unfortunately, that means we wind up oftentimes with the worst of both worlds. We don’t really have a functioning market and we don’t really have a functioning safety net. Instead, we have something that is just more complicated and more challenging.

Even before you get into the challenges of politics and the parties, you start with people who genuinely can’t decide on what the underlying philosophy should be. When you layer on top the politics and the lobbying and the money and the everything else, it really makes it intractable. And it was intractable before, and it’s only more obviously intractable with the new president coming in.
Pulse: For our younger audience out there, do you believe health IT is a good place for professionals to start a career? How about as an investor?

Chris: It’s still a great opportunity and a great time to enter health IT, either as an investor or as an operator in the space. All the same tailwinds that led us to be interested in the industry are great tailwinds for entrepreneurs, executives, and investors in the space. You also have the added benefit in healthcare that often the best outcomes come when you’re helping people, so you have the added benefit of being able to help a system that often doesn’t make sense or work that well, and to potentially create great outcomes that really do impact patients’ lives. It’s a unique area and still a great opportunity.

Ezra: Right now is the golden era and hopefully the beginning of a long golden era in health IT. The openness of the market to new solutions and new ways of doing things is so much greater than it used to be. The spirit of entrepreneurship across healthcare in general and healthcare IT specifically is much greater than it used to be. When I started investing in healthcare IT in 2004-05 in Silicon Valley and I told people what I was doing, they just stared at me like I was crazy. You know, why would I do that? There can’t possibly be any money in it. It can’t be exciting. It can’t be that interesting.

And you fast forward to today, and you look at the types of companies people want to start, the types of companies that venture capitalists want to invest in, the programs that the big hospitals and health systems have. There’s just much, much more understanding of the opportunity, excitement, and the importance of entrepreneurship and technology. I feel like we’re just getting started.

There’s never going to be all that many people in the world who really understand healthcare, who really understand technology, and who really understand investing and finance. If one can assemble and learn those skills and focus on this market, the opportunity in the decades ahead is enormous.