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Wednesday, June 12, 2024

A Raleigh private-equity group eyes opportunities in financing innovation in drug discovery and healthcare services

It’s been half a century since London native Dennis Gillings took a job as a biostatistics professor at UNC Chapel Hill, and more than 40 since he launched a five-employee company that became Quintiles and later, Iqvia, which is now valued at $35 billion.

While no longer active in North Carolina, Gillings’ vision of making drug development a more statistics-oriented and efficient process keeps paying big dividends for the state. That includes a burgeoning private-equity investment company, of which he remains an investor.

QHP Capital’s roots date to 2015 when Jeff Edwards joined NovaQuest, the Raleigh-based company spun out of Quintiles in 2010 by Gillings and other former Quintiles managers. NovaQuest’s main focus is providing financing for late-stage clinical research trials, a sometimes complex process that didn’t fit conventional bank lending strategies. NovaQuest has raised $2.5 billion and managed $3.6 billion in assets.

Beyond project financing, Gillings also saw an opportunity to tap his team’s industry expertise and contacts to start a private-equity business. To lead the charge, he tapped Edwards, a PE executive at the Texas Teacher Retirement System in Austin, who joined in August 2015. A year later, Michael Sorensen joined from PE giant BlackRock. 

Eight years since inception, QHP Capital has about $2.5 billion of assets under management after making 10 investments in “picks and shovels” companies that are part
of the medical services and technology. It has made 12 add-on acquisitions. The firm has raised $875 million in two funds.

The PE firm targets companies with values of $50 million to several hundred million dollars. Its most recent purchase, which occurred last year, was Maitland, Florida-based Copilot, which sells technology related to medical payments, patient assistance and education programs and other services. 

QHP appears poised for further growth in a fairly recession-resistant business, given that demand for treatments of chronic disease doesn’t fade during downturns. Bringing a new drug to market in the United States costs an average of more than $2.5 billion over many years. That frustrates many consumers and policymakers looking for quicker fixes.

The process, though, creates countless opportunities for entrepreneurs that assist the large pharmaceutical companies launching those drugs, QHP officials note. 

Added resources enabled QHP to add three partners with lengthy experience in the Triangle business community: Vern Davenport in 2017, Ashton Poole in 2019 and Matt Jenkins, last year.

“The Research Triangle area is one of the top five biotech hubs in the United States and we’re not aware of any PE firm in North Carolina that is purposely built around life sciences,” says Poole, a former Wall Street executive and ex-CEO of Raleigh-based Triangle Capital. “We’re working hard as a partnership with a goal of building the best private-equity healthcare firm in the world.”

Steve Malik, a veteran Triangle tech executive, expects QHP Capital to thrive. “What they are good at is being operationally oriented. I’ve lived it with Vern, driving (key performance indicators) and dashboards and knowing what to focus on. The whole deal is trying to grow some good companies.” Davenport was CEO at Medfusion, a Cary-based company founded by Malik and acquired by NextGen Healthcare for $43 million in 2019.

The region’s draw as an attractive, livable location is an asset, Poole and others say. Davenport worked in several major markets before returning in 2007. After 13 career moves, “I’m done moving,” he says.

Befitting North Carolina’s strong economy, private equity is an expanding business in the state. The largest firms include Charlotte’s Ridgemont Equity Partners and Pamlico Capital, which were spun off in 2010 from Bank of America and Wachovia amid changing regulations of bank ownership of  PE groups. Ridgemont raised a record $2.3 billion last October and manages assets topping $8.5 billion spanning a variety of industries.

Charlotte-based Falfurrias Capital Partners has also attracted much attention, raising $850 million in 2021, marking its fifth fund. It manages $1.9 billion in several different sectors. In Raleigh, Plexus Capital has made more than 140 investments and has raised $1.7 billion, focusing on deals with middle-market companies. 

QHP is taking a more surgical approach by acquiring majority stakes in specialty healthcare companies led by founders. In most cases, the companies have reached inflection points where they need more money or new strategies, says Davenport. While many PE companies can provide capital, the QHP partners say few have comparable experience of operating and investing in healthcare technology businesses. The goal is to boost growth rates and expand employment at the companies, a contrast to the popular image of private-equity investments that lead to downsizing and executive-level turnover.

A success story is Boston-based Azurity Pharmaceuticals, which adapts medicines to make them easier to consume by patients who struggle with conventional dosages. Since QHP invested in 2018, Azurity’s staff has grown from 50 to about 325. In 2021, it  bought a related company from PE giant KKR. Azurity is QHP’s only investment in a business that sells directly to consumers; the others are business-to-business enterprises.

QHP partners’ “deep knowledge of the healthcare system, resources and operational knowledge have been invaluable to us over the past several years,” says Azurity CEO Richard Blackburn. 

Another winner has been Wilmington’s Catalyst Clinical Research, which provides trial support for oncology biotechs and outsourced services for other companies. Since QHP bought a majority stake in Catalyst in 2018, staffing has jumped from 13 to more than 400 full-time employees, and the number of testing projects has jumped from zero to more than 50, says Chief Financial Officer Patti McNamara.

“QHP gets involved when they need to be involved, but they stay home when they should,” she says on a video on the firm’s website. “They give us the tools and the intent and then we figure out what to do with it.”

Four QHP portfolio companies are based in North Carolina, including one that moved here after the group took majority control.

Building the right culture at QHP, which employs 22, is a priority, Poole says. “We have a lot of pride in this organization, but there are no egos. We always work as a team.” 

VERN DAVENPORT
After working for healthcare technology companies for more than 30 years, Davenport joined NovaQuest Capital Management in 2017. His early career involved working for global operators IBM, Siemens and Eastman Kodak before he returned to Raleigh in 2007 as CEO of Misys Healthcare Solutions. St. Louis-based Allscripts bought the company a year later and Davenport stayed on a couple of years, then led Triangle-based healthcare companies  M*Modal and Medfusion before moving to NovaQuest.

A key part of Davenport’s role is helping QHP’s portfolio companies establish clear operating procedures to track performance and promote accountability. The systems-oriented approach that he developed through his CEO experience has repeatedly paid off in accelerating revenue and profits, he says. It’s also a differentiator from other PE groups competing for acquisitions, he adds. 

Davenport is a former varsity football player at East Carolina University, where he is a former chair of the board of trustees. He’s now on the board of ECU Health, which oversees the largest hospital network based in eastern North Carolina. Understanding the perspective of hospitals is helpful for his QHP work, particularly given financial struggles facing many providers, he says.

JEFF EDWARDS
The first QHP partner worked for hospital systems HCA Healthcare and Carolinas Healthcare (now Atrium) before moving into the finance sector in 2008. He worked for Raymond James Capital Markets and State Street Global Advisors before moving to Teacher Retirement System of Texas, one of the largest U.S. endowments with more than $180 billion in assets.  His healthcare investing experience there from 2012-15 led to contact with Quintiles founder Dennis Gillings. He joined affiliate NovaQuest in 2015 and helped build the foundation of the private-equity group, which renamed itself QHP in 2021.

Edwards earned a bachelor’s degree at the University of Tennessee and has an MBA from UNC Chapel Hill. 

MATT JENKINS
After working as a consultant in Washington, D.C., Jenkins returned to North Carolina 20 years ago to focus on health care investing. From 2005-11, he worked at health-records company Misys and its acquirer, Allscripts, taking part in growth of revenue from $350 million to $1.3 billion. He then spent four years at health information services vendor M*Modal before joining RTI International as head of corporate development and private equity investments.

The not-for-profit, Durham-based RTI is one of the largest U.S. research organizations with nearly 5,900 employees and annual revenue of $1 billion. It was started by the Triangle universities, who wanted to promote research.

Jenkins helped start a private-equity unit that co-invested with QHP in Winston-Salem-based Clinical Ink, which supports clinical-research trial organizations.

He’s a big believer in QHP’s role in expanding the Triangle’s life sciences industry. “Many Raleigh-Durham businesses would like to do more business with local firms. There are lots of entrepreneurs trying to bring new drugs to market.”

Jenkins has bachelor’s and MBA degrees from UNC Chapel Hill.

ASHTON POOLE
Poole joined in December 2019, bringing 19 years of experience as an investment banker at Morgan Stanley in New York. He advised companies in many industries, including the power and utility sectors. He returned to Raleigh in 2013 to become president and a director at Triangle Capital, and later succeeded founder Garland Tucker as CEO in 2017. 

A year later, Triangle Capital sold its assets to a New York investment firm with management oversight shifting to Charlotte’s Barings.  

Poole’s interactions with Vern Davenport, a veteran Triangle tech executive, led to his move to QHP. “I was intrigued by the market for pharma services and I was surprised by what an opportunity existed in Raleigh.” He notes the area is No. 3 nationally in funding from the National Institutes of Health, reflecting the Triangle’s strong university research base.

Helping the region build on its strengths in life sciences, electronic medical records and other healthcare sectors is a key QHP goal. “We’ve shown we can be a really good partner and help founders grow and scale their businesses and create a lot of value.”

Poole is the son of the late Gregory Poole Jr., one of Raleigh’s most successful business leaders. He has a bachelor’s from UNC Chapel Hill and an MBA from Northwestern University.

MICHAEL SORENSEN
The Seattle native joined Edwards at NovaQuest Capital in 2016 after six years in private-equity investing with BlackRock, the giant New York investment firm that manages $10 trillion. NovaQuest’s leadership had strong statistics and drug industry experience, but hadn’t directly invested in the equity of middle-market companies. 

Edwards and Sorensen had known each other previously. “Jeff told me it would be a great place to raise a family, and he’s been absolutely right,” says Sorensen, who was working near Philadelphia at the time. For his wife and six children, “it’s a much better place.”

QHP’s focus on healthcare companies also provides a sense of mission that differs from traditional private-equity investing by a giant institution like BlackRock, he says. “Everyone likes helping patients.”

Sorensen has a bachelor’s degree from Brigham Young University, along with master’s degrees from Harvard University and the Wharton School. ■

 

David Mildenberg
David Mildenberg
David Mildenberg is editor of Business North Carolina. Reach him at dmildenberg@businessnc.com.

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