2Q21 Digital Health – Halftime Show…

Good golly. The mid-year funding data were released this week and the numbers are nearly off the charts – literally. In 2Q21, $75.0 billion of venture capital was invested in 3,296 companies across all sectors, bringing the total through June to $150.0 billion, according to National Venture Capital Association and Pitchbook data. Were the year to end today, it would be the second most active year of all time, just behind 2020 (which is only about 10% greater than where we are now). This is the all-time greatest level of quarterly venture activity, only tied with last quarter. Globally, Crunchbase identified $288 billion of venture capital investments in 1H21, more than 2x last year’s pace.

The greatest contributor to this surge was the prevalence of Late Stage investment activity, which was nearly 69% of all capital invested in 2Q21 (and perhaps not unexpectedly only 31% of all companies given relative round sizes). Mega-rounds (greater than $100 million) accounted $42.2 billion (56%) of the activity across 198 companies in the quarter. CB Insights tallied 136 new unicorns created in 2Q21. A number of non-venture investors (hedge funds, mutual funds, private equity firms) have become considerably more active in this market, accounting for over $116 billion (77% of the total) in 1H21, more often than not investing in significantly de-risked Late Stage companies. The presumption of significant Late Stage “up rounds” may be contributing to the recent spike in Series A valuations.

Surging public equity valuations, robust M&A activity, and greater investor liquidity bolster later stage investor confidence. According to the CFO Journal, there was $1.74 trillion in M&A transactions that involved U.S. companies in 1H21. In that same period, Refinitiv recorded $2.82 trillion of global M&A volume across 28k deals, an increase over 1H20 levels of 132% and 27%, respectively. Pitchbook identified a blistering $372 billion of exits across 883 venture-backed companies already this year, and importantly, 2Q21 is the fourth straight quarter with exit proceeds in excess of $100 billion.

In the past six months, U.S. venture firms have raised over $74 billion in new funds. Preqin reported that over $459 billion was raised by private equity and venture firms globally so far this year. According to recently released Cambridge Associates data, venture capital returns in 1Q21 and the 12 months ending 1Q21 were 16.4% and 81.9% (horizon pooled returns), respectively, which is driving much of the obvious investor interest.

Not even the specter of inflation can dent investor enthusiasm (yet). While the Consumer Price Index spiked up 0.9% in June and increased 5.4% since June 2020, many analysts dismiss this as “transitory” as supply chains stumble back into place.  Against that backdrop, the S&P 500 Index soared 14.4% in 1H21 finishing with an aggregate market capitalization of nearly $36 trillion. FactSet data for 2Q21 forecasts that S&P 500 earnings should increase 64% year-over-year, while earnings in the healthcare sector is expected to grow only 11.3%.

The Altarum Institute calculated the trailing 12 months of healthcare spend to be $3.98 trillion through April, which remarkably is now on pace to be back to pre-pandemic levels. At the outset of the pandemic, monthly healthcare spend declined ~20% when compared to 2019 levels but have since surged back over the past few months as in-person visits increased and delayed procedures ramped back up. Interestingly, the healthcare sector experienced little inflationary pressures (below) as compared to other sectors over the course of the pandemic.

The pandemic, move to value-based care models, and cost pressures have conspired to drive frenzied adoption of novel innovative solutions in healthcare. The next two years will define the strategic agenda for the next five years; the next five years will frame the next twenty years. This is not lost on venture investors. According to Rock Health data, through 1H21 there was $14.7 billion of investments in the digital health sector across 372 companies (average deal size of $39.6 million). For 2Q21, the $8.0 billion was another highwater mark, surpassing the $7.7 billion for all of 2019, a mere 18 months ago. Notably, the digital health sector in 2Q21 was nearly 11% of all venture capital investment activity, up from just 5% five years ago. Almost 60% of the capital invested was in 48 mega-rounds ($100 million or greater), already more than the 44 companies that accomplished that in all of 2020.

While multiple winners can co-exist given the extraordinary size of the healthcare market, those with first-mover advantages will enjoy a valuation premium which is driving such urgency. And the activity was broad based: six categories accounted for 80% of the capital invested. Year-to-date, the drug R&D solutions category accounted for $2.7 billion of investment, on-demand care was $2.6 billion, and fitness/wellness was another $2.0 billion. Treatment of disease, consumer, and non-clinical workflow categories were an additional $4.5 billion collectively. Highlighting the adoption of intelligent solutions to connect consumers with payors and providers, the Consumer Technology Association estimates that there will be $13 billion of health and fitness devices sold in 2021. According to a recent U.S. Census Bureau survey, 24.5% of all Americans has had a virtual visit in the last month.

A powerful new investment theme has been the creation of dedicated care models by disease, tailored to the needs of those specific populations, often times taking risk on outcomes. Rock Health also analyzed the 1H21 data by clinical indication and holding steady at the top of the list is mental health with $1.5 billion invested in that category. The remaining five leading indications are cardiovascular ($1.1 billion), diabetes ($957 million), primary care ($910 million), substance use disorders ($706 million), and oncology ($654 million).

An important implication of this surge of capital into the digital health sector is directly related to the increase in average size of financing by round. Perhaps not unexpected given the size of the market opportunities entrepreneurs are going after, dramatically increased post-money valuations can be challenging should a company stumble. While round sizes increased across all stages, the most notable expansion was seen for Series D rounds; in 2020, the average size was $76 million and in 1H21, it was $131 million. Across the earlier rounds (Series A, B, C), the increases ranged from 1.1x to 1.4x in round size. Presumably, this phenomenon is providing greater runway to achieve important value-creating milestones. If that does not happen, it may be problematic for those companies.

Amidst all of the investor euphoria, a number of important business models have taken hold and are scaling. Obviously, the role of the consumer is critical, and as such, in 1H21 27% of all investments were in B2C models, a nearly 2x increase from levels seen four years ago. The seduction of the market size is enticing but can be illusive. Often requiring out-of-pocket payments (or via HSAs) and sophisticated customer acquisition skills, entrepreneurs new to healthcare tend to gravitate to these models.

Four other models that are well-understood are defined by the customer base served: payor, provider, employer, and pharma. These B2B models accounted for 52% of all companies funded in 1H21. Investors have come to appreciate the idiosyncrasies of each vertical (i.e., how painfully slow decision-making can be) and are factoring that into financing strategies. SaaS and PMPM pricing models dominate and the ever-present hope for “at risk” revenue streams endures, notwithstanding the paucity of those arrangements. Another emerging model that is getting traction (finally) is in the digital therapeutics (“software as a therapy”) space. The blurring with biotech business models that come with regulatory and reimbursement risks can be challenging for tech investors to intuit.

Liquidity has been exceptional over the last six months and puts 2021 on pace to be one of the strongest years yet. According to Rock Health, there were 131 digital health M&A transactions in 1H21 with just over 60% of those being acquisitions by another digital health company, suggesting we may be entering a phase of some significant consolidation. Given the profound sense of urgency entrepreneurs are operating with today, this is perhaps not unexpected; arguably over the next few years, this sector will establish category-leading companies that will scale over the next decade plus.

Given the stepped-up increase in investment activity between 2014 – 2016, it is also not surprising that mature healthcare technology companies are now going public in such a strong capital markets environment. In 1H21, there were 11 public offerings (6 IPOs, 5 SPACs) with another 11 announced SPAC mergers in process for 2H21. Rock Health is tracking 39 announced SPACs with $9.5 billion in proceeds that have a stated interest in the healthcare technology sector. Notably, though, the basket of 18 public digital health companies that Rock Health follows under-performed in 2Q21 when compared to broader benchmarks.  

While not quite as buoyant as the trading activity with the S&P 500 Index, the broader Leerink Healthcare Technology/Services Index increased 11.2% in 1H21 and an impressive 67.7% over the last twelve months. At the end of 2Q21, the mean revenue multiple for the Leerink index was 6.9x and 5.7x for 2021 and 2022, respectively. The comparable EBITDA multiples are 16.1x and 14.8x. The forecasted revenue growth for the composite is a healthy 19.5% (2021-22) and 18.5% (2022-23), contributing to the attractive valuations in the public markets and leaving public investors quite insouciant heading into 3Q21.

So, where does that leave us? It certainly feels like the healthcare technology sector will see low to mid $20 billion of investment this year across approximately 700 companies. While investors should be wary of “capital absorption” issues (is too much coming in too fast?), the enormity of the market opportunities and the quality and impact of the solutions being delivered, provide some degree of comfort that these investments will continue to be productive and profitable. Undoubtedly, there will be examples of pain given that valuation levels arguably are ahead of fundamentals for many companies, but entrepreneurs who are focused on building solutions that (i) significantly lower clinical/administrative costs in the near-term and (ii) have a compelling outcomes story in the medium to long-term, with full attribution, will create important and valuable companies.

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Personalized Medicine vs. Unwarranted Variation…

It is believed that approximately 250k people die each year due to medical errors, which makes this the third leading cause of death in the United States, according to data from Johns Hopkins University and the National Library of Medicine. The National Practitioner Data Bank tallied an annual average of 12.4k cases filed for medical malpractice between 2009 – 2018. Nearly $9.8 billion of direct medical professional liability insurance premium was written in 2019, according to the National Association of Insurance Commissioners, in order to insure against all of these malpractice claims. These are significant numbers describing significant issues confronting the healthcare system.

Much of the promise of technology in healthcare (artificial intelligence (AI), predictive algorithms, clinical decision support, robotic process automation (RPA), etc) is to standardize and automate the practice of medicine, thereby making it “better” – more efficient, less costly, more responsive, and hopefully, safer. Important elements of the healthcare delivery system are being automated with exciting advances in AI and RPA in order to usher in the great promise of precision medicine, which is expected to be a massive market opportunity. A recent analysis in Nature Biotechnology sized the global precision medicine market in 2028 at $217 billion.

Here is what I am struggling to reconcile: all of these advances and yet errors are still rampant. And with these advances come a roster of nettlesome legal and ethical issues, that are only now beginning to be raised, much less answered. The movement to a more intelligent, always-on, virtual care delivery model challenges even the definition of what is deemed healthcare data (video feeds from someone’s home?). A greater respect for social determinants of health introduces new insights to advance whole person care models while expanding the definition of who is a care giver – and whether they are bound or covered by HIPPA.

Algorithms can be deterministic yet have been shown to have certain biases based on the training sets of data used to create those algorithms. A number of issues are revealed when new AI algorithms are asked to coexist with long-established clinical guidelines based on empirical evidence and codified by regulatory approvals. If the premise that AI actually can improve upon existing standards of care, how then does the clinician reconcile opposing or differing recommendations between guidelines and AI tools? Does this introduce new liabilities?

The standard to avoid malpractice claims is for a provider to simply deliver care consistent with similarly trained providers (and that there not be an injury). Issues and legal exposure start to arise when the provider deviates from standards of care in favor of recommendations or insights provided by AI tools, even if they are thought to be superior. If the AI tools, in fact, are inferior or misapplied, and the provider has deviated from standard of care presuming the tools to be of acceptable quality, now the legal exposure is potentially significant, to say nothing of the risks to the patient.

It is this scenario – or the specter that it is even remotely possible – which has created reticence among many clinicians to embrace AI tools. Settled case law is considered quite conservative in this jurisdiction which has limited the clinical adoption even of proven healthcare technologies.

The actual medical liability costs are understandably hard to ascertain. A detailed Harvard University study in 2010 calculated the total cost to be $55.6 billion. The staggering size of this issue continues to motivate entrepreneurs to develop innovative solutions to whittle away of the problem. According to Rock Health data, just the clinical decision support sector received $2.0 billion (35 companies) and $647 million (8 companies) of investment in 2020 and 2021, respectively. This does not even begin to reflect the extraordinary amount of funding into general purpose AI companies. Perhaps not surprisingly, the American Medical Association (AMA) sees the problem as even more significant pegging the costs associated with medical liability between $84 billion – $151 billion.

The AMA recently studied “ambient intelligence” platform technologies in hospitals and cited that video surveillance and transcription systems risk capturing novel data without patient, much less worker, consents. Video of common spaces inside hospitals risk identifying patients and compromising expectations of privacy. Furthermore, if certain clinical issues are identified (in an unstructured format) and nothing is done, does that now introduce liability.

The costs to society of not using novel technologies developed in other industries for healthcare applications is hard to measure but likely quite significant. Law enforcement has struggled with facial recognition, leading to stricter regulations and limits on its use, but similar image algorithms are powerful in the detection of certain skin cancers. Amazon has received a fair bit of public scorn for the way it monitors and evaluates employees’ productivity, but similar technologies power remote patient monitoring solutions that dramatically improve virtual care. The utility of these technologies ultimately should push adoption and acceptance.

It is near-impossible to code for a person’s ability to decipher nuance. The electronic vehicle (EV) industry is struggling with similar issues. Obviously, each of us as drivers are regulated at the state level yet the federal government oversees EVs. This patchwork has created confusion as this industry comes of age. In the event of a driverless EV accident, where does the liability lie? When faced with a terrible dilemma such as to either run over a pedestrian resulting in near-certain death or crash into a school bus, how does the EV make that decision? Who is responsible for the outcome?

As other industries sort out these intractable legal and ethical questions, the healthcare industry may set certain precedents.

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Painful Labor: Man vs “Machine” …

With turmoil in the jobs market, the data last week from the Labor Department recording only 266k net new jobs in April, meaningfully below whisper estimates of at least one million new jobs for the month, was followed by numerous accounts of what might have caused such a miss. Was it due to overly generous unemployment benefits? Fears of infection? Lack of childcare with so many schools still closed? Around the distant edges of the healthcare economy, we may also be seeing the impact of robotic process automation – arguably, the next “new new thing.”

What a paradox: since March 2020 BC (before Covid) the number of new job openings across the economy has increased 34% according to iCIMS, a recruiting platform, and yet as of mid-April, there were 16.9 million Americans receiving jobless benefits. At its peak in June 2020, this registered a staggering 32.4 million of an estimated 160 million working Americans. It is estimated that total employment has declined by 8.2 million people. Over 4.2 million people are considered “long-term unemployed” (more than 27 weeks), while 2.6 million people are unable to work as they are caring for someone who is ill or ill themselves. With the labor force participation rate now at 61.7%, the effective average hourly income was $30.17 in April with 35 hours worked on average each week. To put this in context, the federal unemployment benefits equate to approximately $15 per hour and are set to expire in September.

Data: FRED; Chart: Axios Visuals

As usual, the situation in the healthcare industry is more complicated. The great promise of healthcare technology is to both reduce clinical and administrative costs while improving outcomes, and yet the U.S. has one of the most expensive healthcare systems (17.7% of GDP in 2020) and in recent years has shown declining life expectancies (life expectancy at birth in 1H20 was 77.8 years, down from 78.8 years in 2019). In early 2020, total employment in the healthcare sector was approximately 16.5 million which dropped dramatically to nearly 14.9 million according to Bureau of Labor Statistics data. The declines were unevenly felt across the various specialties with nursing homes and other residential care facilities showing declines of 15-20% in employment and no meaningful recovery. After equally dramatic declines at outpatient care centers and medical laboratories, those sub-sectors now have higher levels of employment when compared to early 2020. 

Overall, there are approximately 16 million healthcare jobs today. There was a 4k job loss in April, which masked the 19.5k decline of nursing home jobs last month. Tragically, the nursing home sector saw nearly 2k Covid-related deaths among its employees, to say nothing of the more than 132k Covid deaths of nursing home residents. Overall, nursing homes experienced a 204k reduction in total employment since early 2020. While hospitals saw nearly 6k of job losses in April, one bright spot was the 21k increase in ambulatory care jobs. Interestingly, a recent American Medical Association study found that in 2020 nearly 40% of all physicians were employed by hospitals which was a meaningful increase from 29% in 2012; 40% were in private practice, down from 60% in 2012. Perhaps not surprisingly, nearly 75% of all residents surveyed by Merritt Hawkins preferred to work in an urban setting.

Clearly, the pandemic is the fundamental contributor to the significant job losses over the past year, but there is an expectation that the automation of certain tasks will begin to redefine and likely reduce the number of future healthcare jobs. The ability to streamline certain operations to both reduce costs and errors are the promise of robotic process automation (RPA). The use of RPA puts enterprises on the path to more robust intelligent processes. RPA software deploys bots to handle rules-based activities that tend to be repetitive and labor intensive. These solutions are implemented on top of existing operating systems, allowing for relatively easier deployments, while not creating parallel workflow processes.

Getting a precise handle on the size of the RPA market is tricky but there is clear consensus that this software category is poised for exceptional growth. A recent Morgan Stanley analysis of 94 occupations estimates that 40% of all American workers hold jobs in positions that are 70% likely to be automated. Allied Market Research has the RPA industry at $1.6 billion in 2019, increasing to $19.5 billion by 2027. Forrester Research believes that the RPA industry will reach $2.9 billion in size this year.

And this sector is now squarely on the venture capital industry’s radar. Crunchbase identified over $1.0 billion in funding in 2018, declining to $920 million in 2019 and approximately $300 million in 2020. The activity in 2021 has been frenetic, punctuated by the $750 million Series F financing of UiPath earlier this year. A partial selection of recent RPA companies tracked by CB Insights is highlighted below (and does not even reflect Flare Capital’s own Cohere Health).

McKinsey identified $180 billion in opportunities in healthcare finance and operations to reduce costs through automation. Some of the most dramatic opportunities involve electronic benefit verification (EBV), prior authorization, and claim status inquiries. For instance, according to the 2019 CAQH Index report, there were nearly 10.3 billion EBVs annually, of which 16% are done manually, costing approximately $10 per manual verification. Similarly, of the 112 million prior authorizations, 87% of which are manually adjudicated at $14 per, the opportunity to remove significant operating costs via RPA is dramatic. It is thought that 30% of the 5.8 billion claim status update inquires are handled manually at a cost of $10 per inquiry. And on and on….

Notably, the BBC recently published a study that found 745k people literally died in 2016 from working long hours. If tedious mind-numbing jobs contributed to that tragedy, hopefully RPA can help address that issue as well.

My thanks to my colleague, Parth Desai, who is spending a lot of time with RPA companies seeking to dramatically change the operating costs of healthcare entities.

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Gambling: Roll of the Dice…

This past weekend, in addition to an estimated 120k mint juleps consumed, it is thought that over $150 million was wagered on the Kentucky Derby (spoiler alert: Medina Spirit won going out at 12-1 odds). This is a fraction of the $500 million wagered on this year’s Super Bowl. And it almost does not even register when one considers all legal and illegal betting in the U.S., thought to be well north of $200 billion according to the American Gaming Association (AGA), which is approximately the GDP of Greece.

Studies by the National Council of Problem Gambling concluded that 15% of all Americans gamble once a week, while 2-3% are considered to have a “gambling problem” (i.e., addicted). How much is lost every year due to gambling is obviously quite difficult to determine, but according to the research firm H2 Gambling Capital, bettors in the U.S. are thought to have lost $117 billion in 2016. A new generation of gamblers appears to have been created as it is now believed that 6-9% of all youth have serious gambling issues. CollegeGambling.org estimates that 6% of all college students are addicted. Addictions.com estimates that 750k people between the ages of 14-21 are gambling addicts.

It is important to put the gaming industry into some context. The American Gaming Association (AGA) sizes the industry at $261 billion, slightly larger than all advertising spend in the U.S. Proudly, the AGA counts 727k employees and observes that gaming contributes $40.8 billion in annual tax receipts. It is that last claim that makes determining how damaging gambling is to the health of Americans so tricky to assess.

The pandemic was obviously not kind to the gaming industry this past year. According to AGA data, total “gross gaming revenues” (GGR) – the legal portion of gambling activity, which appears to reflect only about a quarter of what is actually bet each year – was $30.0 billion in 2020, a 31% decrease from 2019. Slots and table games accounted for $18.9 and $5.1 billion, respectively, and both declined 34% and 39% year-over-year. Much of the growth in gambling has shifted to sports betting ($1.5 billion, 69% increase year-over-year) and “iGaming” ($1.6 billion, 199% increase). According to AGA forecasts, those two categories are projected to be $8.0 and $20.0 billion in revenues by 2024, respectively. While monthly GGR snapped back reasonably quickly, it still has not quite recovered to pre-pandemic levels.

To be clear, the data above are revenues, not the amounts wagered. In 2019, according to the AGA, legal sports gambling was estimated to be $13 billion, which generated $909 million in revenues. In just the first two months of 2021, sports betting was $7.8 billion, generating $576 million in revenues; January 2021 alone was $4.4 billion of wagers.

The obvious driver of sports betting was the 2018 Supreme Court ruling which allowed states other than Nevada to offer sports gambling. Today, 21 states and Washington, D.C. offer such services. Interestingly, and perhaps not surprisingly, according to a recent WalletHub survey, Nevada was ranked #1 as the most “Gambling-Addicted” state while Utah was ranked #50. Unfortunately, Nevada only ranked fifth for states offering gambling treatment services, and even though Utahns for the most part do not require such services, the Beehive State ranked an impressive twentieth in the level of services offered.

Coincident with the change in state laws (although the 1961 Wire Act still stands which restricts remote gambling across state lines), there was an explosion of sports gambling websites and apps such as FanDuel and DraftKings, both of which kick-off with enticements of fantasy experiences. The power of the gamification of sports gambling boomed this past year with most people locked down, eagerly searching for novel forms of entertainment. InvestGame identified $33.6 billion worth of deal activity across 664 transactions in 2020, of which $5.9 billion was private investments (versus $15.1 billion in public offerings and $12.6 billion in M&A deals). The profitability and growth opportunities in gambling are not lost on public equity investors.

Data: Investing.com, Yahoo Finance; Chart: Axios Visuals

Arguably, the most developed country in online sports gambling is the United Kingdom, which according to data from Global Betting and Gaming Consultants, was $7.3 billion in size in 2020. A recent U.K. House of Lords analysis determined that 60% of sports gambling platform revenues come from just 5% of users. Japan is thought to be the next largest market at roughly half the size of the U.K.

Much has been made about the convergence of investing and gambling. In fact, fortunes have been made over recent years by obfuscating the distinction – see Bitcoin, GameStop, Tesla, SPACs, NFTs. With interest rates hovering just above 0.0% and a population largely shut-in their homes, investors witnessed a series of frightfully irrational waves of trading across certain stocks and digital assets. Nearly all of this activity was uncoupled from fundamental economic valuations, yet undoubtedly created the same adrenaline rush experienced when gambling.

According to Financial Industry Regulatory Authority data, at the end of February 2021 there was $814 billion of margin debt held by investors, which is an increase of 49% year-over-year, and may create significant issues should there be a swift and unexpected correction. A recent Wall Street Journal study found that 41% of all financial assets held by individual U.S. investors was now in stocks, the highest level since 1952.

One of the leading online trading platforms is Robinhood, which itself is expected to go public this spring and likely will be valued around $50 billion. So, while its stated mission is “to democratize finance for all,” the gamification of investing with digital confetti raining down after your first trade was recently removed to be more adherent to regulators’ concerns. In fact, Massachusetts recently sought to revoke Robinhood’s registration as a broker-dealer given concerns over its business practices and aggressive marketing activities. Even Warren Buffett is nervous.

Undoubtedly, online gambling (and investing) platforms have invested enormous resources to acquire, engage, activate, and incent online users – not unlike every other consumer-facing industry. The challenge here is that there is a potentially devastating downside that comes with their success. It is well-understood that compulsive gamblers are 50% more likely to commit a crime, in large measure to fuel their addictions, and that these gamblers are 7x more likely to be arrested.

Even more disturbing concerns emerge when looking at the mental health comorbidities that are associated with gambling addictions. Studies have clearly shown that these addicts suffer from much greater levels of depression, alcohol and substance abuse issues, and have an elevated risk of suicide and suicide ideation. A 2016 study in Finland showed gambling addicts had a 5% incidence of suicide and suicide ideation when compared to 0.1% for the general population. More than 88% of this cohort acknowledged “emotional harm” and 87% experienced “health harm.” Younger addicts reported significantly greater levels of financial and health issues (underscoring concerns about youth addiction associated with sports gambling and online investing platforms).

Whether on balance gambling is a positive or negative to overall societal health is a tricky debate. Undoubtedly, the level of tax revenues enjoyed by governments can be utilized for a roster of social services (ironically, some of them necessitated by issues brought on by gambling addiction). The gaming industry has created a lot of jobs and has, in some cases, created hubs of sustainable economic activity (see Las Vegas, do not look at Atlantic City).

The costs to individuals and society from gambling are relatively self-evident. Studies have shown that 10-20% of gambling addicts will eventually be bankrupted by their addiction, and many of those will go on to be homeless. Other studies have concluded that 20-30% of gambling addicts will develop alcohol and other substance use disorders, which have nearly immeasurable and direct/indirect costs to family members. Gambling addiction is expensive to treat and those afflicted will have much greater levels of lifetime debt, leading to further burdens on loved ones.

Fortunately, according to the National Center for Responsible Gaming, nearly one-third of all gambling addicts are able to treat their addictions without formal intervention. It is near-impossible to predict who those lucky ones are – kind of like whether you are going to roll boxcars or snake-eyes.

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1Q21 Digital Health – Up, Up and Away…

By almost any measure, 1Q21 was an extraordinary 90 days, from the political turmoil, progress on the pandemic, and to the “devil-may-care” financial markets. At the intersection of all of those forces sits the healthcare technology sector, which witnessed a record quarter for investment activity. According to a recent Rock Health report, $6.7 billion was invested in 147 companies in the digital health sector, absolutely crushing the prior quarterly high of $4.1 billion in 3Q20. MobiHealthNews pegged the activity this past quarter at $7.1 billion invested in 99 companies.

The start of the year mapped to 2020’s trendline until March, when $4.0 billion was invested in 74 companies in that month alone – average round size in March was $53.6 million. There were 25 “mega” deals of greater than $100 million in 1Q21, ten of which closed in March. For the quarter overall, average deal size was $45.9 million, a marked step-up from the 2020 average deal size of $31.7 million. Arguably, we have entered a phase when investors appear to be “anointing the winner” in particular categories. The average duration from company inception to the close of the “mega round” for this cohort was a mere six years. The annual investment pace six years ago (2014, 2015) for all of digital health was approximately $4.5 billion in ~300 companies. This coincided with the implementation of the Affordable Care Act (as well as the founding of Flare Capital Partners), laying the foundation for the number of break-out companies seen today.

Interestingly, round sizes for later stage digital health financings have meaningfully increased. While the size of the average Series A round modestly moved from $12 million to $15 million (~1.3x) between 2018 – 2021 YTD, Series B and C round sizes increased from $24 million to $49 million (~2x) and $39 million to $77 million (~2x), respectively.

Why are these metrics important? The healthcare technology sector is now operating with a great sense of urgency, in part due to the demands/opportunities created by the pandemic. The next two years will determine what will happen over the next five years; the next five years will set the stage for the next twenty years. While multiple winners can co-exist given the extraordinary size of the healthcare market, those with first-mover advantages will enjoy a valuation premium. Investors today are debating how enduring are these increased valuation benchmarks. Have we fundamentally reset valuation multiples in healthcare?

Rock Health highlighted three sub-sectors within digital health which saw the most activity: (i) on-demand services ($1.2 billion); (ii) drug R&D solutions ($1.1 billion); and (iii) population health management ($850 million). The next most active categories included “treatment of disease,” consumer health information, and fitness/wellness. Of the numerous specific conditions, behavioral health was the leading category – likely in response to issues compounded by the pandemic.  

The broader context is also quite informative when looking at the healthcare technology sector. Global venture funding recorded all-time highs with $125 billion invested in 1Q21, according to Crunchbase. According to Refinitiv data, global M&A activity hit $1.3 trillion, a quarterly record, which was nearly 100% ahead of the 1Q20 level (although only a 9% increase in the number of deals). And while unemployment levels continue to decline (improving from 6.2% to 6.0% in March), admittedly in fits and starts with a long way still to go, there is recent evidence that investor cupidity may now be somewhat in check. The number of new SPACs (special purpose acquisition company) formed has declined precipitously from a ridiculous pace of 5 – 10 per day earlier in the quarter. Some recent high profile IPOs have either struggled out of the gates or have been downsized.

The “mega round” financing phenomenon is not at all limited to the healthcare technology sector. According to PricewaterhouseCoopers and CB Insights, there were 184 “mega rounds” in 1Q21 (of which 25 were digital health) raising approximately $40 billion (average deal size of $217 million). As shown below, this past quarter saw a remarkable step-up in late stage venture investing, highlighting continued crossover investor enthusiasm. It also helps that preliminary 4Q20 venture capital IRR data from Cambridge Associates shows early stage and late stage returns to be 30.8% and 20.0%, respectively. For some context, the S&P 500 Index is up 9.9% year-to-date, while the S&P Healthcare Index has advanced 3.9% in that same period (although the NASDAQ Biotechnology Index is down 1.8%, perhaps reflecting some risk aversion). The Leerink Healthcare Tech/Service Index increased 3.0% in 1Q21 (the Provider sub-sector increased a dazzling 18.4%).

Data: PwC/CB Insights MoneyTree report; Chart: Axios Visuals

The volatility index (VIX), a barometer of expected volatility in the next 30 days, traded below 17 this past week, near a 52-week low and down from a 52-week high of just under 48 at the outset of the pandemic last spring. One starts to get nervous with professional investor complacency. Oh, and unsustainable levels of debt: according to the Financial Industry Regulatory Authority, investors had a record $814 billion of margin debt at the end of February 2021 (see Archegos Capital for what can go wrong). At least the Citi Panic – Euphoria Index is settling down, now at a still-elevated 0.98 versus the wobbly 2.01 from earlier this year.

As was mentioned earlier, driving much of this activity has been extraordinary levels of liquidity and M&A volume. In the healthcare technology sector, there were ten SPAC offerings in 1Q21 in addition to 57 M&A transactions. While there were only two traditional IPOs in this sector, Rock Health is tracking 43 private companies which have each raised in excess of $220 million and stand as strong candidates to be public companies. Underlying all of this is the realization that, notwithstanding it may well take a few extra years and an additional round or two of private capital, healthcare technology companies that are able to both reduce costs (clinical or administrative) and improve outcomes with credible and defensible claims of attribution, significant economic value will be created.

Unfortunately, now SPACs are so yesterday…NFTs are where it’s at. When Jack Dorsey of Twitter and Square fame can sell his first ever tweet for $2.9 million as a non-fungible token, investors are left slack-jawed trying to understand is this the next big thing. SPAC investor sentiment has cooled significantly toward the end of 1Q21 (red line below), after arguably getting way ahead of itself over the winter. Average first trading day gains were a miniscule 0.1% in March after seeing opening trading increases of 5% in January and February. Year-to-date SPACs have raised $95 billion versus $80 billion in all of 2020, and yet since 2019 only 25% of listed SPACs have actually gone on to acquire a company.

Investor activity was not the only thing to get out-of-hand during the pandemic. According to the American Psychological Association, 42% of all adults in the United States have reported “undesired weight gain” on average of 29 pounds due to Covid. We might expect to see the “Fitness/Wellness” category move up the league tables next quarter. Good thing that the best performing asset class in 1Q21 was something called “Lean Hogs,” which while sounding entirely oxymoronic, traded up 43.8%.

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Urgency to Shelter the Homeless…

Habitat for Humanity estimates that 150 million people are homeless globally and that 1.6 billion lack “adequate shelter.” In the United States, the Annual Homeless Assessment Report in 2019 counted 553k homeless people which was thought to be closer to 580k at the start of the pandemic in early 2020 – nearly equal to the number who have succumbed to the coronavirus. Undoubtedly, that number spiked over the course of 2020 with the pandemic’s devastating economic dislocations. As many of the homeless are older, and now at significant risk of Covid infection, housing services for the homeless are quickly becoming healthcare services for the elderly. Nearly 65% of homeless are either Black or Latino.

The most current U.S. Census Bureau data estimates that there are 139.7 million “housing units” in this country of ~330 million people, of which approximately 83 million are single-family homes. The homeownership level at the end of 2020 was more than 65.5%, marking a recovery from the lows reached in the middle of the last decade after a pronounced decline caused by the Great Recession. The Urban Institute (UI) determined that Black homeownership was 44.1%, while Latino and white ownership levels were 49.1% and 74.5%, respectively, further highlighting racial inequities. The UI projects that for the first time ever by 2040 the level of ownership for each generation will be lower than the preceding generation at that same age.

Ownership has a number of implications, most profoundly with wealth creation. Last year was a scorching hot year for home sales, in large measure due to 30-year fixed mortgage rates below 3.0% and the mass pandemic migration out of cities. The median home price at the end of 2020 was $310k (the median new home price was $346k). According to the S&P Case-Schiller National Home Price Index, home prices increased by 10.4% in 2020 with December 2020 showing the greatest monthly increase in the last seven years, often pricing the less fortunate out of the market.

Ironically, the National Association of Realtors (NAR) identified 1.07 million homes for sale at the end of 2020 (and likely below 1.0 million at the end of 1Q21), which was a 23% decline from the end of 2019, further driving up the price of available homes, putting home ownership even further out of reach for many. Notwithstanding a recent rise in interest rates, the Mortgage Bankers Association forecasts that there will be $1.57 trillion of new mortgages issued in 2021. Since last summer, eight of the top thirty mortgage lenders have filed to go public.

Household wealth in the United States was $130.2 trillion at the end of 2020 according to Federal Reserve data, which was 5.6% ahead of 3Q20 levels and over 10% from year-end 2019. Obviously, the dramatic increase was in part due to the recovery in public equities but in large measure to the significant increase in real estate values. The Federal Housing Finance Agency estimated that 46% of the wealthiest 20% of the country were able to stay at home during the pandemic, while only 35% of the poorest 20% could do the same, obviously meaningfully increasing the risk of coronavirus exposure.

Government relief comes in a number of ways. The recently passed Covid relief bill calls for $21.6 billion in emergency rental assistance, $5.0 billion in housing vouchers, and $850 million for tribal and rural housing support, although some legislators believe between $70 – $100 billion in housing aid is required. Importantly, at the pandemic’s onset, a number of states severely limited the potential to be evicted or have necessary utilities cut off. According to the Federal Housing Finance Agency, nearly 70% of all states have banned utility shut-offs. An analysis by the Center on Budget Policies and Priorities estimates that approximately 20% of renters are now behind on their rent payments.

Of course, government relief programs have limitations. First and foremost, no single federal or state agency “owns” this issue, severely limiting accountability and creating inefficiencies. For instance, the $22 billion Section 8 housing voucher program managed by the Department of Housing and Urban Development (HUD) has led to both abuse and discrimination. This month a massive lawsuit was filed against 88 brokerage firms and landlords in New York City, alleging systemic bias against those with housing vouchers; there are 125k households in NYC that rely on such vouchers.

A recent study by the Social Science Research Network found that the 27 states that lifted eviction moratoriums (of the 44 that had initially implemented them), the incidence of Covid infection was a staggering 1.6x of those remaining 17 states that left the moratoriums in place (this increased to 2.1x after sixteen weeks). Mortality rates were also 1.6x greater but increased to 5.4x after sixteen weeks. Just between March and September 2020, it is estimated that there were 11k deaths tied to the lifting of state eviction moratoriums. Shocking.

Mortgage forbearance programs tend to last up to twelve months and are now starting to wind down. According to Black Knight Inc., a mortgage data analytics firm, more than 50% of the 2.7 million forbearance cases will end in 2Q21, likely causing a spike in the number of homeless people.

Early data are quite troublesome when studying infection rates among the homeless. Currently, the general population is showing ~4.5% positivity rate for Covid, markedly down from ~12.5% during the winter peak, according to Johns Hopkins data. The National Health Care for the Homeless Council estimates that positivity rates for the homeless population are now between 9% – 12%, further compounded by their lack of access to quality healthcare. At the outset of the pandemic, positivity rates at community health centers with Section 330(h) grant funding were 15%, only to settle around 10% after each spike.

Setting aside the pandemic, life expectancy for the homeless is significantly lower. The homeless charity Crisis in the United Kingdom found in research conducted in 2011 that life expectancy rates were as much as 30 years below that of the general population. Twenty years ago, one of the most comprehensive studies of this issue was conducted at the Columbia University Center for Homeless Prevention Studies, which found that across the U.S. mortality rates were approximately 4x that of the general population.

One tragic consequence for many now confined to their homes has been the incidence of lead poisoning among children. The Centers for Disease Control and Prevention estimates that 20 million homes still have unsafe levels of lead paint, even after a determined effort since the 1970s to reduce the incidence of childhood lead poisoning, further underscoring the issues associated with inadequate housing stock. With a nearly 50% reduction in regular lead testing due to Covid, fears are that as many as 2% of all children now may have elevated levels of lead.

Many point to the significant HUD budget cuts of the early 1980s as to when structural homelessness became a chronic condition. Today it is estimated that in two of the largest states (New York and California) that the level of homelessness is 0.47% and 0.38%, respectively. The Bureau of Labor Statistics projects that by 2026 approximately 30% of the labor force will be between 65-74 years of age, and that 2.4 million of those senior citizens will not be able to afford adequate housing. The aging of America will quite literally add to the homeless population, further pressuring the resiliency of the $93 billion spent on public health infrastructure.

A cruel irony here is that much of the business model innovation in healthcare today is to move as much care as is feasible to the home. With great fanfare last week, DoorDash announced an initiative to provide same-day home delivery of approved Covid test collection kits. Optimal healthcare is meant to “meet you where you are” but what does that mean if you are homeless?

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Flare Capital Team Updates…

Venture capital firms must be staffed to align with the market opportunities they are pursuing and to provide depth of resources to effectively partner with entrepreneurs – to best meet the moment. With that in mind, we are particularly excited to welcome our newest Executive Partner, Chris Hocevar, to the Flare Capital team.

Across a very distinguished career building leading healthcare organizations, Chris brings a wealth of expertise in innovative value-based care models, integrated care, and technology. Most recently, he had a very successful 16-year run at Cigna, ultimately serving as President of their U.S. Business Segment and Specialty Businesses. Chris has been committed to the transformation of the healthcare industry and has already shown to be a great resource for many of our portfolio companies. We are honored to have him on the team.

Importantly, our Executive Partners are lightning rods for great people and investment opportunities. They often serve as the board chairman for some of our portfolio companies (see Bright Health, Cohere Health, Higi) or in senior leadership positions at important healthcare technology companies (see Amwell). Arguably, one of their greatest contributions is providing the “voice of the customer.” Given their extensive and relevant commercial experiences, our Executive Partners are particularly good at articulating product / market fit in what is now a rapidly changing healthcare technology sector.

Another recent development which we are all excited about is that one of my partners, Dan Gebremedhin, was recognized by the National Venture Capital Association (NVCA) as one of only three “Rising Stars” this past week. The NVCA, which advocates on behalf of 1,328 venture firms managing $444 billion of capital across 2,211 active funds (as of year-end 2019), plays an essential role in promoting policy positions that strengthen the U.S. entrepreneurial ecosystem. The venture capital industry has grown nearly 60% since I served on the NVCA board ten years ago.

One other team development – we are excited to welcome the Flare Scholar Class of 2021 to the firm. While each class is our favorite, this year’s class of 49 brilliant Scholars looks to be particularly strong and brings the total number of Scholars across all six classes to 200. We are quite pleased with the diversity of experiences and background of this class and look forward to welcoming them in-person to our offices later this year (fingers crossed).

Our Scholars, who tend to be younger professionals from many of our strategic limited partners and leading academic centers around the country, serve as ambassadors at their companies and schools, as well as assist with industry diligence and deal sourcing. Last year we announced the formation of Flare Scholar Ventures (FSV), which is a pre-seed initiative to back Scholars for the very first step in their entrepreneurial journey. We are off to a terrific start and will likely have half a dozen or so FSV companies by this summer.

Stay tuned for more team developments…

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Not Kidding Around – Challenges in Maternal Health…

The Centers for Disease Control and Prevention (CDC) tabulated that 3.792 million people were born in the United States in 2018 – worldwide 385k people are born every day. Tragically, several hundred women die each year due to pregnancy-related complications, and while maternal mortality rates globally have declined 44% between 1990 – 2015, mortality rates in the U.S. have increased 139% since 1987. Notwithstanding the extraordinary healthcare resources, the U.S. is a shameful outlier in maternal health when compared to most other developed countries. The causes are complex, the solutions even more so. Flare Capital’s most recent investment is hoping to address these critical issues.

A 2013 study by Medical Economics calculated that the aggregate cost of all childbirths was 0.6% of the U.S. GDP that year. Childbirth is consistently ranked as the top diagnosis for inpatient stays, accounting for 11.7% of all hospital admissions at a rate of 1,195 per 100k according to the HealthCare Transformation Task Force. There are a number of demographic trends that risk further exacerbating the situation:

  • In 2019, 39.6% of all births were to an unmarried mother (more on that below)
  • Preterm births accounted for 10.2% of all births, strongly suggesting additional complications
  • Rate of cesarean procedures has steadily increased and now is 31.9% of all births (up from 20.7% in 1996), in part due to reimbursement models
  • Unintended pregnancies were 45% of all pregnancies (Brookings Institute)
  • In 2020, the fertility rate was 1.779 lifetime births per woman, a 0.06% increase over 2019 (interestingly, the population replacement rate is 2.1 lifetime births per women)
  • Notwithstanding that, annual birth rates have been steadily declining since the Great Recession, yet the costs continue to increase

Underlying causes to account for the demographic data are numerous: women working longer before having children, economic concerns, lifestyle choices, notable decline in marriage rates to flag just a few. According to the National Center for Health Statistics, annual marriage rates fell 6% in 2018 (6.5 unions per every 1,000 people), which is the lowest rate since the data were tracked in 1867; 1946 was the highest year with 16.4 marriages per 1,000 people. Slightly more than 50% of American adults were living with a spouse in 2019 (down from 70% in 1970), with another 7% living with a partner (up from 1% in 1970). The phenomenon of marriage is correlated with greater economic security, better health outcomes, and improved longevity.  

Given the structural issues around access to affordable and responsive maternal care, there exists an extraordinary opportunity to develop a convenient, timely and high-quality maternal care offering, particularly to address the needs of underserved populations. Notwithstanding the market opportunity, as an investor it always comes down to partnering with exceptional entrepreneurial and clinical talent when architecting such a company, and we are convinced we found that with the With OnCall team.

The three co-founders (Kit Dobyns, Mary Fleming, Olan Soremekun) have a wonderful collection of experiences ranging from having deep, nationally recognized clinical expertise in the OB-GYN field, building successful businesses within large payor and provider organizations, and launching and scaling very successful start-ups in the healthcare sector. This trifecta also shares a commitment to re-architect how these services are delivered in a dramatically more impactful and empathic fashion. Meeting these women where they are, be it in the home or virtually, is essential to reducing costs and improving outcomes. Flare Capital is excited and proud to partner with such a talented founding team.

At its core, payment reform will be needed to address many of these structural issues in the maternal healthcare space. According a 2019 analysis by Health Affairs, Medicaid paid for approximately 43% all births in 2018, with coverage extending only for 60 days post-delivery. Postpartum benefits differ significantly by state, creating a patchwork of racial and economic inequities. Often times reimbursement for maternity services is uncoupled from newborn care. Many high-impact services such as home visits, lactation consultations, mental health screening and care, or family planning services are infrequently (or inadequately) covered. The current reimbursement paradigm creates significant gaps in care, and in the case of cesarean procedures, arguably incentives for risky and/or unnecessary alternatives.

In addition to numerous state-run pilot programs to develop more standardized and comprehensive benefit programs that holistically address the prenatal and postpartum journey extending well beyond the first 60 days post-delivery (see below), numerous federally elected representatives are now pursuing another “Momnibus Act” as efforts in 2020 were derailed by the pandemic. With a greater emphasis on social determinants, behavioral and environmental factors, this approach advocates for continuous coverage for up to one year. Such an approach eases the transition back to other primary care services for both the mother and child.

Creation of a “fourth trimester” will help to address a range of significant issues that emerge such as mental health, pain, urinary tract infections, and severe anxiety. Neary one in seven women suffer from perinatal mood and anxiety disorders (PMAD) which costs the healthcare system $32k per pregnancy or $14.2 billion. Often times screening for PMAD is covered, yet the treatment and care is not. Greater reliance on high-impact, lower cost providers such as doulas and midwives, or moving site of service to the home or birthing centers, will have a dramatic impact on outcomes and costs. When doulas are deployed, the rate of cesarean deliveries drops by 39%.

In addition to payment reform, there is a vigorous debate underway to expand child tax credits, effectively an Andrew Yang version of Universal Basic Income but for children. Research by the Niskanen Center, a leading Washington, D.C.-based think tank, concluded that a $3,600 payment per child under six years old ($3,000 for ages 6 – 17 years) would reduce childhood poverty by three million children, but obviously this does not directly address maternal health concerns surrounding birth. Just as Social Security was established to address elder poverty, such payments to families with children would seek to dramatically curtail childhood poverty, presumably improving recipients’ lifetime health quality. Republican proposals are estimated to cost $66 billion annually versus Democratic proposals of $105 billion. An emerging consensus appears possible, notwithstanding critiques from opponents of pronatalist policies that suggest such tax credits would create inducements for more unnecessary births.

Sadly, the CDC has identified dramatic racial disparities in maternal health outcomes. Black and American Indian/Alaskan Native women experience 2-3x higher maternal mortality rates when compared to other demographic groups. These disparities exist across all states and all age cohorts but reach 4-5x higher mortality rates for minority women older than 30 years of age. Quite surprisingly, even for women with college or graduate level education, the rates are stubbornly greater at 5x for Black and American Indian/Alaskan Native.

Covid-19 has introduced a roster of additional concerns for quality maternal health. Notwithstanding that nearly 20k pregnant women already have been vaccinated, the safety debate continues without the CDC taking a precise stand. While it appears that Covid-19 symptoms are more severe with pregnant women, it is still unclear if the vaccine confers protection to the child or should the mother become infected, will that imperil the child.

Interestingly, the maternal health sector has attracted a significant amount of investor attention. Forbes estimated that nearly $800 million was invested in “femtech” companies in 2019, while Pitchbook tracks just over 400 companies in this category with approximately $700 million invested in each of the past three years (below). A number of consumer focused maternal companies recently raised significant rounds: Owlet Baby Care closed a $1.1 billion SPAC (special purpose acquisition company) valued at 10x forward revenue; Nanit raised $25 million and offers a baby-monitoring system; and FitTrack launched its Beebo, a moms-to-be smart scale. Rock Health determined that 65% of all femtech investments were focused on fertility, pregnancy, and motherhood.

Separate but perhaps related, there are emerging paternal issues as well. A 2017 Mt. Sinai Medical School study revealed that sperm count in the Western world had declined 59% from 1973 to 2011. What the role of environmental factors are is not entirely clear, but certainly in conjunction with reduced testosterone levels and increased incidence of testicular cancer, epidemiologist project that the median man would have no viable sperm by 2045 – all echoed in a super scary move called “Children of Men” in 2006.

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Gift of Life vs. Cause of Death…

Sadly, we have been surrounded by talk of death for nearly a year. According to the Centers for Disease Control and Prevention (CDC), an estimated 3.19million people died in the U.S. in 2020, quite a bit more than the 2.85 million in 2019, and at 9.7 deaths per 1,000, last year was the highest rate since 1949. Pre-pandemic, the Census Bureau did not project this level of deaths until 2029.

The medical community has been very careful not to conflate the world of medical examiners and the organ donation industry. Notwithstanding that there are nearly 110k people on organ transplant lists according to the Centers of Medicare & Medicaid Services (CMS), or that there are approximately 500k unexplained deaths each year that require some level of post-mortem examination, it has been a third rail issue to directly link the two worlds. The National Institute of Justice (NIJ) has delicately concluded that organ donation has not meaningfully compromised autopsy evidence, and therefore, subsequent criminal proceedings.

It is hard to make money with death. There are no billing codes for autopsies. Hospitals typically extract from the Medicare Part A basket for a “variety of services” which includes autopsies. In fact, hospitals are not obligated to provide autopsy services nor are they typically reimbursed by private insurance or Medicare. Notably, CMS determined in 1986 that autopsies were not considered “patient care” and therefore, would not be covered. The average cost of an autopsy ranges between $3,000 – $5,000, but can be as much as $10,000, depending on how comprehensive the analysis. It gets even more complicated – upon death, in the eyes of the law one ceases to be a “person” but rather “property” which can trigger a debate about chain of custody. All of this has resulted in the rate of autopsies to collapse.  

It is estimated that less than 5% of all deaths have a proper autopsy by a medical examiner (versus coroner who may either be a lay person without clinical training or other healthcare provider). According to the National Association of Medical Examiners, which has less than 1,000 members (see below), there is an acute shortage of trained examiners, who are spread thinly across 68 offices around the country. While the reasons for this are numerous, low pay (~$150k per annum) and social stigma rank high on the list. Medical schools do not actively promote this discipline.

Irrefutably, autopsies are an essential component of an effective public health infrastructure, from understanding the spread of disease, effects of pollution and drug use, to bio-terrorism; all brought even more so into focus by the Covid-19 pandemic. According to a recent Journal of the American Medical Association study, an estimated 25% of all autopsies discovered a major diagnostic error (although this may be trending to be less than 10% per more recent studies). More troubling, according to a 2005 report by the International Academy of Pathology, approximately one-third of all death certificates identified causes of death that were not suspected prior to death and that more than 20% of those unexpected findings could have only been determined histologically. Furthermore, it is estimated that 10% of all cases had antemortem diagnostic errors.

Recall the early days of the pandemic and the extraordinary levels of confusion over the numerous and varied symptoms. Was it a respiratory syndrome? A circulatory condition? Given that there are effectively no autopsies performed in China, early insights were hard to come by, delaying a more complete understanding of the disease progression. Obvious concerns about infection and transmission severely limited the number of completed autopsies in many U.S. hospitals.

As the pandemic progressed into the summer and fall of 2020, medical examiners started to elucidate issues around prolonged ventilator use and lung damage, as well as observing microscopic lung clots missed by other imaging modalities. It was not for several months after the pandemic’s onset that the systemic attack of the coronavirus became more apparent. Unfortunately, the question “did someone die with Covid or from Covid?” is still for many unanswered.

There is a misperception among many, exacerbated by the glorification of the field by CSI or Grey’s Anatomy, that technology has dramatically improved the accuracy and speed of autopsies. Notwithstanding the advances promised by “virtual autopsy,” improved computed tomography (CT), magnetic resonance imaging, 3-D surface scanning, and Lodox (low-dose, digital x-ray scanning), it is still true that smell and eyesight are the most effective tools utilized by medical examiners. The National Institute of Justice does acknowledge that big data analytics, multi-modal imaging, and augmented reality have meaningfully improved the ability to profile and reconstruct crime scenes which inform autopsies.

Very separate but related, technical advances have materially improved the organ transplantation field. Globally, the World Health Organization estimates that 150k transplants are performed annually (40k in the U.S. alone) and that 1.5 million people today have transplanted organs. Advances in hepatitis testing and better surveillance systems alone have dramatically increased the number of potential donors.

While the first transplant procedures were done with dogs in 1902, it was not until 1954 that the first human organ transplant operation was successfully performed (after developing effective immune suppression therapies). Today there are more than 250 transplant centers that coordinate with a national organ registry. Recent CMS rules promulgated in November 2020 seek to clarify under what conditions Organ Procurement Organizations (OPO) may be reimbursed, bringing much needed certainty to the field, and hopefully reducing the 20 preventable daily deaths for those waiting for available organs.

These rules also attempt to address significant racial disparities around organ availability and access. It is believed that the rules will also encourage greater donation rates while improving a registry’s ability to match viable organs with appropriate recipients. There are 58 OPOs today which coordinate securing consents, managing transportation logistics, and the clinical needs of the donors.

Obviously, for many hospitals, transplantation volumes dropped materially along with many other procedures due to Covid, while some stand-out organizations have seen an increase in case volume. Intermountain Healthcare, based in Utah, saw record organ transplant volumes due in part to its utilization of tele-visit platform to better assess patients and commitment to robust surveillance systems.

None of this is cheap. A kidney transplant is likely to cost upwards of $400k, while a heart transplant is estimated to cost $1.3 million, with on-going monthly bills of $2,500 for anti-rejection therapies (see Fortune’s 2017 estimates below). This begins to introduce a series of more troublesome issues such as how to handle a “free market” for organs and the precise determination of when someone has died.

A controversial 2013 essay by noted economist, Gary Becker at the University of Chicago, posited that monetary incentives for organs would materially eliminate the long transplant list while only increasing the costs of donated organs by 12%. He goes on to conclude that the price for a kidney would be approximately $15k and a liver would be $32k.

Juxtapose that to the illegal black market for donors; in 2009 the FBI broke up an organ trafficking crime syndicate, which was sourcing kidneys, mostly from Pakistan, the Philippines, and China, for street prices up to $160k. The Chinese Deputy Minister of Health in 2007 acknowledged that nearly 95% of organs were “sourced” from executed prisoners. More compliant donors are thought to receive upwards of $10k for a kidney. This is a supply chain fraught with profit margin issues. It also has introduced the concept of “transplantation tourism” as recipients have been known to travel overseas for such procedures, but that often introduces numerous other health issues.  

While a few organs can be donated from someone who is alive, many require the donor to be either brain dead or considered dead by circulatory death. Obviously, this ushers in another host of ethical debates – what is the definition of death? How are consents managed? As flagged earlier, there are real issues surrounding chain of custody and ownership of someone’s body who has passed. Medical examiners can only determine how someone died and is not looked to determine if someone is actually dead.

Where these worlds tragically collide is around murder rates, which increased nearly 40% in 2020 in the U.S.’s top ten cities. This dramatically reverses a general trend of declining murder rates since the early 1990s and is compounded by notable declines in “clearance rates” to solve these murders. In these same cities, clearance rates declined 7% last year to 59%; the rate of murders in Chicago increased 55% in 2020 and now has a clearance rate of only 46%. Surprisingly, Las Vegas solves 94% of its murders. In general, lower clearance rates are in part attributed to so many people wearing masks.

Sadly, there was one other disturbing study released last year by the New England Journal of Medicine which tracked 700k first-time gun owners from 2004 to 2016. Evidently, in that group, men and women are 8x and 35x more likely to commit suicide, respectively. A closer look at the data exposes that first-time gun owners are 100x more likely to commit suicide in the first month of firearm ownership (which tails down to 2x by the twelve year). Over the six months prior to the November 2020 election, background checks for gun purchases increased 50%. Suicide is horribly complicated and tragically is often a source of donated organs.

If you have any thoughts of self-harm or suicide, please pick up the phone right now and call the National Suicide Prevention Hotline at 1-800-273-8255

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Venture Capital Powers Through the Craziness…

The combined jackpot of the Mega Millions and Powerball lotteries this past week was nearly $1.75 billion, creating an unimaginable frenzy at liquor stores and bodegas all across the country. At the same time, the current Citi Research Panic-Euphoria Index, which tracks investor sentiment, is now flashing 2.01 (up from nearly 1.20 just this past December), which is deep in the “Euphoria” zone and 33% higher than the reading right before the correction/crash of 2000. Critics of trading platforms like Robinhood have observed that for many investing is now akin to gambling.

After a year when the NASDAQ powered ahead by 44% and the S&P 500 Index rose over 16%, the good times are clearly rolling. In November 2020, the level of margin debt to purchase stocks was at a record $722 billion (although interestingly, that is also a 15-year low as a percent of total market capitalization). According to a recent Federal Reserve analysis, household net worth in the U.S. increased by 3.2% in 3Q20 to $123.5 trillion, largely driven by dramatic increases in home prices. Household debt was only $16.2 trillion, suggesting a relatively unlevered populace but also a real concentration of wealth.

Maybe the public equity performance is well-deserved. FactSet recently reported that 4Q20 earnings have greatly exceeded analyst expectations with 91% of S&P 500 companies beating forecasts. Overall earnings decline has been 5.9% which is considerably better than the expected 12.7% decline estimated at the start of the quarter. Goldman Sachs economists just increased 2021 GDP growth forecast to be 6.6% with an unemployment rate at year-end of 4.5%, both marked improvements over earlier estimates and Wall Street consensus, and what we saw in 2020.

This “Everything Rally” generated an extraordinary fee windfall on Wall Street. Globally, investment banking fees tabulated by Refinitiv topped $124.5 billion (nearly the GDP of Kuwait) driven by $5 trillion of debt issuances and $300 billion of equity offerings. IPO fees alone were $13 billion. There were approximately 480 IPOs in the U.S. inclusive of 248 SPAC (special purpose acquisition company) offerings. According to Dealogic, the SPACs raised over $82 billion, which was 6x the 2019 SPAC level of activity; just in the first few weeks of 2021, there have already been $15 billion of SPAC offerings.

Venture capitalists were also swept up in all of this excitement, undoubtedly due to the $290.1 billion of exit activity in 2020. Of this activity, there were 636 acquisitions of venture-backed companies that accounted for $61 billion (approximately $95 million on average). Clearly, the IPO activity was dramatic: there were 102 venture-backed IPOs valued at $222 billion. Notably, just under 10% of exits were greater than $500 million in value, suggesting a significant number of more muted outcomes. One other word of caution – there were nearly 200 buyouts of venture-backed companies, and according to Pitchbook, median enterprise value/EBITDA was 14.1x in 2020, of which 6.3x was in debt, a near all-time high (leverage was 6.5x in 2014).

An estimated 12,254 companies raised a staggering $156.2 billion in 2020, a high-water mark for investment activity. While the 4Q20 level of $38.8 billion was slightly lower than each of the prior two quarters, there was a marked rotation to Late stage rounds which accounted for 29% of the deals but 67% of the capital invested. The impact of “mega financings” (greater than $100 million) was dramatic; there were 321 such financings which totaled $70.9 billion or 45% of all dollars were invested in less than 3% of the companies. In total, Late stage financings were $104.2 billion, while Early stage was $41.8 billion, and Seed stage was $10.1 billion.

Of particular interest is the median pre-money valuations by stage (below), which suggests that valuations for Seed and Early stage have been relatively consistent over the last two years, while there has been upward pressure on Late stage round valuations. Importantly, the median round size by stage was $2.3 million (Seed), $7.0 million (Early), and $10.0 million (Late), implying attractive step-up in carrying values for initial investors. Average round sizes for Early and Late stage rounds were $16.0 million and $37.3 million, respectively, highlighting again the impact of “mega financings.”

Industry analysts estimate that there is approximately $152 billion of “dry powder” stashed with venture capital funds now. The circle of life for venture firms is to generate significant liquidity which gives license to raise successor funds. The extraordinary level of exits this past year powered the $73.6 billion of fundraising activity by 321 funds, which while a smaller number of firms, this level was markedly higher than the $56.4 billion raised in 2019. The median fund size was $76 million, quite a bit smaller than the average fund size of $236 million, pointing to consolidation around a fewer number of larger established venture firms. The 50 first-time funds (16% of the funds) raised only $3.9 billion (5% of the capital), which is the lowest level since 2016. Forty-four of the 321 funds (13% of the funds) were larger than $500 million (64% of the capital). A case can be made that larger funds lead to larger financing rounds.

Obviously, there are a number of other contributors to venture capital performance but fundamentally liquidity drives much of the activity. The enormous $1.9 trillion relief package (equivalent to 13% of U.S. GDP) now grinding its way through the legislative process will provide a significant boost, as will the $284 billion of Paycheck Protection Program (PPP) loans, much of which will end up in the coffers of venture-backed companies helping to bridge to better days. The money supply has grown nearly 25% since March 2020 and yet inflation remains nearly invisible. Core Consumer Price Index (CPI) in 2020 increased a mere 1.6%; economist consensus for 2021 is for CPI to increase by just 1.8%, below Federal Reserve target of 2.0%.

With interest rates so low, there are rumbling fears that investors are clamoring for returns in increasingly risky corners of the capital markets. Notably, the Renaissance IPO Index, which invests in companies just after being publicly listed, increased nearly 110% in 2020. Something called the “Pitchbook SPAC Mobility Index” which tracks the $100 billion of 26 SPACs of electronic vehicle companies, increased 78% in 2H20. And the “bad boy” of assets classes, crypto currencies, saw a parabolic rise this past quarter coupled with ridiculous volatility, but lost 18% or nearly $100 billion in value just this past week.

Place your bets…

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