There were a number of very exciting developments in the healthcare technology sector this past quarter. After a relatively modest investment pace in 1Q19 of $1.0 billion, nearly $3.2 billion was invested in 119 companies in 2Q19 according to Rock Health data, suggesting that the investment pace this year may be slightly ahead of last year’s record high of $8.2 billion. This level of activity reflects what continues to be an extraordinary market opportunity as the “business of healthcare” is transformed. Industry dynamics today demand innovative business models and novel technologies that will leverage advanced analytics and mobility to enable value-based healthcare. The overarching pressures for better outcomes at lower costs will create important and valuable new companies.
Furthermore, the adoption of healthcare technology solutions is accelerating. Many companies launched earlier this decade can now point to measurable impact on outcomes and costs. Companies more often than not are able to claim real attribution for the successes of their products and services; that is, they are able to calculate an ROI with actual data. Repeatable business models are now better understood (product development timelines, successful “go-to-market” strategies, etc.) and more predictable. What this really means is that entrepreneurs are able to consistently build big businesses. The sector is reaching an important threshold level of maturity and investors are recognizing that.
In addition to the level of investment activity, there were a number of other strategic developments and announcements in the healthcare technology sector this past quarter. Investors eagerly anticipated the very notable IPOs of Livongo, Health Catalyst and Phreesia (all priced in July 2019) and were excited about the building backlog of other IPO candidates. While there were only a dozen significant M&A transactions, some of them were potentially transformative such as Dassault System’s $5.8 billion purchase of Medidata, UnitedHealth Group’s acquisition of PatientsLikeMe, and Best Buy’s acquisition of Critical Signal Technologies. There were also a number of smaller acquisitions, but nonetheless very notable, such as Apple’s acquisition of Tueo Health, which speaks to the attractiveness of the sector from non-healthcare companies.
Product releases such as Alexa Skills for healthcare or the Centers for Medicare and Medicaid Services expanding access of telehealth services for Medicare Advantage members deepen the narrative that healthcare technologies will continue to be a core part of delivering care in non-traditional settings. Additionally, the Food and Drug Administration announced a streamlined regulatory framework with its “Digital Health Software Precertification Program” which underscored the sector’s importance.
Against a backdrop of extraordinary overall venture capital liquidity in 2Q19, and with the very well-received IPOs of Livongo and Health Catalyst two weeks ago, a fair question is to look closer at investor liquidity in the healthcare technology sector. Rock Health (disclosure: Flare Capital is an investor in Rock Health’s seed fund) analyzed in detail the $36.3 billion private capital invested in the 1,274 digital health companies that they track since 2011, concluding that $29.4 billion is still “at work.” There are 23 companies which have raised over $7.9 billion that are both mature and likely IPO candidates, suggesting significant potential liquidity for this sector. Importantly, only $1.5 billion was invested in companies that were shut down, which is a relatively modest capital loss ratio given the typical risk profile of venture capital investments (of course, some of the $4.1 billion of M&A activity is likely quite underwhelming).
Arguably, healthcare is one of the cornerstones of any impact investment strategy. Recent public equity investor attention has become quite fixated on the “socially responsible” impact sector. Notably, in 1H19 those funds experienced record inflows of $8.4 billion according to Morningstar adding to the roster of public equity healthcare investors. In all of 2018, there was $5.4 billion invested in these funds, bringing the five-year total to $35 billion. Hopefully, healthcare technology will continue to be a sector where one can “do good and do well” at the same time.