London Calling…

A few days in London during the height of the impeachment hearings might be a good respite I somewhat foolishly thought. With the grinding Brexit debate, there is now a furious and contentious sprint to a snap general election on December 12 to largely determine whether the U.K. finally departs the European Union (EU), all of this after a 2016 referendum compelling it to do so. As polling data increasingly suggest a victory by Boris Johnson’s Conservative Party, there is increased investor anxiety as the U.K. economy appears to be weakening (see below – PMI is the weighted average of the Manufacturing Output Index and the Services Business Activity Index). According to a recent Merrill Lynch global fund manager survey, a net 21% of respondents are below global benchmark indices for U.K. holdings.


The spectacular weather did its best to mask all of the political turmoil and made shuttling between meetings with investors and local entrepreneurs more enjoyable. Like most countries around the world, the U.K. has a healthcare system that is in transition, both incorporating novel technologies and moving to more value-based models. Most care today is provided by the National Health Service (NHS) which is generally free to permanent U.K. residents and is paid out of the general taxation authority of the government. In 2017, the U.K. spent 197.4 billion pounds on healthcare services or approximately 9.6% of GDP. Private healthcare providers are playing an increasingly larger role, capturing 11.8 billion pounds of that total in 2017.

The healthcare system also appears quite exposed to the Brexit debate, principally around labor shortage issues. Screaming headlines from The Guardian while I was there cited a study that indicated 90% of NHS senior staff believe the shortage is so severe that it is endangering patient safety. The Royal College of Nurses determined that the NHS has 43,000 nursing vacancies. The British Medical Association is outraged at “BoJo’s” Conservative Party’s plan to increase the annual fees that immigrants have to pay to work at the NHS from 400 pounds to 625 pounds; this fee is payable for each person in the immigrant’s family. Average nurse salary is 23,137 pounds, while junior doctors range from 27,000 to 46,000 pounds, implying a significant financial burden on foreign healthcare workers.

As in the U.S., healthcare has become a central topic of political debate. When more than 60% of the U.K. electorate ranks healthcare as the most important issue, the Conservative Party loses seats in the Parliament, which is what happened in 1997 and 2017. The Labour Party has never picked up seats when the healthcare issue is below the 40% level. Currently, 36% of the electorate ranks healthcare as the top political issue.

Perhaps reflecting heightened anxiety, last week BoJo dropped planned cuts to the corporate tax rate from 19% to 17%, generating an additional 6 billion pounds for the NHS, and this is in the face of repeated promises to lower tax rates which is a center piece of his agenda. Coincident with that announcement, the NHS announced that it will cover the income tax for doctors who work extra shifts, in part to address the labor shortage.

Against that backdrop, I was excited to tour the new Cleveland Clinic hospital under construction in London’s Belgravia, a short walk from Buckingham Palace. Clinic leadership highlighted the attractiveness of the London market and the strength of the local healthcare ecosystem. Somewhat in response to the NHS’s call for greater levels of innovation and enhanced physician leadership models, the Clinic is excited to foster a deep culture of innovation and increased standardization of care pathways to improve outcomes. There is also an opportunity to leverage the Clinic’s tremendous brand in a market where patients are unbelievably trusting of specialists. Coincidentally, last week the Independent Healthcare Providers Network warned that should the Labour Party prevail that 42 new hospitals will be needed in England in light of expected onerous new work rules.

As evidenced by the several hundred participants at the healthcare technology conference I spoke at, it appears that the healthcare technology sector is quite robust in the U.K. While precise data are hard to come by, the sector in the U.K. was estimated to be 2.7 billion pounds (approximately $3.5 billion) in 2018 by Deloitte, which was quite an increase from the 2 billion pounds in 2014.


UK Healthcare Sector


In addition to the breadth of the technologies, the robust growth rates suggest strong adoption as the U.K. healthcare system is re-architected to be more patient-centric and with the introduction of value-based models. As evidence of that, I had a chance to visit with senior leadership of Babylon Health, which has raised over $600 million at over $2 billion valuation and is providing comprehensive remote health services across the U.K. and other markets.


UK Sector Growth


With this rapid proliferation of technology comes a number of the other concerns expressed by regulators. The Financial Times last week released a study of the top 100 healthcare websites, announcing that 79% of them use cookies to track user traffic for monetization. This announcement was coincident with the Ascension / Google imbroglio that revealed millions of patient records had been shared. All of this compounded the controversies surrounding Google’s DeepMind data contract with the NHS. Last week even Angela Merkel of Germany piled on by warning that the EU should claim “digital sovereignty” by developing proprietary platforms to lessen dependencies on Google, Amazon and Microsoft.

Naturally, that got me thinking about the state of the European venture capital sector which has seen 25.4 billion euros invested year-to-date, ahead of 2018’s high-water mark of 23 billion euros, according to the Pitchbook 3Q19 Euro Report. Of that total, 7.7 billion euros was invested in the U.K. this year (30% of total) and 8.1 billion euros in 2018. While there is no obvious Brexit impact, the record U.K. levels are attributed to marked increase in deal size, greater prevalence of later stage rounds (22% of the number of deals, but 60% of the dollars invested), and the proliferation of technology clusters outside of London such as Cambridge, Oxford and Bristol. Unfortunately, exit activity in the U.K. has been somewhat lackluster year-to-date with only 339 venture-backed exits at 7.2 billion euros in value (as compared to 469 and 52.9 billion euros in 2018, respectively). Across the EU, fundraising activity has been quite healthy with 7.1 billion euros raised across 55 new funds year-to-date; venture capitalists in the U.K. accounted for 3.7 billion euros and 24 funds, respectively.

One other U.S. technology company is squarely in the sites of U.K. regulators and that is Uber, which just this past week lost its license to operate in London (although it will continue to operate during what should be an extended appeals process). Evidently, over a few months earlier this year, there were in excess of 14,000 unauthorized trips, mostly instances when 43 uninsured drivers swapped their identification photos – two of those drivers did not even have a drivers license. They should “brexit” those guys.

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