Digital Health: Sprinting to Year End…

Notwithstanding the election results tomorrow / next few days / next few weeks (God forbid), the investment activity in the healthcare technology sector will continue to power ahead. The pandemic and its assault on public health infrastructure and the healthcare system has exposed significant shortcomings, all to be solved by transforming the “busines of healthcare.”

In part a response to COVID-19, investors have poured $4.0 billion this past quarter into 97 digital health companies (per Rock Health), suggesting that this sector will likely see more than $12.0 billion invested in 400 companies for the year. Interestingly, the average round size in 3Q20 was $41.2 million, greater than the year-to-date average of $30.2 million, suggesting increasing investor enthusiasm as a number of emerging winners become clearer. Across all industries, venture capitalists invested $37.8 billion in 2,288 companies in 3Q20, implying that the digital health sector is now nearly 11% of all venture investment activity.

A MobiHealthNews analysis tabulated an even more robust $4.6 billion invested in 109 digital health companies in 3Q20. In addition to the obvious investor interest in telehealth and virtual care models, a number of other themes emerged this past quarter such as prescription management and on-demand pharmacies, remote monitoring, patient triage and advanced data analytics. Year-to-date MobiHealthNews identified 24 companies that raised rounds larger than $100 million which accounted for 41% of all dollars invested in the sector so far. The three most dominant themes in 2020 have been on-demand services ($2.0 billion, of which $1.6 billion was for telehealth), technologies to accelerate R&D programs ($1.3 billion), and the fitness/wellness sector ($1.3 billion).

Much of this investor interest has been reflected in the public stock market as well. According to SVB Leerink, the public “HC: Tech/Services” index has increased 44% over the last twelve months, dramatically outperforming the S&P 500 index which only gained 8%. Furthermore, valuation multiples for this sector are quite robust. At the end of 3Q20, the average Enterprise Value (EV)/Revenue multiples for 2020 and 2021 were 6.9x and 5.6x, respectively, while the average EV/EBITDA multiples were 15.0x and 13.9x, respectively. The average P/E multiples were 24.0x and 20.9x for 2020 and 2021, which according to a Barron’s analysis is still below the current S&P 500 Information Technology index P/E multiple of 27.0x.   

In addition to the promise of disruptive novel technologies creating valuable new venture-backed companies, the size of the healthcare technology markets are also quite seductive. Pitchbook recently sized just the health and wellness sector to be $640 billion, growing to $1.3 trillion by 2025. Additionally. the impact of the COVID-19 crisis has identified a number of new urgent priorities that policymakers, employers, and healthcare organizations will need to address, which should drive increased investment in this sector and further consolidation. Flare Capital has identified this as the “Response to Pandemic” phase of the healthcare technology sector.

In the wake of the $18.5 billion merger of Livongo and Teladoc, TripleTree flagged a number of specific M&A themes that have taken on greater prominence: improved risk and compliance solutions, enhanced payor technologies, greater attention on post-acute models, and improved risk-bearing primary care services. Two other themes were flagged: increased M&A activity by SPACs (see MultiPlan, Clover Health, Augmedix) and the continued engagement of corporate venture capital entities, currently participating in ~15% of all digital health financings.

Notwithstanding all of the investor excitement, it is quite clear that the entire healthcare system will not be virtualized. Even with COVID-19 cases surging now, the number of telehealth visits are declining as a percent of all visits. According to an analysis by The Commonwealth Fund, the incidence of telehealth visits has settled in at about 6% of all visits, which somewhat tempers the starry-eyed enthusiasm of uncapped upside to these solutions. Quite clearly while hospitals and doctors’ offices are still operating below pre-COVID levels, the role of traditional in-person care models will be quite enduring. In fact, the leading public medical real estate investment trusts (REITs) continue to trade in a relatively robust range of 18x – 22x operating income, suggesting quite a bright future still.  

Obviously, the next few days will be nerve-wracking, anxiety inducing, sleep depriving. I am glad that I do not wear a Whoop which would be firing all sorts of alerts (although it did just raise $100 million round which will be reflected in 4Q20 data), further elevating the stress levels. I may be enticed to purchase hologram machine from PORTL Hologram which just raised a seed round to build a machine to transport ourselves far away (of course, the first generation of their machines will just be our images). In any event, the volatility index (VIX) clearly is anticipating a very rocky period in the public markets. Any resemblance to my EKG chart is coincidental. Thank goodness it is not a flat line…

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