Category Archives: Uncategorized

2019 – Groundhog Year…

Rinse and repeat. In many important ways this past year felt very much like 2018. Many pundits had expected that the great bull market would finally come to an end, interest rates would rise, inflation would kick in, and unemployment rates would start to increase. None of that happened.

While there was a notable shift in investor sentiment on profitability over growth at all costs, particularly in light of the failed WeWork IPO, the $136.5 billion of venture capital investments in 2019 nearly hit the all-time high of $140.2 billion registered in 2018. Ten years ago, coming out of the Great Recession, venture capitalists invested just over $31 billion, less than a quarter of the current activity. Quite clearly this robust pace was driven by an extraordinary year for exit activity. For all of 2019, there were 882 liquidity events which totaled $256.4 billion in exit value, a high-water mark nearly doubling any prior year and perhaps not likely to be seen again.

But be forewarned: 2019 was the first year in nearly 20 years that 40% of all public companies lost money (negative net income) and yet the Dow raced to 29,000, now trading at 25x P/E ratio for the S&P 500 index.

As with any headline, there are nuances beneath the surface which make the story somewhat more complicated. As shown below, even the quarterly investment pace slowed significantly in the number of financings and likely suggests growing concerns among VCs to make new commitments heading into an election year with an impeached President and the Dow now marching to 30,000. Even the exit activity was heavily weighted to the first half of 2019 and skewed by the $75 billion valuation of the 2Q19 Uber IPO. In fact, this past quarter saw only 174 exits valued at $18.8 billion.

 

4Q19 VC

 

Notwithstanding that the 4Q19 pace is more than $13 billion less than what was registered in 4Q18, for the entire year the amount invested and number of deals across all stages were relatively consistent between 2018 and 2019. This past year there were 4,556 angel and seed deals which raised a total of $9.1 billion as compared to 4,541 and $9.2 billion in 2018, respectively. For early stage investments the amount invested and number of deals were $42.3 billion and 3,624 in 2019 and $43.3 billion and 3,722 in 2018, respectively. The same holds true for late stage activity: $85.1 billion and 2,597 in 2019 and $87.7 billion and 2,279 in 2018, respectively.

More than 62% of all capital invested in 2019 was in late stage deals, suggesting that investors may be focusing on less risky, more mature opportunities. In point of fact, 181 deals in 2019 were larger than $100 million; 53 of those 181 deals were for early stage companies, raising $9.7 billion (or 23% of early stage deals were larger than $100 million).

According to Crunchbase, globally there were 455 financings in 2019 that were greater than $100 million in size, raising in total $108 billion. Given the increased scrutiny on IPOs (and the possible emergence of direct listings which largely side-step Wall Street), it is noteworthy that of all of the “mega rounds” greater than $100 million between 2008 – 2015, 19% of those companies went public – a rate far greater than companies that did not raise such a round.

All of this robust investment activity in the late stage marketplace has clearly put upward pressure on valuations as shown below. A mere five years ago median late stage valuations were just over $50 million and now are close to $90 million (average late stage valuation in 2019 was $488 million, clearly skewed by the 155 unicorn financings) as shown below. Median late stage round size was up slightly over the last five years from $9.0 million to $10.4 million in 2019, suggesting that investors now are owning a far smaller percentage of these companies. Another implication is that early stage investors are showing dramatic unrealized mark-ups in their portfolios.

2019 Valuations

The real story in 2019 was about exit activity. Of the 882 exit events, 627 were acquisitions and 80 were venture-backed IPOs. Interestingly, the investments to exit ratio was 12.2x in 2019, a level not seen before (2018 was 10.4x) indicating a growing backlog of private companies. While the $256.4 billion of exit values last year somewhat masks a relatively weak 4Q19 for exits, undoubtedly significant liquidity to LPs will be recycled as new commitments to new funds. Fundraising last year hit $46.3 billion across 259 funds which was the second strongest year behind the $58 billion raised in 2018. The median fund size was $79 million while the average fund size was $182 million, highlighting that the venture industry continues to see a “barbell” phenomenon with a handful of mega funds co-existing with many small micro funds; 93 funds were less than $50 million in size.

According to Preqin, there is $276 billion of “dry powder” held by US venture funds, which is ~3x the level in 2012. Preqin also estimates that there is $365 billion held by Asian venture capital firms, of which $100 billion is uninvested “dry powder.”

Elsewhere, the level of U.S.-based venture capital investment in China is estimated to have dropped to less than $4 billion last year from an extraordinary level of $17.4 billion in 2018, according to an analysis by the Rhodium Group. Obviously, this reflects the grinding trade war with the U.S. but also may be impacted by China’s 6.1% GDP growth rate in 2019, meaningfully below 7.0% – 10.0% over the past decade. The level of venture capital invested in the U.K. hit a record of $13.2 billion in 2019, an annual increase of 44%. Germany and France venture capital activity increased 41% and 37%, respectively. Clearly in an economic environment with near-zero interest rates and uncertain GDP and trade growth rates, investors appear to be seeking return investing in innovation in relatively stable jurisdictions.

 

2019 Growth

 

Extraordinary levels of raised capital was not just for venture capitalists. Preqin also flagged that the private equity industry has $772 billion of “dry powder” and raised $595 billion globally last year. Perhaps signaling investor desperation for yield, more than 25% of all IPOs last year were by special purpose acquisition companies (SPACs) which do not have any operations and are “blank check” companies whereby the issuer then has two years to acquire an asset. Over $13.6 billion was raised in 59 SPAC IPOs last year. And all of this against a backdrop of lower rates and a Federal Reserve that injected a few hundred billion dollars into the financial system this past fall. Hmmm.

So, this will close with a word of caution and that involves global debt levels, which hit a record of $253 trillion (with a “T”) in 3Q19 according to the Institute of International Finance. The debt to global GDP ratio of 332% is also a record and cause for significant alarm. While much of this debt are obligations of governments and non-financial corporations, the risk for systemic instability is real and very present should interest rtes spike or global economic growth continues to slow.

 

2019 Debt

 

Leave a comment

Filed under Uncategorized

Flare Capital Team Upgrade…

Last week we made two somewhat related announcements, both of which look to further deepen the Flare Capital bench.

Parth Desai, who joined us as a Senior Associate in March 2019, was promoted to Principal, largely in recognition of his tremendous contributions to the investment activities of the firm. Parth has identified a number of compelling new investment opportunities, and more importantly, has introduced us to extraordinary entrepreneurial talent. Venture capital is all about working with the best entrepreneurs and Parth has made a significant impact there. It was quickly evident to us that his industry insights and strength of network were viewed as real assets by many people we wanted to back. In addition to terrific investment judgement and being a lightning rod for great people, he is an absolute delight to have around.

Notably, Parth has also taken on the oversight of the Flare Scholars program, which is a five-year old initiative offering professional development for people who are earlier in their careers, excited about healthcare technology innovation and want to learn about venture capital. With the Class of 2020, which will be announced shortly, there are nearly 150 current and former Flare Scholars. Many of them have gone on to either start exciting new companies, join leading healthcare technology companies, or join other healthcare investment firms. Scholars either come from leading schools around the country or innovative healthcare companies. Parth was a Scholar himself.

Concurrent with the new Scholar class, we are excited to announce the formation of Flare Scholar Ventures, whereby we have allocated a portion of our newest fund to invest in Scholar-backed opportunities. Many of our Scholars are looking to start companies and only need a small amount of capital to knock down early technical or commercial milestones. Our hope is that Scholar Ventures may help stand up as many as a few dozen companies backed by what we have come to believe are some of the most compelling young entrepreneurs in the healthcare technology sector. Scholar Ventures
According to Rock Health, $7.4 billion was invested in the digital health sector in 2019, which while modestly down from the $8.2 billion invested in 2018, still suggests that there is plenty of capital available but much of it was for more mature companies (average deal size in 2019 was $19.8 million). Working with many of our Scholars, we determined that the market opportunity was to provide “pre-seed” financing to get them started. As roughly half the Scholar classes are academics, we expect to see a number of very novel, super technical projects where we would look to connect them with strong commercial and product leaders from our network. Conversely, the other half of the Scholar classes are from industry and see firsthand where the healthcare system needs to be re-invented.

If Parth’s trajectory is any indication, we have plenty of reasons to be excited about what Scholar Ventures spins up.

Leave a comment

Filed under Uncategorized

Pharmacists in the Vortex…

Did you know that there are over 314k pharmacists in the United States? Amid all of the bluster around “Medicare For All” and cost of drugs, the front line of healthcare is often manned by the pharmacist standing sentry in over 67k pharmacies and hospitals. Medscape estimated that 5.8 billion prescriptions were filled in 2018 or 17.6 per person, underscoring the pharmacist’s role in potentially bending the cost curve and closing gaps in care.

The pharmacist has taken on a much more expanded set of responsibilities as the complexity of therapeutic options has increased and with the dramatic rise in chronic disease. Pharmacists are increasingly providing important clinical services, advising patients about drug selection, dosage, potential harmful drug interactions and side effects. They have also assumed a much more profound role in public health issues, while deploying strategies to better drive adherence and compliance, reduce medical errors, and therapeutic reconciliations.

First some industry context. There was a doubling of pharmacy schools over the last 30 years; there are now 143 accredited institutions. This naturally led to a concomitant explosion in the number of pharmacists which put pressure on compensation. According to the American Pharmacy Journal of Education, median pharmacist income in 2018 was $126.1k or approximately $60 per hour. The Bureau of Labor Statistics (BLS) estimates that job creation between 2018 – 2028 will essentially be flat, in large measure due to challenges confronting retail pharmacies. BLS estimates that 57% of pharmacists work in retail, 26% in hospitals, and the remaining 17% either in wholesale, online pharmacy or government settings.

Ironically, while the increasing complexity of the role has led to greater demand for quality pharmacists, it is not expected to increase the number of job openings. As more of the industry moves to central-fill shipped to retail distribution models, pharmacists will need to provide more counseling services to augment the drop in dispensing activities. Scanning the nearly 64k-member Reddit Pharmacy community comments reflects much of the workplace pressure on these healthcare professionals.

The turmoil both at retail and with pharmacy benefit managers (PBM) has been widely reported. As products traditionally purchased at traditional retailers (pharmacies and supermarkets) move to online, pharmacies are looking to meaningfully repurpose that real estate, often offering important clinical services. As a source of product differentiation, PBMs are looking to develop clinical services to augment existing drug formulary products. Walgreens and CVS are establishing offerings to treat chronically ill people in-store. Analysts estimate that early attempts to offer clinical services, initially focused on less severe episodic issues, are now evolving to a focus on chronic conditions, promising repeat foot traffic. Two months ago, Walgreens announced closing 160 walk-in clinics, while CVS announced that it would roll-out over 1,000 HealthHUBs, a more evolved model of MinuteClinic.

All of this disruption to the pharma supply chain is not lost on the venture capital community. This past quarter witnessed a marked increase in both the amount of capital invested ($1.0 billion) and number of deals (44). Much of this activity reflects opportunities for improved delivery and access, novel payment models, as well as solutions to enhance compliance and adherence.

Pharma-Supply-Chain-Funding

But there are other industry developments which directly affect the role of the pharmacists. Thomas Menighan, President of the American Pharmacists Association (APhA), in our conversation highlighted a number of issues which his organization is navigating. One involved establishing clarity around “provider status” which would allow pharmacists to bill for discrete services above and beyond the dispensing fees. Additionally, the APhA is very focused on securing relief from “direct and indirect remuneration” (DIR) fees assessed by PBMs to offset member costs, thereby bringing a greater degree of transparency around rebates. The APhA, with 60k members and a $50 million budget, recently secured favorable language in the Prescription Drug Pricing Reduction Act to address DIR.

Menighan stressed the important role of technology as the pharmacist workflow is transformed. For example, the development of digital platforms to more effectively manage the opioid crisis and to improve interventions will be critical. The Pharmacy Quality Alliance is creating quality metrics and surrogate measurable markers to address attribution when determining quality ratings. Menighan is hopeful that with greater analytics, pharmacists will be better equipped to quantify their contributions in collaborative value-based care models, perhaps billing separately, particularly with the increased prevalence of high deductible plans with patients having to take on greater responsibility for drug costs. Provocatively, Menighan predicts that “85% of pharmacist jobs in ten years have not yet been invented.”

David Medvedeff, CEO and founder of Aspen RxHealth, cited medication synchronization (“med synch”) as another profound industry development that requires greater clinical services to be provided by pharmacists (DISCLOSURE: I am on the board of Aspen RxHealth). Patients on multiple medications are harmonized to all be prescribed on the same day, thereby closing gaps in care with greater medication management and oversight. Arguably, this will improve adherence but likely will reduce traffic at retail and possibly the number of opportunities for face-to-face clinical interventions.

Medvedeff cited a handful other industry developments. Retailers are increasingly competing on convenience and same/next day delivery, all of which further reduces access to neighborhood pharmacists. Notably, though, dispensing contracts are tied to clinical performance (closing gaps, etc) which potentially elevate the pharmacist’s role. Insurance plan design is increasingly playing an important role. High deductible plans are causing patients to look for lower cost alternatives such as generics and mail order, further complicating the role of pharmacist at retail. Approximately 90% of all therapeutics prescribed are generics, yet only account for 25% of total U.S. drug spend. While not highly profitable, generics ensure significant repeat foot traffic that is now at risk of moving to online distribution. One other unknown: the role of digital therapeutics (DTx), while very modest in volume today, presents a conundrum for pharmacists. What will their role be with software therapies?

Earlier this month, Centers for Medicare and Medicaid Services (CMS) reported that national healthcare spending in 2018 increased to $3.65 trillion or $11,172 per person (or 17.7% of GDP). Notably, retail prescription drug prices declined by 1% last year which was the first year since 1973 that prices declined, largely attributed to the role of generics, although overall retail prescription spend increased 2.5% to a total of $335 billion. In-patient pharmacies, chemotherapies and infusion increased more dramatically around 4.5% in 2018.

Rx Spend

If past is prologue, pharmacists should be jacked up. According to a report by Georgetown University’s Center on Education and the Workforce which looked at 40 years of longitudinal income data across 4,500 colleges and universities, the Massachusetts College of Pharmacy and Health Sciences (MCPHS) had a greater net economic gain than Harvard University. MCPHS was ranked #3 nationally with $2.4 million of net gain over 40 years versus Harvard at #8 with $2.0 million net gain. It gets better as the top three institutions overall are all pharmacy schools. Presumably, as the role of pharmacists become even more integral to overall patient care, expect these metrics to improve even further.

While none of this improves pharmacist eyesight, perhaps these types of cartoons will be less funny in the future as the pharmacist role becomes more vital…

eye-test-for-pharmacists

Leave a comment

Filed under Uncategorized

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.

UK PMI

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.

Leave a comment

Filed under Uncategorized

China in a Healthy Transition…

The first morning after arriving in China last week was the hardest. As I sipped an unusually strong blend of Chinese tea, reading the China Daily, I was pleased to see one of the lead articles describing in glorious detail the health benefits of tea, which evidently was first consumed in 2737 BC in China. Apparently, it has now been shown in a 25-year longitudinal study that tea drinkers had “better organized brain regions” which certainly sounded useful.

Obviously, it is a complicated time for an American to be in China, and absent one of my taxi drivers proclaiming deep affection for the President of the United States, most conversations steered quite clear of the geopolitical tensions. Frankly, it largely appeared to be business as usual, with a slight undercurrent of concern around general economic conditions. The 3Q19 economic growth rate of 6.0% was announced last week, a marked deceleration from prior quarters (although anecdotal evidence suggests actual growth rates may well be quite a bit lower). The state planning agency called the National Development and Reform Commission declared that this was due to an economy shifting from “rapid growth” to “high quality development.” Clearly, though, trade tensions are directly affecting cross-border transaction volumes.

 

China M&A

Notwithstanding that the GDP growth rate over the last five years in China was 3x what was experienced in the United States, the MSCI China Index has increased only 18% versus the 50% increase of the S&P 500 Index over that same period. The International Monetary Fund is now forecasting 2019 global GDP growth to be 3.0% and China economic growth in 2024 to be 5.5%. Notably, the revenues of Chinese operations of U.S.-based companies will be $544 billion this year, underscoring the inter-dependencies of the two economies.

Analysts point to a number of factors for this deceleration including the financial drag caused by the central bank’s dominance of the financial system which tends to crowd out private companies in favor of state-owned enterprises. Clearly, the trade dispute looms ominously given the inconsistent progress after 13 rounds of bilateral talks. Issues including protection of intellectual property, cyber theft, government subsidies, and technology licensing (putting aside NBA tweets, turmoil in Hong Kong, the blacklisting of Chinese technology companies) ensure that the ultimate resolution is not even on the horizon. Barron’s estimates that the trade dispute will cost the global economy $770 billion in 2020, equivalent to the economy of Switzerland.

This week marks the start of the Communist Party’s Fourth Plenary Session of the 19th Central Committee, which is fraught with political intrigue. From such gatherings tend to come broad policy directives which analysts parse very carefully. Out of a similar session ten years ago it was decided with great fanfare that the Chinese renminbi (~7 RMB : $1 US) would play a greater (near equivalent) role in international trade as the U.S. dollar does to reduce China’s exposure to foreign exchange rate risk. Today, according to the Bank for International Settlements, 88% of all transactions involve the dollar while the RMB only accounts for 4%. Only 2% of total foreign exchange reserves are in RMB.

I was also interested in another article in the China Daily that provided progress on the 12th Five-Year Plan of the Healthcare Industry (2016-2020), which has three core tenets: increase the advancement of healthcare technologies, increase the capabilities of the domestic pharmaceutical industry, and drive increased consolidation. While the healthcare industrial complex in China is undergoing extraordinary reinvention to serve the needs of its 1.4 billion residents, centrally managing such a complicated system may at times appear ambitious, if not aspirational. Today, it is estimated that there are 300 million people who have chronic diseases and that by 2030 there will 360 million people over 60 years of age.

Even estimating the size of the Chinese healthcare market is complicated with at times quite divergent assessments. The research firm Eastspring China pegs the market in 2020 to be approximately $800 billion. Notwithstanding that, it is readily apparent that the opportunity is enormous given the stated priority of various central government directives and that it should naturally be on parity with other developing economies. China accounts for only 3% of global healthcare spend yet has 20% of the world’s population.

 

China Market Size

Per: Eastspring China (July 2019)

 

The 19th Central Committee has put forth its national healthcare strategy called “Healthy China 2030” which has set forth private commercial insurance as an essental component of a multi-level health security system. EY estimates that China spends slightly more than 6% of GDP on healthcare and that out-of-pocket is approximately 30% of that spend. There are 149 health insurance carriers operating in China that generated total health insurance premium revenue in 2017 was $62.7 billion. Between 2012 – 2017, the health insurance market grew at over 20% per annum.

The current single payor model with a high degree of government involvement has shown recently a willingness to experiment with novel payment and care models, even involving on a limited basis the private sector to participate. Some of the large successful internet companies (Alibaba, TenCent, etc.) are launching forays into healthcare, not unlike what is unfolding in the United States. According to Dezan Shira & Associates, a leading Asian business intelligence firm, the healthcare technology sector in China should reach $28.6 billion by 2026, which represents a 10-fold increase from 2016.

Given over 700 million Chinese now have smart phones and/or reliable access to the internet, critical early healthcare technology applications include delivery of online medical content, booking patient appointments, online payments, and accessing test results. Notably, the Organization of Economic Development estimates that there are only 1.8 doctors for every 1,000 people in China. There are 2,300 “top-tier” public hospitals and another 950,000 “low-tier” community health centers and clinics. The provider infrastructure is inadequate and must be augmented by innovative technology solutions.

Another article from the China Daily last week heralded the roll out of a centralized platform that inventoried all of the pharmaceutical industry assets in-country. Evidently there are 1,500 CROs, 3,500 pharma companies (although the China Chamber of Commerce estimates that there are 8,500 pharma companies and 16,000 medtech companies!), 2.37 million distinct healthcare products sold in China, and 50,000 healthcare investors.

A consistent theme echoed by healthcare industry leaders was the urgency to migrate from being principally a generics industry to a global leader in “first-in-class” novel therapeutics (95% of existing capacity is generics). According to the Chinese Academy of Sciences, between 2010 – 2018 more than 72% of novel therapeutic development was in the United States, while only 3% was in China. As part of this transition, there is a stated objective to shift to products and services that provide premium clinical benefits, a greater focus on ensuring equitable patient access, and to increase pharmacoeconomic value and affordability – not unlike much of the regulatory debate in the United States today.

Interestingly, the MSCI China Healthcare Index had a cumulative market value of $275 billion at the end of 1Q19 as compared to the U.S. Healthcare Select Sector Index of $3.5 trillion. The publicly traded Chinese biotech companies have historically invested considerably less in R&D as a percent of revenues (see below); given the stated goals to challenge U.S. and European pharmaceutical companies in the novel therapeutic development, one should expect that relationship to change materially. One immediate implication of this is likely to be a more robust market opportunity for AI and Real World Evidence (RWE) solutions that will improve drug development processes.

 

China Pharma

 

One last observation unrelated to healthcare which involves the level of Chinese debt, a constant source of concern among investors which is now generating heighten levels of official anxiety. The National Development and Reform Commission recently observed that high yield debt issuances doubled in 2019 over 2018 to $51.8 billion, 90% of which was issued by real estate developers. Total debt issuances in 2019 are estimated to be over $67 billion. Outstanding real estate debt alone is now estimated to be $571 billion, $28 billion of which comes due in 2020 according to Dealogic. The Financial Times this weekend highlighted that of the 43,600 desks at WeWork China in Shanghai, 35.7% of them were unoccupied (worse in Shenzhen with 65.3% unoccupied). Slowing growth and elevated levels of debt are something to watch closely.

2 Comments

Filed under Uncategorized

Greek Life…

Having just returned from a week in Greece, I may well have taken a few years off my life. If you have spent time on some of the Greek islands, you certainly know what I mean. And what a time to have been there, on the heels of a dramatic transition in political power (July 2019) and a resurgent economic environment, there was a sense of optimism that one would not have expected for a country emerging from a crushing economic crisis over the past dozen years.

Analysts assessed the situation in Greece a decade ago as more dire than that of the U.S. during the Great Depression of 1929. Unemployment rates spiked to over 28% from 9.7% in 2009; it now stands at 17%. Promises of meaningful structural reform by incoming Prime Minister Mitsotakis of The New Democracy party were enthusiastically received by global investors this summer, as he ushered out the far left Syriza political party and years of political turmoil. Year-to-date, the MSCI Greek ETF index far outperformed the U.S. Dow Jones index 35.5% to 15.0%, respectively.

 

Greek Equity.jpeg

 

This is likely to be the best year in the Greek equity markets in 20 years and the Greeks seem to be enjoying it given what we witnessed of the night life in Mykonos and Santorini (of course, maybe it is always like that). The Athens Index price/earnings ratio spiked from 10.4x at the end of 2018 to 14.1x now. The current European Union GDP growth forecast for Greece in 2019 is 2.9%, remarkable given that GDP collapsed by 45% from 2008 to 2016 as the country suffered through multiple austerity plans.

 

Greek GDP

This was considered the greatest economic collapse for any country during peacetime. Three out of every ten companies failed this past decade according to the Greek Center of Planning and Economic Research. The level of public debt in 2018 was 183% of GDP and according to International Monetary Fund forecasts, will only be down to 135% by 2028. Currently, with $218 billion in GDP ($20.5k per capita), Greece only ranks #51 in size of economy. The ability to raise capital in the midst of the crisis became prohibitively expensive and restrictive.

 

Greek_bond_10_year_historical_STL (1)

In the midst of all of this economic carnage was the historic refugee crisis, with hundreds of thousands of people literally washing up on the shores of the Greek islands. According to the International Rescue Committee, Greece today hosts approximately 50k refugees, this in a country with only 11 million residents. Unfortunately, there has been a recent spike in arrivals, at rates greater than at any time over the last three years when the European Union severely restricted inflows.

The hand that PM Mitsotakis was dealt was quite problematic. Greece ranks as the second lowest in overall competitiveness in the European Union. Of the 140 countries ranked by the World Economic Forum, Greece was #44 in something called “innovation capability,” #72 in business dynamism, and #129 in access to venture capital. In fact, according to the Found.ation Accelerator in Athens, there was a mere 117 million euros in venture capital investments in 2018 with three companies accounting for nearly 70% of that.

Of particular interest, as a healthcare investor, was to better understand the impact of this period of severe economic distress on the general health of the Greek population. With an increasing understanding on the role of social determinants of health, what would be the impact when the entire system is completely overwhelmed.

The Greek National Health System, established in 1983, has been fraught with numerous inefficiencies from an overly centralized decision-making framework, to poor resource allocation models, and inadequate investments in healthcare technologies. Notwithstanding that average life expectancy now stands at 80.9 years, the current healthcare system is not considered at all patient-centric and inadequately responsive to current demands. Of note, Greece ranks #31 in life expectancy of the 228 ranked countries; as point of comparison, Monaco tops the chart at 89.3 years while Namibia ranks devastatingly last at 50.9 years. Years from now, it will be quite informative to see the impact of the economic crisis on longevity trends.

As part of the bailout terms set by European Central Bank and International Monetary Fund, Greece had to open historically protected economic sectors, implement austerity steps, address systemic corruption, and dramatically reduce public expenditures, notably those on public health services. According to the World Health Organization in 2014, public healthcare spending was 13.2% of overall government expenditures in 2006 which dropped to 11.5% in 2012, which was nowhere close to the established target of 6.0% by the terms of the bailout (equivalent to 9.0% of GDP). Just the level of pharmaceutical spend declined by more than 32% between 2006 and 2012. The chart below highlights how much of an outlier Greece was during this period for social expenditures.

Euro HC Spend

An analysis conducted by the German Institute for Economic Research, which isolated on the period of 2008 – 2015, concluded that there was a staggering 10 point decline in the Visual Analogue Scale (86.1 to 76.7) when assessing overall healthcare status of the Greek population. During that period, healthcare expenditures dropped by 41%, wages declined by 35-45%, and in 2014 alone, 36% of the population was deemed “at risk of poverty.”

The Lancet recently published a comprehensive research study which concluded that for every 1.0% increase in unemployment rates, there was a corresponding 0.8% increase in suicides and an equal 0.8% increase in alcoholism. The European Observatory on Health Systems and Policies in 2014 released a study that saw a 45% increase in suicides during 2007-2011 (most pronounced among working men). There was a 19% increase in low birth weight babies and an increase of 43% in infant mortality during 2008-2010. Ironically, there was a 24% decline in the number of car accidents given the dramatic decline in economic activity during that same period.

While further longitudinal study is necessary, it is unambiguously clear that severe economic stress has devastating implications on population health. Greece witnessed significant rotation from the private healthcare system, which for many became immediately unaffordable, to an overwhelmed and inadequate public healthcare “safety net” system. The healthcare journal Hippokratia in 2014 highlighted the substitution of quality food for cheap energy foods which led to a spike in diabetes, obesity and hypertension (although confoundingly, Hellastat reported that pizza consumption dropped 30% that year). Three other meaningful contributors to overall decline in health conditions included a drop in medication adherence, increase in chronic stress, and decline in monitoring and follow-up.

For many populations and geographies, what was experienced by the Greeks during their devastating economic crisis, is their everyday reality. The promise of robust healthcare technology solutions may assist some of these people confronting such conditions, but when the overall healthcare system is so severely compromised, the problems become nearly intractable with far-reaching and damaging implications.

9 Comments

Filed under Uncategorized

Environmental Determinants of Health…

July 2019 was determined to be the hottest month in recorded history according to scientists at the U.S. National Oceanic and Atmospheric Administration. The temperature was 1.71 degrees above average July temperatures over the entire twentieth century. In fact, nine of the ten hottest Julys occurred since 2005.

The healthcare technology sector is all afire with identifying solutions to manage a range of social determinants of health such as access to quality food, affordable and safe housing, underemployment and relative economic and social stress levels. Irrefutably, at least for many of us, environmental conditions are known to play a dramatic and direct role in one’s overall health and well-being. Effective and comprehensive solutions are illusive though, in part because the problems are systemic, and the investment required for systemic solutions can really only be made by governments in a somewhat coordinated fashion. The investment models for therapeutics, medical devices or healthcare technologies are reasonably well-understood but what is the investment model to lower the earth’s temperature by 1.71 degrees?

Obviously, climate change is a public health crisis and according to my good friend, Margo Oge, former director of the Environmental Protection Agency, it is not adequately addressed by current medical school curricula. At particular risk with climate change are the elderly, the young and the poor, a population that promises to be most advantaged by the development of innovative healthcare technology solutions. Oge highlighted the shocking situation in Flint, Michigan as just one example where generations of residents consumed lead-tainted drinking water when simple inexpensive water quality tests existed. How worried should the rest of us be about more insidious environmental developments when such obvious environmental factors are missed?

More affluent regions of the world appear to suffer fewer deaths due to climate change. In November 2018, The Lancet published a seminal global analysis sponsored by the United Nations which linked clearly the state of the environment on healthcare. Specifically, the report focused on “heat stress” created by a warming climate and determined that 157 million additional people were subjected to heat-related health issues above levels in 2000, directly responsible for a loss of 153 billion hours of labor. These health issues manifested in significantly greater incidences of kidney and heart diseases. Furthermore, the report projected an additional 50-100 “heat deaths” per one million people by 2050.

Climate Deaths
Perhaps more devastating are the collateral issues that elevated heat levels will create, such as a greater incidence of major storms (like Hurricane Dorian this past weekend, considered the strongest storm to ever hit the Bahamas) and flooding. These weather phenomena will reduce crop yields, lower overall quality of food stocks, and may well damage the healthcare infrastructure itself. It is estimated that one billion people live below 33 feet above sea level. In the U.S. alone, scientist project that 2.4 million homes will be flooded by 2100. Just this year, U.S. farmers are expected to grow 13.4 billion bushels of corn and 3.5 billion bushels of soybeans; both meaningfully lower than the definitive Pro Farmer estimates from earlier this year of 14.5 billion and 4.7 billion, respectively. The National Climate Assessment warned of a dramatic increase in mosquito-borne diseases, even in regions that have not confronted such diseases before.

Interestingly, Axios recently projected the economic impact by U.S. county by the end of this century (see below). Perhaps not unexpectedly, there is a rotation to regions further north, presumably cooler geographies, as the earth continues to warm.

Economic Impact

 

In addition to purchasing real estate in Alaska and Maine, there are other interesting investment strategies to capitalize on these environmental developments. While the energy sector has been the poorest performing S&P industry sector index this past decade, returning only 4.4%, the S&P Global Water Index has increased 15% year-to-date. Clearly the slowing global economy, overall capital intensity, and the constant battering by climate-change activists have hurt the stocks of traditional energy companies.

It is estimated that only 2.5% of all the water on earth is fresh and that 800 million people are facing an imminent water crisis. Furthermore, another 2.4 billion people do not have reliable access to clean water for proper sanitation. It will require at least $1 trillion to upgrade domestic water delivery infrastructure. According to the EPA, tap water in the U.S. averages about $2 per 1,000 gallons, suggesting that the price of water is likely to increase significantly.

One of the best performing environmental investments recently has been European carbon credits, established as part of the Kyoto Protocol in 1997, which are up 20% year-to-date and double the levels from January 2018. This market is estimated to be close to $40 billion in size. One credit is required for each carbon dioxide ton emitted and is trading for about 26 euros. Across Europe, 1.7 gigatons of carbon are emitted annually according to Energy Aspects data.

Additionally, there has been a flurry of investment activity in the alternative meat sector. In part reflecting concerns about the impact of livestock production which is responsible for 15% of all greenhouse gas emissions, a number of high-profile plant-based food companies are seeing dramatic market acceptance as they introduce alternatives to traditional meat products. Beyond Meat, which went public in May 2019 with a $3.8 billion valuation, is currently valued at $10.1 billion or 115x trailing revenues. The global meat market is considered to be $1.4 trillion and accounts for 29% of the water used in global agriculture but a staggering 80% of all agricultural land.

The American Lung Association attributes 7,500 deaths each year to coal pollution. While an important industry which last year provided 30% of all U.S. power (down from 45% in 2010), the coal industry only employs 50k people. By comparison, there are 260k people working in the solar industry. Given in large measure to the attractiveness of cheap natural gas, the number of coal plants have declined from 580 in 2010 to less than 240 now, according to the U.S. Energy Information Administration, perhaps suggesting that market forces may assist in reducing the cocktail of harmful pollutants due to coal.

The Centers for Disease Control and Prevention recently announced that 16 states have 153 reported cases of serious vaping-related respiratory illnesses in just the past two months. Importantly, CVS just announced a $50 million campaign to curtail teenage vaping, and five years after the company stopped selling tobacco products.

Director Oge’s work at the EPA was to ultimately create policies to reduce environmental stresses on human health. Five years ago, the Center for International Earth Science Information Network scored all countries on the ability to mitigate those stresses. Consistent with other regional data, more affluent countries further removed from the equator tended to score more favorably.

2014 Environment

In this environment, there may need to be a greater reliance on market forces and the creativity of entrepreneurs to lessen the environmental impacts on health. Unfortunately, the EPA made only 166 referrals to the Justice Department in 2018, a 30-year low and half the amount in 2012. Only 78 cases were prosecuted last year, the fewest amount in 25 years. By law, the EPA must have no fewer than 200 enforcement agents in its Criminal Investigative Unit and yet only has 164 now. Recently, the Government Accountability Office determined that the EPA’s Integrated Risk Information System unit had its research stifled, most notably its extensive formaldehyde analysis linking the chemical to cancer.

Leave a comment

Filed under Uncategorized