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Let the Good Times Roll – 2Q19 In Review…

Accelerating out of 2Q19, both the S&P 500 and Nasdaq indices hit all-time highs, trading at close to 19.8x trailing earnings. Last week the U.S. Bureau of Economic Analysis announced that GDP increased 2.1% for the quarter, and while a marked decline from the prior quarter, it was still a reasonably compelling figure. Interestingly, consumer spending which accounts for approximately 70% of the activity, increased 2.9% in the quarter (although credit card delinquencies are up 22% since 2015). Macroeconomic Advisors estimated that revenues for the S&P 500 companies grew 2.6% in 2Q19, while FactSet estimated that earnings declined 1.9% year-over-year (first time in recent memory), perhaps suggesting that operating costs have increased markedly over the past few months.

 

2Q19 GDP

Source: Axios

Against this narrative, the National Venture Capital Association and Pitchbook released their 2Q19 report with screaming headlines about investor liquidity. Quite simply, it was a tremendous quarter with $138.3 billion of exit value created (via either IPOs or M&A transactions), nearly half of which was due to the Uber IPO alone. Year-to-date exit value totaled $188.5 billion, more than any prior year, suggesting broad-based activity and a robust environment. And there will be even more to come: CB Insights is tracking 362 “unicorns” globally, 18 of which are valued in excess of $10 billion each. These mature private companies will seek investor liquidity at some point in the near future.

For the entire quarter, there were 2,338 financings which raised $31.5 billion, keeping the venture capital industry on pace to once again exceed $100 billion in annual investment activity. While the number of investments has been relatively constant since late 2012, the advent of “mega deals” (in excess of $100 million round sizes) has dramatically increased the amount of capital invested. Year-to-date there have been 123 “mega deals” which, while only 2.5% of all financings, accounted for nearly 45% of the capital invested.

 

2Q19 VC Activity

The amount of seed and angel activity continued to meaningfully decline in the quarter, registering $1.7 billion across 1,001 deals. The median age of those companies at the time of these financings was slightly over three years old, suggesting that the amount of “pre-seed” activity is high and now an important part of how many entrepreneurs are funding their businesses. In part due to the proliferation of accelerators and incubators, entrepreneurs are able raise very modest amounts of capital to accomplish a handful of initial milestones. The average size of these financings was $1.7 million at a median pre-money valuation of $7.6 million.

Early stage activity (Series A and B rounds) remained relatively constant with $8.9 billion invested in 754 deals (average size of $11.8 million). The median valuation was $30.0 million. Late stage financings (Series C and D rounds) continued to account for much of the activity with $20.9 billion invested in 583 deals (average size of $35.8 million). It is these rounds when there starts to be significant separation in terms of amount of capital invested and valuations, particularly for those companies that are scaling quickly. Series C median valuation in 2Q19 was $115 million, while Series D companies commanded a median valuation of $418 million. Over 70% of the capital of the Late stage financings was invested in “mega deals” yet were only 17% of the companies. To underscore the separation at these Late stage rounds, the 25th percentile companies were valued at $140 million on average, while 75th percentile companies were valued at $1.08 billion (as compared to $702 million in all of 2018).

Notably, corporate VCs are hanging in there. In 2Q19, 311 companies raised $13.0 billion in financings which a corporate investor was a member of the syndicate; that is,13% of the financings included a corporate investor yet those rounds accounted for over 41% of the investment activity, indicating that corporate investors tend to participate in later rounds.

Back to where the attention was focused this past quarter – exit activity. In addition to the more notable IPOs of Uber, Lyft, Pinterest and Zoom was the Slack IPO, which was a “direct listing” like the Spotify IPO in April 2018. Many recent enterprise technology IPOs have been priced at 25 – 30x revenues (not earnings). Notwithstanding the extraordinary IPO activity in 2Q19 ($130.8 billion), the M&A exit activity was relatively underwhelming with only $7.3 billion versus $22.6 billion in 1Q19 and $10.7 billion in the year ago quarter. In fact, year-to-date the ratio of number of new investments to exits is 12.7x. Historically, this ratio has hovered between 10.0x – 10.5x so the growing backlog of private companies is notable, especially with the number of large rounds with somewhat impatient later stage investors. Bookmark that.

 

2Q19 Exit

As this liquidity windfall is distributed back to investors, grateful limited partners are expected to recycle much of it back to venture firms in the form of new commitments, suggesting good times ahead for fundraising. Through the first half 2019, 103 funds were raised totaling $20.6 billion. In 2Q19 alone, 66 funds raised $11.0 billion but only two funds were larger than $1.0 billion. Interestingly, in 1Q19 the average and median fund size were $259 million and $103 million, respectively. At the end of 2Q19 those amounts had declined meaningfully to $202 million and $81 million, indicating a trend of much smaller fund sizes. There was an even more dramatic decline in the number of “first time” venture funds with only 10 raised through 2Q19, and they were only 2.9% of all capital raised. Yet against this backdrop, SoftBank just announced its second Vision Fund totaling $108 billion of commitments.

According to Cambridge Associates, venture returns through 1Q19 have been consistently compelling when compared to public stock indices, certainly over longer time horizons. The lack of liquidity is often pointed to as the principle reason as to why limited partners are not more aggressive venture capital investors. The narrative over the last decade has been one centered around “unrealized gains” which have been dramatic but unfortunately unrealized. In a recent Fenwick & West survey of venture terms for 215 financings in 2Q19 over 86% were “up-rounds” (the average price per share increase was 58%). It will be fascinating to see if limited partner sentiment recalibrates over the next 6 -12 months as the 2Q19 IPO liquidity is distributed.

VC Returns 1Q19

As an interesting point of comparison, the venture market in China has struggled mightily in 2Q19. Notwithstanding that the Fortune Global 500, which was released this past week, included 129 Chinese companies (first time ever that the U.S. did not lead in the medal count), the overall investment activity declined a dramatic 77% decline from 1Q19. The $9.4 billion invested across 692 companies compares unfavorably to the 2Q18 level of $41.3 billion. Quite clearly there is anxiety about trade tensions as well as relatively lofty private company valuations. Interestingly, though, China last week launched the Science and Technology Innovation Board (“STAR Market”), which is part of the Shanghai stock exchange but only for local investors. On the opening day, 25 technology companies raised $5.4 billion, with the index closing ahead 140%. Go figure.

Somewhat insulated from this is the Israeli venture capital industry which saw $3.9 billion invested in 254 companies year-to-date. In 2Q19 alone, 125 companies raised $2.3 billion, but $1.2 billion of those financings were for only 10 “mega deals” (considered greater than $50 million round size).

The Institute of International Finance recently released its quarterly survey of global debt levels that showed it to be $246.5 trillion at the end of 1Q19, which had increased by $3.0 trillion over the quarter. This unprecedented debt level is now 320% of global GDP. The situation in the U.S., while relatively in better shape, is still worrisome with $69 trillion of debt at 101% of GDP. The role this plays on the venture capital industry and fund flows is certainly worth monitoring. Quite clearly, the current environment has investors desperately looking for returns with high growth companies such as those in venture capital portfolios. As a point of comparison, Facebook, Amazon and Google grew revenues 28%, 19% and 19%, respectively, this past quarter. But are we living on borrowed time with the historic economic expansion in the U.S.?

 

Expansion
Source: Axios

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Flare Capital Raises Its “Series B” …

This week we announced the close of Flare Capital Partners II, L.P. with a total of $255 million of committed capital.

This fund is considerably larger than our prior fund, which in large measure 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.

Blah, blah, blah. Many of us already know all of that. Here is why the fund’s timing is so propitious. Adoption of healthcare technology solutions is accelerating. Many companies launched earlier this decade can now point to measurable impact on outcomes and costs (see IPO pipeline of healthcare technology companies). 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.

HC Adoption Accelerating

When we closed the last fund in 2015, according to Rock Health data, the digital health sector saw approximately $4.6 billion invested, which stayed relatively constant into 2017. The investment level in 2018 spiked to $8.1 billion and the year-to-date investment pace suggests that 2019 will be even greater. In addition to a number of large and transformative M&A transactions over the last two years which redefined the landscape, an exciting bullpen of private healthcare technology companies are emerging which should be well-received by public company investors (see Livongo, Health Catalyst, Phreesia, etc.).

As a point of comparison: the U.S. advertising industry is approximately $200 billion in size, and as that industry was profoundly re-architected over the past 20 years, arguably several trillion (with a “T”) dollars of market capitalization was created (Google, Facebook, Apple, Netflix, Twitter, etc.). Important companies were created, consumer purchasing behavior and entertainment choices were forever changed.

Now turn your sights to healthcare. The U.S. healthcare industry is 15x as large as the ad industry. And while it may be harder, and there will be fits and starts, there is a sense of inevitability that enormously important and valuable healthcare technology companies will be created as this industry is transformed. There is no denying that scaling healthcare technology companies is hard, at times frustratingly and quixotically so, but the pressures are simply too great for industry participants to not embrace innovative new solutions. That is the essence of our investment thesis.

Core to our success has been the level of engagement with our investors. We initially set out to raise $200 million, the same size as the prior fund. It was gratifying to see both the level of investor interest and understanding of the market opportunity. As such, we are excited to welcome a number of new strategic and financial investors as partners of the firm, who will further strengthen our franchise and reputation in the market. Given the industry complexities, our strategic investors are particularly helpful to our portfolio companies as co-investors, channel partners and customers.

While this is an important milestone for Flare Capital, we will continue to be heads down assisting our entrepreneurs to build important and valuable healthcare technology companies. We expect to close the first investment out of the new fund within the week.

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Blood Money…

Not sure if it was the penultimate episode of “Game of Thrones” or recent press coverage of Ambrosia LLC, which was marketing, and subsequently reprimanded by the FDA, “longevity” blood plasma transfusions for $8,000 that caused me to look more closely at the blood supply industry. And what a strange set of dynamics at work – a product with a relatively short shelf life, largely dependent on donors, and one that appears to have terrific gross margins. With advances in technology and business model innovation, the amount of blood required to meet current needs has dropped dramatically but unfortunately for an increasing number of individuals, their precise blood type has likely become very hard to find.

First, some context. Over 13.6 million units of whole blood are collected every year in the U.S. for the 4.5 million Americans who will require a transfusion which is nearly 40,000 units every day. In order to satisfy that demand, an estimated 6.8 million people donate blood each year, which means that of the 37% of the U.S. population eligible to donate, only 10% will do so. According to the World Health Organization, 112.5 million units were collected in 2017 (equivalent to over 21 Olympic-size pools). Blood, for which there is not a synthetic substitute, has a shelf life of no more than 42 days (platelets are only 5 days) which complicates the supply chain. Blood accounts for roughly 7% of one’s body weight.

blood

The blood collection and bank industry has struggled in recent years. Analysts estimate that revenues were in excess of $5 billion in 2008 and are now well below $1.5 billion, in part due to advances in surgical techniques which simply require less blood per procedure, better electronic medical record capabilities, and the introduction of more “at-risk” economic models causing providers to look harder at blood usage. Blood is one of the most expensive items ordered solely at the doctor’s discretion.

While every hospital has blood bank and transfusion capabilities, the American Red Cross accounts for approximately 45% of all donations, with the balance largely collected by the America’s Blood Center, a national network of 600 non-profit collection centers. There are a number of commercial entities, such as CSL Pharma, which provide blood collection and screening services and will pay for blood donations.

This is where it starts to get tricky. While initial “starter” payments for a unit of blood may be as high as $50, typical payments run closer to $30. Power donors can give twice a week which means people can make over $3,000 per year – which is likely to appeal to the most desperate of us. Analysts estimate that plasma companies, once that unit of blood is processed, sell wholesale immunoglobulin for $300 per unit. Academic research from Case Western Reserve suggests that commercial plasma collection centers are disproportionately located in poor communities, an observation disputed by the Plasma Protein Therapeutics Association (PPTA). The PPTA represents over 750 commercial collection centers.

This is a big business. Globally, there were $32.9 billion of blood products sold in 2017 and Global Market Insights projects that to increase to $42.6 billion by 2021. Worldwide, $7.5 billion of blood products are exported annually so much of what is collected is consumed locally. The U.S. is the second largest blood exporter with $1.1 billion or 15% of the total; Ireland is the clear export leader with $2.7 billion or 36% of all export volume. There is an obvious correlation to beer consumed.

Over the last century tragic events such as world wars drove blood collection innovation. While the first transfusion in recorded medical history was attempted in 1628 shortly after the English doctor William Harvey determined that blood circulates. It wasn’t until 1665 – 37 years later – that the first successful transfusion occurred when another English doctor (Richard Lower) transfused blood between dogs. The first U.S. blood bank was established in 1937 at Cook County Hospital in Chicago.

As many of us learn, and quickly forget in high school biology, there are eight blood types (A, B, AB and O, with positive and negative for each) and over 360 types of antigens according to the International Society of Blood Transfusion, making it a universal yet supremely complex fluid. Type O negative can be given to anyone, while only 3% of people in the U.S. have AB positive blood. Dramatic advances in screening and testing over the last 75 years have nearly eliminated risk of disease transmission via transfusions. The risk of getting Hepatitis C, a viral infection of the liver, is now 1.2 per 100k transfusions per PubMed data.

While advances in blood screening have increased the availability of blood, differences among ethnicities have complicated supply chain issues and caused some heated public debate about the “ethnicity of blood.” Industry analysts point to globalization as having increased the complexity of managing the blood supply. According to researchers at the National Center for Blood Group Genomics, geographic differences due to historic exposure to certain diseases and pathogens undoubtedly led to evolutionary differences in blood types which has been conflated with the role of ethnicity and blood types.

The blood supply chain is further complicated by regional differences in surgical practices. The number of surgeries per 100k of a population tends to correlate to country GDP. According to most recent data from IndexMundi, Ethiopia registered a mere 43 surgeries per 100k (2011) while astonishingly, Australia had over 28,900 surgeries per 100k (2015).

Unfortunately, a significant “driver” of blood needs are traffic accidents. It is not unusual for one victim of a car crash to need up to 100 units of blood. One of the great promises of autonomous vehicles is the expected dramatic drop in traffic fatalities. Perversely, such a development will dramatically reduce the number of life-saving organs available for transplant. The National Safety Council estimates that 380 people are likely to have died on U.S. roads this Memorial Day holiday period. Very sobering.

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Dazzling VC Activity in 1Q19…

At the 2018 year-end holidays, venture capitalists celebrated an unprecedented year of investment activity, certain that it could not be repeated. Now that the books on 1Q19 are closed, the pace seems to have only modestly unabated from an historic 4Q19 with $32.6 billion invested in 1,853 companies. All of this was punctuated by the Lyft IPO in the second to last day of the quarter.

While the activity in 1Q19 was indeed down from the prior quarter, it was still the second highest month in nearly 20 years. Now that the S&P 500 Index is effectively back to its all-time high set in September 2018, the anticipation of sustained unicorn IPO activity has bolstered investor confidence. All of this is further energized by the 3.2% GDP growth in 1Q19.

 

1Q19 VC

Evidence of continued concentration of capital, by company and by venture capital fund, persists. The top ten deals accounted for $10.3 billion of the quarter’s activity (0.5% of the deals represented 32% of the capital). As encouraging as the overall 1Q19 activity might appear, there are also some other notable vexatious trends buried deeper in the data. Seed investment activity was largely flat in terms of dollars invested, but there was a marked reduction in the number of seeded companies – nearly a 200 company decrease quarter-over-quarter. The median seed round was $1.0 million at a pre-money valuation of $7.5 million.

Even more notable was the decline in the number of early stage financings (Series A and B) from 1,013 to 828 quarter-over-quarter. Might this suggest increased investor aversion to early stage risk? The median round size in 1Q19 was $8.2 million which is substantially larger than the 2018 median of $6.0 million. In aggregate, median pre-money valuations for the early stage category was $32.0 million, up sharply from the $25 million for all of 2018. If investors were nervous, they certainly seemed to be at risk of over-capitalizing companies at historically high prices. Nearly 42% of all early stage financings were greater than $10.0 million in size, accounting for almost 90% of all the capital invested. There were 15 “early stage” rounds greater than $100 million. Quite clearly concentrated investments around fewer, presumably, very high potential opportunities.

 

Median Pre-Money Valuations

1Q19 A B Valuation

Nearly $21.4 billion was invested in late stage opportunities (Series C and D) in 1Q19 which was two-thirds of all capital deployed in the quarter. Of the 538 late stage investments, 62% of them were greater than $100 million in size. Another sign of capital concentration. Quite remarkable was the dramatic step-up in pre-money valuations when companies were able to graduate from Series C to Series D, with median Series D valuations of $345 million.

 

Median Pre-Money Valuations

1Q19 C D Valuation

There were a handful of other interesting items in the 1Q19 data, including…

  • Corporate venture capital investors participated in 17.1% of all deals this past quarter; those deals accounted for nearly 60% of all dollars invested. Quite clearly, corporate investors tend to join later stage syndicates, when the start-up has solutions that are ready for prime time
  • Somewhat counter to the theme of concentration, only 30.1% of all financings were for software companies which is down from the 34.8% for all of 2018. A number of new categories are emerging (autonomous vehicles, etc) which is leading to a greater diversity of sectors.
  • Geographic concentration continues apace though. Three MSAs (Bay Area, New York metro, Boston) captured 75% of all 1Q19 capital invested yet represented only 40% of the deals.

The aforementioned Lyft public offering accounted for nearly 50% of the quarterly exit activity (based on the $21.7 billion valuation at the time of the IPO which now seems like a rather distant memory). There were 137 exits of venture-backed companies in the quarter, of which only 12 were IPOs – the dramatic fall-off was due in large measure to the government shut-down. The top 10 M&A transactions generated $18.7 billion of proceeds; between those transactions and Lyft IPO, 87% of the exit value went to 8% of the transaction. Further concentration.

A word of caution. The Economist recently reported that the dozen recently and soon-to-be listed unicorns recorded operating losses of $14 billion last year. Cumulative losses for those companies were $47 billion which is precisely the amount the entire venture industry invested in 2013 (or nearly 5x all the capital raised by venture firms in 1Q19 – see below).

One of the truisms of the venture capital industry is that liquidity (or the promise of it) drives fundraising activity. Notwithstanding the recent difficult trading dynamics of Lyft, the very successful Zoom and Pintrest IPOs provide hope that the pipeline of unicorns will finally be released from the private market corral. This past quarter 37 funds raised $9.6 billion with a median fund size of $103 million, which is up substantially from the 2018 median of $80 million. The average fund size was $259 million, given that the top five funds raised accounted for $5.4 billion (14% of the funds raised captured 56% of the dollars). Notably, there were 11 funds raised which were smaller than $50 million, and only two of them were first-time funds raised and they were so small that they did not even register in the data for capital raised. Evidence of even further concentration.

Determining the precise size of the US venture capital industry is challenging, but analysts tend to peg it at around $300 billion of assets under management (of course, SoftBank’s $100 billion Vision Fund complicates this even further). Given that, it is often useful/instructive/entertaining to put all of this activity into some broader context.

  • Blackstone in the past twelve months alone has raised $126 billion in investable assets, effectively equivalent to what the US venture capital industry invested in all of 2018.
  • Berkshire Hathaway has a cash balance of $110 billion.
  • Last month, the Saudi national oil company Aramco disclosed preliminary plans for its $100 billion IPO, which is expected to come to market in the next 12 – 24 months. It was also revealed that Aramco is the most profitable company in the world given it’s absurdly low $3 per barrel oil extraction costs, making it wildly more profitable than venture-backed SaaS companies.
  • BlackRock’s $2 trillion iShares exchange-traded fund had $31 billion of inflows in 1Q19 – as much as the entire US venture industry invested.
  • And Tianhong Yu’e Bao money market fund in China, which is part of Ant Financial which is affiliated with Alibaba and has 588 million investors, has ~$168 billion under management. That fund was launched in 2013. Ponder that.

And in the possible good news category for 2Q19, the infamous yield curve inversion in March, which is one of the most reliable recession predictors, seems to have corrected itself. We will see in 90 days.

 

yield curve

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Quarterly Check-up On Healthcare…

Notwithstanding the quite significant stock market turmoil for publicly traded healthcare companies in recent months, the level of private investment actitivty continued to be quite strong this past quarter. According to Rock Health, 1Q19 registered just under $1.0 billion of investments made in 61 healthcare technology companies, which while below the trailing two year quarterly average of $1.4 billion, still suggests an annual investment pace running toward $4.0 billion. StartUp Health, which reports global funding data and inlcudes non-software healthcare companies, tabulated $2.8 billion invested in the quarter.

Q1-Funding_Digital-Health-Funding-1200x720

It certainly appears that 2018 may well have been a high-water mark for digital health funding. Over the last five years, between 300 – 375 companies were funded annually in the healthcare technology sector. A more modest investment pace arguably will lead to a greater degree of consolidation, from which stronger companies should emerge. It also suggests that management teams and investors should be even more vigilant about expenses to ensure appropriately long cash runways to hit value-creating milestones.

A review of Rock Health’s analysis of M&A activity in the healthcare technology sector is quite illuminating. Given the lack of sector-specific IPOs, the M&A dynamics become even more important to assess. Clearly the overall level of activity is trending down in terms of number of transactions while the percent of “in sector” consolidation among healthcare technology companies is consistently just over half of total merger activity. While mostly conjecture, much of that consolidation is likely uninspiring for the selling shareholders. Much of the other M&A activity likley reflects larger companies back-filling for gaps in their own product roadmaps, particularly in light of the dramatic vertical healthcare mergers (CVS/ Aetna, Cigna/Express Script). A strong case can be made that once the re-architected playing field emerges, the pace of strategic M&A will acccelerate as companies seek to fortify positions in a particular market.

Q1-Funding_Acquisitions-1200x760

Broadly speaking, there is a high level of venture investor enthusiasm for companies that improve both affordability and access. There has also been a notable increase in investment in care coordination and monitoring start-ups, in part due to the recent establishment of billing codes by Center for Medicare and Medicaid Services (CMS) for those products. In light of staggering income inequities highlighted below in the Axios analysis, it is not surprising that recent investment activity has tended to focus on businesses that are outcomes based and have the ability to take on risk, driving value-based models. The 2018 poverty line for a 4-person household was $25,100. Those families are paying between 14% – 35% of income on healthcare. What are the innovative models that can lessen the burden for those Americans?

 

Income vs HC Spend

The early stage healthcare technology community does not operate in isolation. Interestingly, Bain & Co. calculated that $63.1 billion was invested in healthcare transactions by the private equity industry in 2018, an increase of 50% from 2017 and the highest level since 2006. Over $35 billion of that activity was in 159 provider deals, as broadly speaking, there was a trend to transition away from acute care settings into more specialty, consumer-centric care models. These new entities arguably will look to early stage innovative solutions to make their offerings more effective and outcomes oriented. It was not surprising to see MobiHealthNews report on App Annie data that showed global medical apps downloads was more than 400 million in 2018, which was 15% ahead of the 2017 pace.

Corporate venture capitalists have participated in approximately one-third of all healthcare technology financings consistently over the last five years (as compared to all other sectors which has corporate participation in the ~15% range). In particular, the healthcare systems have been quite active venture investors, in large measure as a strategy to incorporate novel solutions into clinical workflows and to generate non-traditional revenue streams, all encouraged by the transition to value-based care models.

According to an analysis prepared by Axios, the average healthcare system generated nearly twice as much operating income from investment activities than from clinical activities in 2017. Interestingly, the twelve largest not-for-profit health systems reported cumulative investment losses in 2018 of $3.7 billion due to 4Q18 public equity turmoil. In 2017, aggregate investment gains were $11.4 billion for those same dozen providers.

In sharp contrast, it was recently reported that IBM Watson – yet again – will be retooled and that Watson for Drug Discovery will no longer be sold. This follows the June 2018 announcement that Watson Health was scaling back its offerings targeting the provider segment. Many large legacy vendors struggle with how best to incorporate novel AI and ML solutions into their broader healthcare suite of solutions, opening the door for innovative start-ups.

Given the enormity of the market opportunities, as well as the promise of new healthcare technology solutions coming to market, the recent public equity performance in April 2019 was especially incongruous. Political uncertainties that will directly inform healthcare policies post-2020 (role of government in healthcare, pricing transparency, etc) have pushed the S&P 500 Healthcare Index down 4.4% in April month-to-date, generating losses of $150 billion in market capitalization. Notwithstanding that healthcare was the best performing sector in 2018 of all industry sectors, year-to-date 2019 healthcare stocks are lagging at a near historic rate (only up 4.2% versus S&P 500 which has increased nearly 16%). Ironically, healthcare is expected to exhibit the strongest earnings growth of all sectors in 1Q19 per FactSet with 3.9% quarterly growth (although the pharmaceuticals sector is expected to decrease by 4.0%). Currently, the healthcare sector is trading at 15.3x P/E ratio versus 16.9x for the broader stock market.

Sounds like a “buy” to me.

 

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Colombia – Peace Dividend Boosts Healthcare…

What a fascinating time to have traveled in Colombia. In addition to being scorching hot (it is bisected by the equator), the country recently settled a painful 55-year Marxist uprising, to say nothing of the extraordinary level of despair on its eastern border with Venezuela. Last week there were large street protests in the capital city of Bogota against proposed changes by President Duque to adjudicate the nearly one million pending cases from the half-century long conflict that claimed 250k lives.

Colombia measures over 440k square miles with a population of 50 million people, which is estimated to have just expanded by over one million Venezuelans fleeing the repressive and wholly incompetent regime of President Maduro. The last two decades saw dramatic GDP growth, which is estimated to be $345 billion in 2019 by Trading Economics (or approximately $7k per capita). Colombia is deemed to be one of only 18 “megadiverse” countries in the world given the level of bio-diversity of the environment.

Annual GDP

colombia-gdp

Notwithstanding the very high level and very visible police and military presence, the peace accords appear to have directly benefitted the well-being and health of the Colombian population. Against initial expectations that a country which had weathered such a grinding protracted insurrection would have an inferior and devastated healthcare infrastructure, the World Health Organization ranked Columbia #22 in the Top 100 Health Systems with an overall Healthcare Efficiency Index of 0.91. For context, France ranked #1 scored 0.99, while the United States was ranked #37 with an index of 0.84. Sierra Leone was ranked last at #191 with 0.00 score.

The Revolutionary Armed Forces of Colombia (FARC), which led the insurgency for all those years, numbered 18k militia at its peak and survived on a diet of extortion, kidnaping and drug smuggling. Estimates are that the organization earned $300 million annually, but over the last decade, the FARC became less of a disruptive force as the government pushed aggressively to integrate the combatants. Notably, in 2008, the Venezuelan President Chavez recognized the FARC as the proper Colombian army, which furthered strained relations between the two countries. Sadly, locals told us to save our smaller bills for the numerous Venezuelan pan-handlers which were more visible than the police and military.

In the 1980’s, the Colombian government made a massive commitment to healthcare. In 1993 only 21% of the population was covered by any health or social security programs; by 2012 that number was 96%. Notwithstanding that according to the most recent data (2017) from the National Administrative Department of Statistics that 26.9% of the population lives below the poverty level (7.4% is in “extreme” poverty – there are three billionaires with aggregate net worth of $17.1 billion per Forbes), Colombia has become one of the main destinations for medical tourism, particularly for cardiology, neurology and dental procedures. In fact, the microkeratome and keratomileusis techniques (affectionately known as LASIK) were invented in Colombia.

Determining Healthcare Efficiency Index is complicated and wrestles with a number of variables to assess progress against three principle goals: (i) has the health of the population improved; (ii) has the responsiveness of the healthcare system increased; and, (iii) is there intrinsic fairness and reduced financial risk to all. Colombia ranks #49 in healthcare expenditures per capita globally and now has average life expectancy of 74.8 years (71.2 for men, 78.4 for women). Good progress.

The success of the Colombian healthcare system shows up in other important metrics, particularly in light of the civil strife for so many years. The country ranks #119 of the 183 countries monitored for incidence of suicides with 7.0 per 100k which compares quite favorably to other South American countries (Uruguay had 16.5 per 100k, Chile had 9.7 per 100k). According to the International Diabetes Foundation, 7.4% of Colombians had diabetes which ranked it an attractive #86 of the 194 countries tracked. Unfortunately, the incidence of obesity is 20.7% according to recent World Health Organization data.

The “peace dividend” appears to be paying off in other interesting ways. According to recently published country data by Numbeo, Colombia ranked #54 on the Pollution Index with a score of 61.7 of the 106 countries measured. As a point of comparison, Finland at #1 scored 11.9 with the United States at #21 with a 34.0 score; choking at the end of list was Mongolia, ranked #106 with score of 93.1.

Of perhaps of greatest importance, Numbeo ranked Colombia #57 with a score of 108.4 on the Quality of Life Index, which while a significant distance from #1 Denmark at 198.6, it was comfortably ahead of Egypt in last place with 84.0. The United States eased in at #13 with score of 179.2.

While there, I learned of an island off the western coast of Colombia called Santa Cruz del Islote (below), which may have dinged Colombia’s Quality of Life score. The size of just over two football fields (~130k square feet), this island is home to 1,250 people and lays claim as being the most densely populated island in the world. Good thing for the residents of del Islote that they are not separately ranked.

Santa Cruz del Islote

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Flare Capital Team Expands – Yet Again…

Today we are thrilled to welcome Parth Desai to the Flare Capital investment team as a Senior Associate. As a partnership we will make literally hundreds of decisions together every year but the decision to add to the team is a profoundly important one and one that is infrequently done. Parth’s background makes him almost uniquely prepared to help us right away.

Most recently, Parth was with the investment team at New York Presbyterian Hospital, focused on a wide array of innovative solutions to improve both the quality and the ability to access care while driving improved patient outcomes. Prior to his time there, he spent nearly five years at Deloitte Consulting advising provider systems as they re-architected their care models, often to arrange novel risk-bearing arrangements. Right after graduate school, Parth was a Health Policy Analyst for the Massachusetts House of Representatives, where he worked on critical oversight legislation to oversee the pharmaceutical industry.

What also struck us was his deep commitment to be in Boston. In addition to having “BOS” in his personal email address, Parth earned his Master of Arts in Clinical Medicine and a Master of Public Health in Health Management and Policy, both from Boston University, as well as graduating from Boston College with a BS in Biology. Admittedly, we pushed back hard when he asked if we could somehow work “Boston” into the name of the firm.

There is another important dimension to Parth joining the firm. He is a member of the great Flare Scholar Class of 2018. He is well known to us and joins Vic Lanio as the second Flare Scholar to join the firm. Since inception there are now 109 former and current Flare Scholars, who tend to be younger healthcare technology executives and academics from across the country. What unites them is their passion about the transformation of the business of healthcare. Many of our Scholars are from our strategic investors while others are studying at leading graduate schools around the country. Serving as our “ambassadors” back in their home markets, the Scholars assist with diligence but also identify emerging talent who may want to work in many of our portfolio companies or launch the next great start-up.

Please welcome Parth to the team…

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