Digital health investing – at least in the U.S. – is in a bubble.
That was the main takeaway from a panel at the annual Health 2.0 conference in Santa Clara, featuring speakers from Canaan Partners, GE Ventures and Sanofi Ventures, the VC arm of the big pharma company.
The event was notable for another reason, an all-woman panel in an industry where women make up only around 8 percent of top VC firm partners.
Canaan Partners’ Wende Hutton, who has been a venture capitalist focused on the healthcare industry for more than two decades, was the first to take a swing at expectations.
“I think one would say we’re kind of at the peak of the market in terms of access to funds and capital pouring in,” Hutton said.
She also pointed to the declining number of investments, capital concentration in a smaller number of companies and recent major deals like Roche’s $1.9 billion acquisition of Flatiron Health and Guardant Health’s $100 million public offering potentially “distorting the kind of bubble we’re in.”
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
Roughly $3.4 billion in investment was raised in the first half of 2018, tracking on the upward trajectory seen since 2011, according to a Rock Health report.
However, on the other end, exits have also remained sluggish with the IPO drought in the industry since 2016 persisting and M&A activity is tracking at lower levels than in years past, notwithstanding blockbuster deals like Amazon’s $1 billion acquisition of online pharmacy Pill Pack.
Risa Stack, the general manager of business creation at GE Ventures, said she expects that the funding cycle will slow down in conjunction with a decline in exit activity.
She added that what has largely changed in the market is the sheer amount of capital available from new sources like family offices and sovereign wealth funds, some of whom don’t have a long track record in healthcare investing.
According to Stack, this has pushed valuations up to unrealistic levels and GE Ventures has had to respond by investing in more early-stage companies.
While she also agreed that the market is in a bubble, Sanofi Ventures’ Ruchita Sinha underscored that some of the most promising emerging companies and business models like primary care provider One Medical, health insurer Oscar Health and genomics startup Freenome are incredibly capital-intensive.
Sinha identified Guardant’s IPO as one potential pathway for exits for these high-valued companies, as well as acquisitions from big tech and pharma companies.
“There are a couple of categories of companies where the capital is justified and once you prove that out, there will be exits,” Sinha said.
It was not all doom and gloom though. When taking a larger perspective in the healthcare information technology space, Hutton highlighted the massive potential and business opportunity to bring tools like big data analytics to healthcare.
Still, even that idea was tempered, especially with the difficulty in gaining customer adoption in the industry.
“What I think is going to be interesting to see with the flood of money coming in is whether the new money is aligned with a model that can work in healthcare,” Hutton said.
“Sometimes I don’t think lots of money can boil the ocean fast enough in healthcare because you can’t drive adoption any faster than it will go within a payer buying cycle or a provider budget cycle.”
Picture: Getty Images
