How long will the health tech boom last?

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Heidi Rataj: In 2020, venture funding for health tech innovators crossed a record $14 billion, almost doubling in 2020 compared to 2019, based on Deloitte’s analysis of the Rock Health database, and the growth will likely continue unabated in 2021.

Welcome to Tales of Transformation.

Today, I have Pete Micca, a Deloitte partner [Audit & Assurance partner, Deloitte & Touche LLP], Alyssa Jaffe, a partner at 7wireventures, and Vig Chandramouli, a principal at Oak HC/FT with me to discuss the trends, opportunities, and predictions for the health tech market. Welcome to the show.

Pete Micca: Thank you. It’s certainly an exciting time in health care. Great to be here.

Alyssa Jaffe: Absolutely. Thanks so much for having us. Really excited for the discussion today.

Vig Chandramouli: Likewise, very, very excited to have this conversation.

Heidi: Pete, many investors, including corporate venture capital, see the post-pandemic era as the beginning of a multi-year opportunity rather than a bubble. What triggered this funding increase?

Pete: You know, what’s interesting is that many of the macro trends that were driving the innovation in health care existed even before the coronavirus hit, trends around the importance of the consumer, convergence amongst components of the health care ecosystem, and the emergence of the regulatory environment were all there. The seeds were there. Coronavirus really accelerated the importance to the end user and the consumer as to how those changes could be brought about in real time. That coupled with the macroeconomic trends of low interest rates and access to capital really accelerated what was already happening in a significant way. You know, technology in health care is at an all-time high in terms of the demand in the marketplace, and that demand will continue as the consumer who increasingly pays a larger and larger component of the overall health care dollar will demand transparency, interoperability, and other trends that they see in the marketplace.

Heidi: How can innovators keep this momentum up beyond 2021?

Pete: Clearly, these organizations see the value that very nimble organizations have in terms of emerging technologies and solutions. I think each of them see the importance of these emerging companies, not just providing technology, but actually helping solve an immediate issue to impact within the health care ecosystem, whether it’s affordability or access, or some of the other challenges we face in the health care ecosystem.

Vig: If you look at the broader health care ecosystem, we really just started scratching the surface.
We still have well over a $3 trillion problem. At the end of the day, we just need to redesign and focus our care protocols and models around the patient. So a lot of the innovation to come in the future, we still have to solve the very basic things that our health care system has gaping holes on, and this is really where we think innovators should focus. How do you find a shift of value? How do you address social determinant needs, where we’re not just thinking about care within the four walls of the health care system, but really focusing on other social needs that we now know and understand impact health care costs. We’re just in the first inning of even thinking about virtual care delivery and just what that means. How people interact with their providers. When people interact with their providers. There’s plenty of runway and room for innovation to thrive in health care and exactly the reason why we’re seeing so much money pour into the category.

Alyssa: Really the endeavor that we’re trying to build is ubiquity, where technology and services meet people where they are. You can use mobile banking on your phone, you can pick up the phone and call somebody, and you can walk into a bank, and that health care should be seen as transformational across all of the different ways that consumers utilize it. I refrain from using the term patient, because patients are people that have things done to them. Consumers are active stewards of their own health. And at 7wire our thesis is built on the premise of what we call the informed connected health consumer. It’s giving people access to the information that they need, connecting them into the system to help them help themselves and work within the system to improve health outcomes. And so, instead of creating this bifurcation between different parties and this tension that we have across the incumbents and the consumers and digital health, can we create a world where this is more cohesive? And not promoting the world where everything’s direct to consumer. We only have, I believe, 11% of total health care expenditures are actually out-of-pocket expenditures. The bulk of the system is still paid by the system, paid by the incumbents, but there is a way to bridge that gap that has the consumer at the helm to drive real transformational change and ultimately improve the outcomes of our population and reduce the cost.

Heidi: Alyssa, I appreciate that point of this focus on care delivery and well-being for the informed consumer.
Vig, we are seeing trends around aligning with and going to market with incumbents. How do you validate these partnerships? And how do you successfully partner with incumbents?

Vig: That’s the million dollar question that we ask most of our portfolio companies every day. There are incumbents that are out there that recognize that they have meaningful gaps in their own capabilities and product sets and that they have to partner with innovators to stay relevant, else you can very quickly get displaced. So, we look at it as payers. Well, if you focus on insurance companies, COVID has been a massive boon for them. All of their earnings have been shattering records. And what that really means is their option A is to invest that money into companies and partner aggressively. Option B is to rebate that money back to individuals, which is something that they’re not going to do. So, if you think about motivated buyers, payers right now are the right segment and population, where if you can tell the payer as a company, here’s the population we’re focused on, here’s how we’re going to drive value, and here’s how we’re going to execute on this plan, the likelihood that they will partner with you is fairly high. Then, of course, there’s the element of did they want to invest in you as a corporate venture arm? What type of ownership in your company should you allow them to have? And do you factor things like warrants into the equation. And our guidance to most companies is whatever you do, tie it to a commercial deal. So, if a payer is willing to commit X dollars to you, then absolutely, go ahead and figure out the right value that you would give back to them in return in the form of an equity investment, warrants, et cetera. That’s one side of the equation.

I would say on the other side of the equation, on the tactical side, the real guidance in most of our companies is around the ability to get data access from the payers. So health care, we all know, has a significant health care siloed data problem, and our push in every situation is to get access to the data and have it flow in real time, as well as you can, given so much of what you will build and so many of the problems you will identify in your partnership journey with the customer has to come back to the data source and identifying where the problems exist, and are you able to actually move the needle based on what you’re doing? And if you leave the data access problem in the hands of your customer, there is no way for you to validate that your solution is working as it’s intended to or that you need to make changes before the partnership goes sideways. So, I think those are two very important considerations as you think about who to partner with, how much of your company should you give them, and what type of components you’d need to put in place before engaging in a meaningful partnership.

Heidi: It’s interesting coming from the report, this is where I see this opportunity for all of these entities to come together, rather than a friction type of environment. The opportunity I think we’ve seen is where core competencies can fill in the gap, support, and coach, and prove value for existing relationships.

Alyssa: The more we’re able to create more of a seamless experience to partner and pair technology with services, incumbents with early stage companies, the better we are to deliver a more seamless care experience that ultimately benefits the end user. As we think about areas and abilities to reduce costs in the system, creating more of a meaningful approach, partnership ends up being rewarding for all those parties involved.

Heidi: Alyssa, what’s in store for future funding? Based on the report, IPOs had 11 health tech innovators going public, SPACs 20 in the health care industry. What’s at the future that you see?

Alyssa: This is one of my most exciting things to talk about, because the future is bright. Vig said it best, when we’re a $3 trillion market and we have barely even scratched the surface. We’re starting to see the tailwinds in our favor. It’s quite awkward in a pandemic with all of the devastation to say the industry had such a top-performing year, but it just goes to show how much digital health can support and benefit what are today’s inefficiencies in health care. And 10 years ago, digital health was a billion-dollar market. Well, in Rock Health’s data, they said the last two weeks of March alone, each were billion-dollar weeks, and so we’re starting to see real dollars come into the market today. Now, is it going to be the financial apparatus en vogue? Is it going to be a stock? Is it going to be a traditional public market IPO? Are we going to see more M&A? I think the answer is maybe yes and yes. So, public markets are starting to get much more comfortable with the emerging profile of a technology business, where we invest for growth while we see a lot of value. At the same time as our digital health companies continue to grow, they can start becoming the acquirer. Again, we saw that with Teladoc, we’re seeing that with a number of other, and so it creates even more market opportunities for some of the early-stage companies who historically had to rely on getting bought by one of three entities, and most of them were health plans. And now they have more diversity in acquisition or exit opportunities and therefore there becomes more opportunity in market on the whole.

Pete: Capital will flow to efficient high-growth markets where the demand for innovation exceeds supply, and that’s the environment that we find ourselves in health care. And so, I think we’ll see all three of those forms, perhaps even others in terms of financial arrangements that might occur in the future. I think the common denominator is capital will flow into markets that need more efficiency and where the demand exceeds supply.

Vig: If you just look at the performance of some of these health care IPOs, the market demand has been off the chart. And if you step back and look at investors, investor appetite in a beyond tech investments, which the tech index broadly has returned double digit returns, the next thing on the list is health care. And now that’s driving this downstream gold rush into health care broadly and we’re living in an environment where valuations and health care startups is unprecedented. I mean, companies getting valued 30, 40, 50 times forward revenue multiples are here because people see the longer-term value in the long-term value creation opportunity. Whether it’s an IPO mechanism or a SPAC, those are the two viable paths. I mean, to Alyssa’s point, on the M&A side, you really only had three buyers historically, and those folks, they transact, but they’re not buying high-growth startups with significant cashflow. They’re buyers looking at scale earnings, et cetera. So you have a case to be made that companies, like Teladoc, and this next generation of health care, high-growth companies that do go public will form a new class of M&A, acquirers that should support the market going forward. I mean, we’re at a time where there are more health care unicorns by an order of magnitude than we’ve had at any time ever. There’re companies like Oak Street Health that are worth 20% of Humana with close to one-fiftieth the membership. You have to wonder what happens and how this ages, and why is there this much value being attributed to the health care ecosystem. I’m eagerly awaiting to see what happens, but this is certainly the most—the area of most intrigue to me over the next few years, the exit path.

Heidi: Vig, I couldn’t agree with you more. It is an unprecedented time, and it’s an incredibly exciting time.
As the health tech market continues to grow, successful innovators should continue to demonstrate market opportunity to their customers and investors. And CVCs will have important responsibilities to bring their industry and regulatory expertise to continue to move the industry as a whole toward the future of health.
I want to thank my guests, Pete Micca, Alyssa Jaffe, and Vig Chandramouli for joining me today on Tales of Transformation. Thank you so much for a really interesting conversation.

Alyssa: Thank you.

Vig: Likewise, thank you.

Pete: Yes, thank you.

Heidi: Stay tuned as we continue our series exploring the future of health and trends transforming the industry.