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By Christopher Malter
The healthcare system is ripe for VC investment, particularly in early-stage companies that have an array innovative digital technologies which can resolve a raft of problems seeking solutions. While these technologies are now being integrated throughout healthcare, hospital systems are a particular focus by some investors throughout the continuum of care – including the operations, finance, and administrative side of the equation.
Through Q2 2020, total global investment in digital health investment was $9.1 billion, a 19% increase compared to the $7.7 billion in the same period in 2019, according to Startup Health. Q1 2020 was the most funded quarter on record at $4.9 billion. There were 377 deals Q1 2020 and 193 deals in Q2. Investment dollars spread across telemedicine, insurance, wellness, cancer detection, and wearables.
The underlying driver for VC and PE investment in hospital healthcare, at its core, is the same as in other industries: ROI. Some nascent companies today may become ubiquitous “industry standards” that will not only generate revenues immediately once deployed, but will have ongoing revenues because of continuous use subscription commercial models (migrating a model from the financial services industry). The multiples in these companies will increase over time.
Yet, there are particular drivers for technology in hospital systems that are attractive for investment firms. This is the nexus in hospitals between the need for efficiency, productivity, and delivery. Currently, the operations infrastructure for these systems is fragmented and legacy-based. COVID-19 demonstrated these problems in stark relief.
Here is one simple transaction example that affects patient outcomes, clinical efficacy, and system-wide costs: which pill goes to which patient; what are the operational costs associated with delivery of the pill to the patient; what is the optimal purchase in number and cost of pills across multiple hospitals in a system? That data can be aggregated across patient populations and applied to all pharma and all procedures, and the system itself. Now apply that kind of question to the billions of aggregate transactions that occur across all hospital systems nationwide in one year. To track, measure, and evaluate such massive data sets, artificial intelligence (AI) and advanced interpretive analytics need to be integrated and deployed across the entire hospital system.
Advanced analytics is a viable approach as evidenced by Roche’s April 2018 acquisition of Flatiron Health for $1.9 billion. AI and dashboard accessible real-time data will impact the entire healthcare chain, as hospital system C-suite executives, payers, healthcare systems, lines of service, and doctors are increasingly reliant on and driven by predictive data. The ability to monitor and measure revenues and cost effectiveness throughout the chain will largely determine how investors will value healthcare entities. The reverse also applies: the inability to deliver such analyses will leave investors with no method of meaningful valuation. And ironically, investors will get the valuation data they need by first investing in companies delivering analytics to achieve these goals.
The most advanced edge of the horizon are firms which move past predictive analytics and give a sense of optimal outcomes predictability. Here, the analytics move beyond “what am I doing?” to “what should I be doing?”
Firms that deliver these capabilities to hospital systems and their participants are increasingly on the radar screen of investors, as they provide “must have capabilities” to their hospital system partners. This market is relatively “blue ocean” as healthcare is rapidly ramping up to more sophisticated SaaS Cloud platforms. As industry standards emerge, first-mover providers will secure higher multiples as a function of product sophistication and the capture of market share.
The global pandemic has demonstrated multiple points of failure in healthcare, and the analytics now available will identify these gaps in advance to mitigate any effects in the future. The identification of these failures has come at a high institutional and human cost. As with most hindsight views, the failure has accelerated the response to making sure systems are in place so that in the future healthcare is never again caught short. As such, the future of U.S. healthcare will largely pivot and depend on the response of the investment community.
Christopher Malter is CEO of Avalon.ai, a leading global innovation aggregator in Fintech and HealthTech.