The Seventh Annual Fenwick & West Digital Health Investor Summit profiled a sector that continues to attract record levels in investment, further matures and consolidates, and that is leveraging the newest technologies in blockchain and artificial intelligence to improve the practice and delivery of health care. Speakers included Rock Health’s Bill Evans and Goldman Sachs’s Peter van der Goes, who discussed the possibility of an investment bubble and outlook for 2019, and Ruchita Sinha of Sanofi Ventures, who talked about blockchain in digital health. Fenwick’s Kristine Di Bacco moderated a panel on machine learning and artificial intelligence in healthcare with guest speakers Brandon Ballinger, co-founder of Cardiogram; Alison Darcy, founder and CEO of Woebot Labs; and Christine Lemke, co-founder and president of Evidation Health.
Does the Most-Funded Year Point to a Bubble?
Bill Evans, CEO and managing director of Rock Health, kicked off the meeting by promising to address the question of a potential digital health investment bubble, rumblings of which could be heard in the fall. But he started with a review of the state of digital health funding, noting that at the end of the third quarter of 2018 the sector had taken in almost $7 billion in private investment, well ahead of 2017’s year-end total of $5.6 billion. All in all, Evans said Rock Health expects funding in 2018 to top $8 billion. With results like that, talk of a bubble may not be surprising. In its 2018 Year End Funding Report, Rock Health went on to share its assessment of the market, including the broader VC context, and concluded that digital health is not in a bubble.
Our recent posts have chronicled the rise of the mega-round—late-stage investment rounds of over $100 million that many believe are driving investment totals sky high. But Evans noted that deal sizes are up for companies at every stage. Year-over-year, the average Series A round increased from $7 million in 2017 to $8 million in 2018. The average Series B round increased by $5 million between 2017 and 2018. And the average Series C round jumped from $23 million in 2017 to $30 million in 2018.
All the same, it was Series D and later rounds that enjoyed the most growth. The average size of Series D or later rounds was $60 million at the end of Q3, up from $25 million last year. That’s an increase of 140 percent.
Evans also noted that for the third year in a row, there were more repeat individual investors in the space, most of them traditional venture capitalists, which he sees as a sign of durability. He also called out the fact that through Q3, one out of seven deals included a corporate investor.
As for talk of a bubble, Evans said investors will need to identify and define leading indicators of an investment bubble as they enter 2019.
Whither the IPO?
Peter van der Goes of Goldman Sachs followed Evans with a summary of the public markets. Van der Goes said he believed private investment in digital health could reach $9 billion by the end of the year.
However, van der Goes was not overly concerned about a digital health bubble in the private markets. He argued that the high valuations are simply a function of supply and demand. With modest returns in other healthcare subsectors, investors are looking to digital health companies for their higher rates of return. Van der Goes believes the lack of digital health IPOs may be in part explained by the abundance of private capital. “There is no need to go IPO with so much private capital available,” he explained.
What’s in Store Next Year
As to what we should expect in 2019, van der Goes said:
- Look for big private equity-backed companies to go public in the second half of the year.
- Expect United Health to continue to be an active buyer and for CVS, Cigna, Anthem, etc. to become active buyers again.
- Look for financial sponsors to invest in platform companies through acquisitions.
- Expect Big Tech to push farther into digital health.
- And look for Big Health Care to invest in digital health, including life sciences companies.
Emerging Technologies to Watch
Ruchita Sinha, senior director of investments for Sanofi Ventures, walked the participants through the opportunities for blockchain in health care. She outlined a number of use cases where the distributed ledger and smart contracts features of blockchain are well suited to specific challenges the industry faces, including:
- Pharmaceutical Supply Chain Management: Counterfeit drugs are a $200 billion problem that can lead to deaths of patients and fines and compliance costs for manufacturers
- Clinical Trials: A $3 billion market with multiple stakeholders and large quantities of data where transparency and trust are essential
- Payments: Payments are increasingly tied to outcomes, which will require tracking patient outcomes and tying outcomes to payment metrics can be enabled through the development of patient-centric smart contracting
Machine Learning/Artificial Intelligence
Fenwick’s Kristine Di Bacco moderated a panel on how machine learning and artificial intelligence can be used in healthcare. The panel included Brandon Ballinger, co-founder of Cardiogram; Alison Darcy, founder and CEO of Woebot Labs; and Christine Lemke, co-founder and president of Evidation Health.
Ballinger noted that “every industry is ahead of healthcare,” when it comes to the use of machine learning. “The time series in healthcare is atypical and may offer opportunities for innovation.”
The panelists agreed with Dorsey who made the point that AI is not the “what”, it’s the “how.” “AI is just a means to an end,” she said, adding that “this hype cycle will pass...AI alone is not a selling point to investors.”
Lemke was excited about the opportunities to leverage machine learning in diagnostics. She said we will know we hit the tipping point when the radiologist who is using an AI tool to assist in deciphering images becomes so confident in the technology that they begin to rely on it. She also noted that technologies using AI have to be “highly intuitive; as easy to use as a bathroom scale.”
The Culture Has to Fit
The afternoon finished with a panel on “Corporate Development and Strategic Partnerships” moderated by Lynne Chou O’Keefe, founder and managing partner of Define Ventures. The panel included Rowan Chapman, PhD, head of Johnson & Johnson Innovation; Jeff Eidel, head of corporate and business development at Illumina; and Aashima Gupta, global head of healthcare solutions for Google Cloud Platform, Google.
If there was a theme for this panel, it was ‘culture.’ While Chapman said it’s important to “spend more time making sure we’re aligned on goals,” than on drafting contracts, everyone agreed, as Eidel put it, the “culture has to fit.”
Gupta said that beyond culture, which she put as sharing Google’s values, an investment needs to “solve a pain point of bend the cost curve.”
Going into 2019, we will see if private investment in digital health will continue to soar, or take a step back and plateau for a while. Will digital health IPOs return as van der Goes predicts, or will corporate and venture investment continue to be adequate to fund innovation?
It’s probably a safe bet that digital health entrepreneurs will continue to adopt technology breakthroughs like blockchain and machine learning, as well as whatever comes next.
And with both Big Tech and Big Health expected to make plays in the digital health sector, it’s important for entrepreneurs and their investors to find partnerships where the goals and cultures of both parties are aligned.
Originally published December 26, 2019 on Fenwick's Life Sciences Legal Insights blog.