Looking for the digital health tonic

Denise Ko Genovese
16 October 2019

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With digital health investments expected to reach new records in 2019, Denise Ko Genovese looks at recent success stories and the untapped potential available to investors

There has been a massive uptick in digital health investing in recent months, with funding for the sector growing and investments in 2019 expected to reach an all-time high. According to a global healthcare report published by CB Insights in August, total digital health funding was at $3.5bn in Q2 2019, up 23% compared with the first quarter; volume was also up, with 371 digital health deals compared with 354 in Q1. There are currently 38 venture-backed digital health unicorns globally worth a combined $90.7bn, with valuations on the rise as a result of continued mega-rounds to existing unicorns. Stars of the European scene include Babylon Health, Doctolib, Mindmaze and Benevolent AI.

French startup Doctolib reached unicorn status this year when it received €150m from a consortium of backers led by General Atlantic, valuing the digital health business in excess of €1bn. Doctors use the online platform to manage appointments, while patients can use it to find specialists nearby. Eurazeo, BPI France, Kernel and Accel also took part in the funding round.

But the biggest fundraise in digital health delivery took place this year when UK startup Babylon Health closed a $550m series-C funding round, valuing the company at $2bn. Investors included Saudi Arabia-based investment fund PIF, Munich Re's Ergo Fund, as well as returning investors Kinnevik and Vostok New Ventures. Founded by Ali Parsa in 2013, Babylon started as a platform providing remote consultations with doctors via text and video messaging, and has gone on to develop a string of AI-based services.

Investors concur that there is growing interest because the sector is deep and potentially very lucrative. And there is room for further growth in Europe: according to OECD data, one fifth of the entire US GDP was spent on healthcare in 2017, or the equivalent of $10,000 per capita. This is compared to $7,000 spent per capita in Switzerland, $5,500 in Germany and $4,000 in the UK. From simple back-office functions to AI-enabled diagnostics, the remit is broad and money is required for digitalisation and growth.

"Let's begin with just plain-old – or horizontal – digitalisation of systems and processes. This is about making the back office – notably billing and record keeping – more efficient. This alone would result in massive cost savings, allowing those funds to be funnelled into more productive parts of the healthcare system," says Paladin Capital senior strategic partner Nazo Moosa.

In the US, approximately 25% of all healthcare spend goes into admin-related areas. In Europe, it is lower but still makes up approximately £1 out of every £8 of total healthcare spending, which is a very large pool of money that can be streamlined, Moosa says.

It is unthinkable that in the 21st century we do not have a coordinated system to manage personal medical records. The industry is very much behind" – Jean-Marc Patouillaud, Partech Ventures

One company addressing the backlog of paper admin is Partech Ventures-backed Lifen – an online platform that allows doctors to digitise and share medical reports securely. Partech led a €22.7m funding round for the French startup in June this year, with Idinvest Partners and Majycc eSanté Invest also taking part in the raise. According to the company, the time saved using the system will be the equivalent of 300,000 new consultations and €3m per year, per hospital.

Digitalisation delay
"It is unthinkable that in the 21st century we do not have a coordinated system to manage personal medical records," says Jean-Marc Patouillaud of Partech Ventures. "The industry is very much behind."

Indeed, compared with other industries, healthcare lags in terms of digitalisation. This creates a powerful incentive for investors eager to harness this untapped potential, but one of the main reasons behind this is the complexity of the system and the number of stakeholders involved – public health bodies, private practices, regulators and insurers, to name only a few. There is also much at stake if things go wrong, hence the reticence in some quarters.

"Privacy is a primary concern for health organisations. Accuracy is key, but in order to leverage data you need privacy," says Patouillaud. The potential to collect and use data is very powerful, but before that information is leveraged, assurances that the information is secure need to be put in place, he adds.

Moosa agrees that security and data privacy is a key investment theme: "Paladin actively mines for [related] opportunities, especially as we move into an Internet-of-Things environment where the physical devices, such as defibrillators and biosensors, and the digital converge." Addressing this theme first also opens up businesses to further value-adding strategies, she adds: "After dealing with the admin and peripheral tasks, and ensuring that the systems are secure and private, you can then get on to the really exciting parts: investments in technologies that make care more intelligent and effective, easier to access, more affordable and human-centric at the point of care."

While healthcare tech has typically been the preserve of early-stage investors and VC funds, as the sector matures and technologies advance, now could be the time for larger private equity players to take the plunge. In its recently released Private Equity Opportunities in Healthcare Tech report, McKinsey argues that the first cohort of European and US healthcare tech companies is now sufficiently mature for private equity firms to consider as investment candidates. With EV multiples likely to come in at as much as 17x EBITDA compared with 14.9x for a pure healthcare deal, these larger players will have to be bullish – but the rewards upon exit can make that particular pill easier to swallow.