Oliver Wyman Health (OWH): What will 2018’s VC landscape look like? Which healthcare sectors will be the clear winners and sleepers?
Lisa Suennen (LS): Two areas that will garner much attention in 2018 are areas that support precision health (by which I mean something much broader than precision medicine) and technology-enabled services, with an emphasis on services.
There is interesting innovation on the precision health side around the discovery and delivery of new drugs. And this innovation is likely to continue, particularly given the expanding immunology opportunity. But we will see expansion around integration of genomics and the core healthcare system around finding better and more appropriate treatment for people, as well as a serious commitment to expanding funding for social determinants of health that make a real difference in clinical outcomes — like nutrition, housing, transportation, loneliness, cultural sensitivity, and the array of functions that make us human, and make us healthy.
By looking at people as whole beings, we can serve them far better on the healthcare front. This is finally being recognized in the form of for-profit entrepreneurship.
There is finally recognition that most money that flows through healthcare flows through services. Technology is great, but in healthcare there is a need for technology to integrate well, mostly through the delivery of clinical and administrative services. Companies are finding they can capture more of the value chain when they provide integrated tech-enabled services that customers can more readily adopt than technology alone. So although many tech investors have shunned services, when you’re in healthcare, that’s not the path to nirvana.
OWH: News of mergers and acquisitions (M&A) flooded the headlines in 2017. Will M&A activity continue to increase in 2018?
LS: Given how companies are having a tougher time getting financed, we will see a lot more M&A, both the “good” kind, where investors and entrepreneurs realize good ROI, and the “bad” kind, where asset sales dominate and invested capital is washed away.
As some of the interesting health tech companies reach a meaningful size, they are much more attractive acquisitions for larger entities that can provide the distribution reach that small companies simply can’t support on their own. Therefore, M&A will be up compared to 2017.
OWH: Is 2018 the year the Amazon re-shapes healthcare?
LS: Amazon has certainly re-shaped what keeps some in healthcare up at night. We are seeing wholesales changing of who our industry leaders are. The traditional companies that could not (or would not) embrace technology, or did not want to acknowledge the consumer experience matters, are getting a reckoning.
There is room for new market leaders, and we are beginning to see them emerge. I am not sure if the new leader will be Amazon, Apple, Google, CVS, or another company, but traditional players wanting to keep their leadership role will have to embrace the importance of consumer experience, understand how to deliver efficiently in a technology-laden world, and stop relying on how things have always been done. Also, we are seeing more bedfellow partnerships, which will re-shape the industry. There is a new game of musical chairs underway.
OWH: How has the current Administration’s reform efforts impacted VC in 2017? What can we expect in 2018?
LS: Although “reform” is not how I would characterize it, the administration’s activities around health insurance policy, especially the strong pullback from value-based initiatives, have put a bit of a chill on the sales process for young companies trying to sell into a value-based world that doesn’t exist yet. The majority of healthcare services are still delivered through fee-for-service mechanisms, and that is clearly not up to speed with CMS’ rollback of initiatives like bundled payments.
I don’t see how this will change in 2018, as there will ultimately be a slowdown in investments in companies that had raised earlier money to focus on delivering in a world that would achieve financial alignment much sooner. As a result, they will not find the revenues they had hoped for so quickly, and will thus suffer in the next rounds of financing.
We may have reached a peak in digital health investing. There is, thank goodness, a growing drumbeat around the importance of evidence and proof that value proposition is real. We may see many young companies falter and many larger companies adjust strategy for the long march to a value-based world.