Creation of New Health IT Companies to Increase in Next 2 Years

April 15, 2019 - The creation of new health IT companies will increase over the next two years, according to a survey of more than 240 healthcare leaders by VC firm Venrock.

A full 79 percent of respondents said health IT company creation would increase, 14 percent said it would stay the same, and 8 percent thought it would decrease.

Twenty-two percent of respondents believe that capital markets for private health IT companies will remain strong at all levels; 26 percent believe the markets will remain strong for early stage companies, but become more difficult for long-term growth; 36 percent believe that the markets will become more difficult for early stage firms, but will remain strong for long-term growth; and 16 percent believe that the market will become tougher for all stages.

A full 72 percent of respondents are concerned about talent and hiring challenges to health IT innovation over the next 12 months, while 46 percent are concerned about funding challenges to health IT innovation over the same time period.

At the same time, many believe that unicorn valuations are not in line with their market potential. A unicorn is a private startup company valued at more than $1 billion.

Fewer than half of respondents thought that the valuations of 23andMe and One Medical were in line with their market potential, while 37 percent thought that Devoted Health was in line with market potential.

VC Investment in Healthcare Companies on the Rise

A recent CB Insights report also found enthusiasm for VC investment in healthcare companies. The report found that healthcare investment by corporate VC firms increased 51 percent year-over-year in 2018, reaching $10.9 billion.

Corporate VC deals in healthcare companies increased 23 percent year-over-year last year, totaling 298.

The healthcare investment surge was driven by large CVC funding rounds for Massachusetts-based biotech firms Moderna Therapeutics and Relay Therapeutics and California-based Samumed.

Corporate VC funding in healthcare has grown steadily since 2013, when it totaled $2.3 billion involving 151 deals. In 2014, healthcare investment by corporate VC firms totaled $2.8 billion with 184 deals; 2015, $5.2 billion with 211 deals; 2016, $5.4 billion with 214 deals; and 2017, $7.2 billion with 243 deals.

Corporate VC activity in Massachusetts increased 76 percent year-over-year to $4.1 billion involving 110 deals in 2018.

Digital Health Is Priority for Healthcare Investors

According to a global survey of 441 healthcare business leaders and investors by  Simmons & Simmons, digital health companies are a strategic priority for them.  

Eighty-three percent of respondents said that consortiums and corporate joint ventures are their preferred method of investing in digital health companies.

More than three-quarters of respondents said minority investments are the best way to grab digital health opportunities, while 78 percent cited mergers and acquisitions as the best path, 70 percent said hiring staff with digital expertise is best, 65 percent cited building internal capability as the best bet, 66 percent said signing service contracts is the best method, and 59 percent said changing company culture and policies is the best approach.

Around 71 percent of respondents said they intend to exmpand investment in multiparty deals over the next three years, two-thirds plan to increase open-science collaborations, 65 percent plan to increase mergers and acquisitions, 64 percent will look for cross-sector/multi-industry collaborations, 64 percent will up minority investments, 55 percent will expand crossborder collaborations, and 52 percent will consider consortia with competitors to address industry-wide challenges.

The survey highlighted several barriers to fruitful collaborations, including lack of direction, siloed thinking, IP complexities, data insecurity, uncertain market access, product liability issues, divergent objectives, and cultural clashes.

“Our report highlights that cross-sector collaboration is driving the development and delivery of exciting new digital technologies which are challenging traditional business models and have the potential to transform healthcare globally,” concluded Simmons & Simmons IP/Regulatory Partner Michael Gavey.