To say that COVID-19 and recent social unrest have placed the economy in an unusual situation would be nothing short of an understatement. The past few months have seen tens of millions of Americans file for unemployment, businesses across the country shut down and tentatively resume services, major heated gatherings in the streets of major cities, and many policymakers still holding their breath to see whether or not the pandemic will return for an even stronger second wave.
And yet, some major fundraises across digital health, and a glance at recent trading activity across major private equity exchanges, could make the case that investors, by and large, are not too concerned about what 2020 has so far had to offer. A recent discussion between health tech investors, however, suggests no shortage of doubt or caution among stakeholders.
"We're in a very strange place right now," Ruoxi Chen, an associate at Warburg Pincus, said during a recent BIO Digital panel of digital health investors. "For investors, ... there's just increased uncertainty, and when that occurs it becomes harder for us to provide risk, and the crystal ball on how companies will perform in that sort of environment becomes murkier.
"On the other hand, when you look at the equity markets, you couldn't tell that any of these circumstances were present. NASDAQ, I was shocked to see this morning, was up 8%. ... That creates a bit of a disconnect between the uncertainty that's out there, that's looming over all of our heads to some degree."
Although digital health investment has seen a slight decline from the breakneck pace of the first quarter, "robust" public-market activity and other venture deals are no indication that it's hit a wall, explained panel moderator Wainwright Fishburn Jr., founding partner of Cooley LLP’s San Diego office and global chair of the firm’s digital health group.
However, some new practicalities driven by the pandemic are changing how investors are meeting new business partners, Chen said, and could have at least a short-term impact on the volume of deals in 2020.
"We're weighing for the first time how to invest in companies where we don't have an opportunity to have a face-to-face meeting with the management teams, with the entrepreneurs – and a lot of what investing looks like for us is the ability to build that foundation of trust with the management team, the alignment of the strategy, to be able to break bread with one another," he said. "While Zoom has come a long way, there are some limits and I think that will have a dampening effect on the pace of investment on the private equity side this year."
Some new trends in the types of deals being made are already starting to emerge as a result of the shift from in-person to virtual dealings.
"People are saying it's a little more difficult to do Series A because interpersonal connection is so important," Fishburn said. "But we're seeing many oversubscribed deals at Series B and beyond, and those have all taken place over the last couple of months since COVID."
But despite changes in the "how" of digital health investing, all of the session's panelists said that their groups are still primed to sign new deals. Chen highlighted the "record amounts of dry powder" his funds and others were sitting on prior to COVID-19's emergence, while Echo Health Ventures Partner Jessica Zeaske noted that the past year of skyrocketing investments – which some had worried could signal a bubble – have actually served to prepare the sector for an event like COVID-19.
What has largely seen a change since March is the types of companies and products that are now in higher demand, or are simply weathering the storm until 2021. Telehealth, remote monitoring, data-driven analytics and other such products are all seeing a very well documented rise in adoption, but Zeaske stressed that it is the intersections of these technologies and specialties that will gain the most momentum.
"Where a lot of us are going to start looking is this convergence. We say: 'I was a healthcare IT investor.' 'I was a devices investor.' 'I was a life sciences investor.' 'I was a services investor.' I think that's out the window. I think we're going to look for entrepreneurial teams that actually are facile in all of those things," she said. "It's small as an individual patient, but when we start to look at the industry changes, that convergence is really going to change all of our investment themes going forward."
Tom Kluz, general partner at Qualcomm and Novartis joint-venture-investment company dRx Capital, noted that more customers have been open to artificial intelligence-based pitches over the last 12 weeks, "because it's clearly solving a critical need and users are at a point of desperation," he said. Ruoxi highlighted the resiliency of companies in his portfolio with business models based on software or software-as-a-service.
"Those are highly recurring business models: multi-year contracts, very high renewal rates, incredibly sticky services. We're not seeing, obviously, anybody turning off their EHR systems in this market and backdrop. Those are still seen as very critical services," he said.
"[But] anything that's really selling into the hospital channel during this COVID environment – where you're relying on them as your primary customer or other specialty providers for which their fates are heavily tied to elective procedures – we're finding sales cycles are becoming longer. While people may not be switching off the EHR systems they're currently utilizing, this is no longer top-of-mind for them as they're dealing with the pandemic and other priorities."
Of course, not every investment has found itself in high demand as a result of COVID-19. For these company, Chen said, 2020 will likely "be something of a lost year," but investors will still have an appetite for a strong business model and attractive fundamentals in 2021 or beyond.
"Stellar expectations around valuation have not really changed," he said. "What we're finding is that, generally, very strong businesses do not need to put themselves up for sale at the present moment or raise capital. They're starting to choose not to, and to wait for a better market environment and window."