Empowering Healthcare Advancements through Venture Capital and Private Equity
Weiwei Liang, Avery Ma, Alina Zou
In the last few years, the emergence of the COVID-19 pandemic exposed notable vulnerabilities within the healthcare system. During the peak of the global health crisis, numerous hospitals and clinics made effective efforts to enhance their healthcare capabilities and outpatient services. Within the realm of enhancements, Private Equity (PE) and Venture Capital (VC) firms played an influential role in promoting medical innovation and bridging the gap between scientific creation and patient accessibility.
During our background research process, we learned that in the months of March 2020 to June 2020 alone, there was an estimate of a total financial impact of $202.6 billion in losses for America’s hospitals and health systems, or an average of $50.7 billion per month (American Hospital Association). Federal aid has rolled in to aid the huge financial deficit, but even then, the damage is enough for health systems and facilities to dive into other options to promote outpatient services and more efficient ways to provide care.
In recent years, there has been a notable increase in the allocation of investments towards digital healthcare services by VC and PE firms. In our very first Health newsletter, we will highlight some of the influential roles that venture capital plays in providing support to healthcare startups and enabling innovation within the industry. Furthermore, we will examine the impact of private equity firms on Healthcare services, specifically concentrating on their investment tactics designed to foster growth and diversity of patient care delivery.
What have Venture Capital firms been up to?
Venture Capital (VC), to me, is often a term full of wonders. The technical definition of VC includes a firm investing in a start-up within a promising field, and hoping to gain strong returns after the company has launched and become “successful,” in other words, profitable. Through secondary sources, we have found that VC firms can really serve as a catalyst for empowering patient care improvement in the health industry. Within the firm, there are often subject matter experts who can help guide the start-up and lead them closer to their end goal- whether that be bridging a gap in various scientific contributions and commercial performances, or bringing resources together to fight a certain cause that is prominent in the medical field. In this section, we will dive deeper into this “VC X Health” realm taking place during the peak of the Pandemic and today.
During the COVID-19 Pandemic, hospitals were struck with over-occupancy and a strong disproportion between healthcare workers and patients. Many hospitals realized that they did not have sufficient manpower to treat this enormously increased influx of patients, and transitioned to a more outpatient service stream and remote services such as Telemedicine. Based on research done by Rock Health, Digital Health received more funding during the year 2021 than any other year during the past decade, with an average deal size of $39.6 M and a total fund of $29.1 B. That is a lot of money!
https://rockhealth.com/insights/2022-year-end-digital-health-funding-lessons-at-the-end-of-a-funding-cycle/
Digital Health includes many categories of products/services, such as Digital Health tools (DHTs) like wearable devices and cloud management databases. It also includes Telehealth platforms. There is still a huge unfinished debate on whether Telehealth is considered “real medicine,” since the healthcare practitioner is not actually physically present with the patient, and oftentimes, many diseases require in-person examination to be diagnosed. However, some advantages include allowing for more convenience for the patient in regard to appointment scheduling and commuting to the doctor’s office. There are arguments from both sides, but many large hospital settings are currently using Telehealth to conduct consults. Nonprofit funds such as Kaiser Permanente and Mayo Clinic Ventures have invested in Hospital-at-home technology and other remote solutions to treat patients. I can go on and on about this topic, and maybe we will explore this in another newsletter. For now, let’s take our focus back to VCs and what they are up to today.
Today, with the help of vaccines, treatment, and time, the pandemic is a lot less destructive and is not a major worry for the general American population. VCs have diverted their focus from the more pandemic-targeting Digital Health solutions and have slowed their seed investments year-round. Digital health startups raised around $6 billion across 240 deals in the first half of the year (Rock Health Digital Health Funding Trends), but the upcoming funds are expected to slow down tremendously compared to the last two years. As shown in the figure below, Biopharma start-ups receive the most funding followed by Health technology and device companies.
https://www.svb.com/trends-insights/reports/healthcare-investments-and-exits
In an interview with Saklecha, the Head of Ventures at the Cleveland Clinic, he said that “the venture capital group is really focused on those inventions that have a significant opportunity to impact patients but really based on finding identified white spaces where there’s no competition and where there’s large market opportunities financially.” The Cleveland Clinic, Kaiser Permanente, and other large health institutions have been investing in health products and services for many years, and will continue to do so in the future. They usually invest in companies that create medicines or medical technology products/platforms that would benefit their own patients.
Interesting examples include The Autism Eyes™, a platform that accelerates the diagnosis and risk assessment for children with Autism (received funding from Cleveland Clinic), and Dexcare, a virtual intelligent decisioning platform to help find the best-fit care options for patient concerns (received funding from Kaiser Permanente). One of the most successful ventures is Cleveland Clinic’s Centerline Biomedical, featuring an endovascular navigation technology that increases precision yet decreases procedure time. It is now FDA-approved and used in many renowned healthcare institutions. To wrap it up, funding goes where it needs to go, some of the time. In future newsletters, we will discuss the good, bad, and ugly of where money and healthcare collide. For now, Venture Capital is enabling a generous amount of novel and exciting inventions to be commercialized and accessible to the greater public! We love to see it.
Private Equity X Healthcare
Before we dive into how Private Equity plays a role in the technological advancement of Healthcare services, let’s define and outline what this industry actually entails. Private equity (PE) firms typically invest in established companies with the goal of optimizing and growing them at a lower risk. It is substantially different from VC since it does not usually invest in new start-ups and has a large pool of stable funding to support its diverse portfolio. PE firms primarily invest in different fields to drive innovation, enhance a product/service through financial reinforcements, and of course, uphold an attractive and liquidative portfolio for their investors (we had to say it). In an interview, “BlackRock on healthcare investment opportunities amid COVID-19,” with Ben Bei, the director of BlackRock's Active Equity Group, he mentioned that long-term opportunities such as minimally invasive technologies and implant technologies are the most promising in the health industry. He also highlighted that as long-term investors, they are most interested in areas with outstanding potential for medical technological advancement, and hope to fulfill some previously unmet demand through new solutions. As a result, many companies are willing to invest in “technology and innovation-driven healthcare”. Since 2020, the pandemic has been putting immense stress on the healthcare systems worldwide, especially the finance and operational groups of numerous institutions. Below are some diagrams showing where and when PE firms really piqued interest in the health industry during the pandemic.
Since 2021-2022, private equity companies invested the most in healthcare equipment such as medical testing kits, blood glucose monitors, and respirators.
https://www.spglobal.com/marketintelligence/en/news-insights/latest-news-headlines/private-equity-investments-in-healthcare-equipment-sector-decline-in-h1-2023-77298296
Due to the enormous increase in the number of patients during 2021-2022, healthcare settings mentioned before in the newsletter faced a dramatic shortage of the workforce. Taking that into consideration and with the awareness of social distancing, digital health, especially telemedicine platforms, has become increasingly prevalent. The application of telemedicine for doctor-patient communication has benefited patients in terms of convenience and efficiency. According to Doximity's 2020 State of Telemedicine report, “More than 20% of all medical visits in 2020 will be conducted virtually, representing $29.3 billion in services.” Due to pandemic lockdowns, telemedicine became a valuable access platform for patients, especially those with chronic diseases requiring regular medication and consultations with their primary care provider (PCP).
In the figure below, the Doximity report published the yearly percentage comparisons of Telemedicine platform usage between patients with and without chronic illnesses in 2020 and 2021. We can see that the usage of patients with chronic illnesses is significantly higher than that of those without chronic illnesses. In the long term, it can be considered that patients with chronic illnesses will become the primary users of telemedicine.
Image source: State of Telemedicine Report
Looking forward, trends strongly indicate that the utilization of telemedicine and other digital healthcare products will stay stable in usage. Some private equity firms have run research analyses to predict the long-lasting impact of digital healthcare. Tencent, a technology company based in China, invested $70.0 million in a patient at-home service platform, DXY. DXY has about 5.5 million users and it brings medical consultation services to the public with the ease of never leaving their homes. It was the first platform that introduced the Covid tracker during the pandemic. In their 2022 report, Doximity also mentioned that over 73% of patients report that they plan to receive care through telemedicine after the pandemic. This year, CVS Health invested $100 million in Carbon Health, a health facility that provides virtual and in-person urgent care and primary care. Now, in 2023, despite the decreased demand for public social isolation and the general population being more prone to in-person doctor visits than a few years ago, PE firms are still investing in various digital health companies that facilitate Telemedicine and other technological products.
PE has also stepped into other aspects of healthcare, such as outpatient services, medical devices, and biotechnology. From Fierce Healthcare, more than 250 deals in 2020 plowed private equity investments directed toward outpatient clinics, ambulatory surgery centers, and urgent care centers. For instance, InnovaHealth Partners invested in Radiaction, a company that creates robotic systems that significantly reduce radiation exposure for both doctors and technicians during imaging and operations. InnovaHealth also invested in Monteris Medical, which has developed a groundbreaking minimally invasive MRI-guided robotic control system for neurosurgery, helping to decrease the invasiveness of procedures like brain tumor removal.
In summary, the COVID-19 pandemic has posed substantial obstacles for healthcare institutions, with the issue of over-occupancy and the unbalanced ratio of practitioners to patients. These are all still emerging as prominent areas of concern today in many countries. This passage provides a short introductory overview of how certain health systems have addressed these challenges through the adoption of innovative health solutions such as digital health tools. Our analysis also provides a deeper exploration of the increased financial support for digital health initiatives amidst the pandemic, the multifaceted nature of digital health, and the ongoing discourse surrounding the effectiveness of Telemedicine. Moreover, it underscores the significant change in emphasis exhibited by venture capital (VC) firms, as they divert their attention from digital health solutions specifically designed for the pandemic. Furthermore, we have examined the pivotal significance of venture capital and private equity firms in the healthcare sector, their influence amidst the pandemic, malleable funding preferences, and shared case studies of healthcare startups and other established companies that have gained financial support from VC and PE. Our efforts hope to highlight the growing significance of the business industry in healthcare, particularly through their investments in digital health and other sectors in recent years. Telemedicine, accelerated by the pandemic, has become a lasting convenience for patients. Beyond telemedicine, PE firms have also ventured into outpatient services, medical devices, and biotechnology, fostering innovations like robotic systems and AI-guided technologies. As we move into the new year, we are excited to see the continued influence of these two business sectors collaborating with health professionals and continuing to bring advancements to improve patient care!
