In New York, You’ve Got to Have All the Luck

“In New York you’ve got to have all the luck.”– Charles Bukowski

I was in NY two weeks ago and ended up at a NYC Health Business Leaders event put on by Bunny Ellerin that I hadn’t planned to attend.  I was invited by my comrade-in-arms, Milena Adamian and was so glad I went. I got to see a ton of old friends and make some new ones and hear a really interesting panel that had 5 investors on the one hand, and an audience of about 100 on the other hand, both weighing in on what’s hot and what’s not on the healthcare investment front.

The panel itself included 5 investors: my friends Bijan Salihizedah of Navimed and Max Kahn of Merck GHI were there, as were Cecilia Gonzalo of Essex Woodlands, Phillipe Chambon of New Leaf Ventures and Brad Weinberg from Blueprint Health.    Lots of investment experience was represented, as well as broad experience from the many healthcare sectors.

The audience included a pretty eclectic mix of investors, entrepreneurs, advisory folks, corporate representatives, even some non-profit healthcare people.  Pretty much every sector of healthcare was represented here as well:  biotech, medtech, health IT, healthcare services—the whole magilla, as the saying goes.  If this meeting had occurred in San Francisco there would have been far more 20-something digital tech gliteratti and far fewer fur coats.  Note to people in NY:  your weather sucks and in case no one told you, you are allowed to leave.  On the other hand, if you move here the weather is awesome but there are way too many 20-something glitterati types running around.

Aetna’s Justin Silver and his colleague Jon Puz designed the format of the event based on a similar event they held at the HBS Healthcare Alumni Association recently.  I particularly enjoyed it because it pointed out how much people rely on gut feelings and intuition and old-fashioned educated guessing when it comes to picking winners and also how unreliable that method can be.

The meeting started to test the audience participation devices by asking who would win the Super Bowl, which had not yet occurred obviously.  Two thirds of the audience was convinced the Broncos had it in the bag, Let’s hope these are not the people deciding how to invest your money.  For the record, I picked Seattle because I saw the beating they gave to the 49ers and they seemed unstoppable.   Heavy sigh.  But it’s nearly baseball season so I am on the road to recovery.

Justin Silver moderated the event, going through each of the key sectors where healthcare investors dare to go:  biotech, medtech, health IT, digital health.  Poor old healthcare services got short shrift here, smushed, as it often is, into Health IT in the form of the dreaded “tech-enabled services.”  It continues to amaze me that no one likes health services when they are literally the 80%–that which drive all costs in healthcare.  But it was not explicitly mentioned, so there.

Justin pointed out that in 2013 there were less dollars ($4.4B) flowing into biotech venture investments than in any year since 2007, except 2011, which was even worse.  The venture panelists were pretty down on the sector; Bijan and Cecilia not big fans, Phillipe feeling we might be at a peak even thought it had been a good IPO year.  Interestingly, despite the panel’s view, the audience voted 55%-45% that this was the sector to be placing bets on.  It felt to me a bit like when you win big at the craps table and then put all your winnings on the hard eight.  Yeah, you might hit it, but the odds are against you right now.  Interesting to see the diversity of opinion.

What shouldn’t be a surprise to anyone is how bad the medtech sector is faring, both in terms of dollars invested in new deals and in the volume of M&A transactions, which accounted for $20B in proceeds in venture-backed deals in 2013, the lowest in more than 10 years.    As Justin pointed out, this is despite medtech producing the best realized IRRs (internal rates of return) of any healthcare sector for the period 2008-2013.  Of course, there were some ginormous individual deals during that period (Ardian, for instance, which turns out to be a bit of a problem for Medtronic), but still.  The entire venture panel was very negative on the sector and, to paraphrase, were probably more likely to invest in magic beans than new medtech companies.  But in weird contrast, 46% of the audience is bullish, believing the sector will bounce back.  Hmmmm…not so sure here.  It might find it’s way out of hell, but I don’t think it’s headed back to heaven given how tight reimbursement policies have become on the payer and provider front.

Of course, healthcare IT, and especially digital health, are the new darlings and more than $2.1 billion flowed here in 2013, up 10x form the $211 million invested in sector startups in 2010.  Note that this represents a jump from 22 to 571 deals.  Does the world need 571 new health IT companies all at once?  Not so sure about that and I hope that any talk of bubbles relates to champagne being consumed after great exits, but it makes me nervous.  All the panelists like healthcare IT and digital health (I suppose you have to invest somewhere if biotech and medtech are out!), but there was much talk about enterprise vs. consumer-directed products and which subsectors were most viable.  Everyone on the panel acknowledge the important of demonstrating a cost-savings from new products, which led to the inevitable concern about consumer-directed new entries onto the playing field.   But the audience disagreed, with 50% saying that consumer-focused companies are the way to go.    And even Brad Weinberg of Blueprint acknowledged that while 45/46 of his current investments are enterprise-focused, he expected the ratio would flip within 5 years.

Wow.  I hope that during those 5 years consumers learn to change their health-related behaviors and how to part with their money.  I agree as much as anyone that the financial responsibility is heading straight at the consumer and I am personally a believer that the vast majority of people in this country, including the employed, will be buying individual products on health insurance exchanges within 10 years (maybe sooner—see article today quoting former HHS Chief Mark Leavitt saying it might be 5 years).  But I don’t think that is the same as saying that consumers will willingly or even unwillingly start paying directly for tons of healthcare products and services.  I can’t tell you how many meetings I go to where doctors are talking about how to engender consumer healthcare engagement while they themselves are sipping Coca Cola between sentences.  Houston, we have a problem.

In the end, healthcare services did actually win the day.  While less explicitly named, the audience and panel were given an opportunity to pick from four semi-fictitious but actually real companies in order to say which would be their investment of choice, if real money were on the line.  A health insurance company and a bundled payments/pay-for-performance company were the winners, leaving two more pure health IT companies in the dust.  So maybe this is all just semantics and healthcare services is really where it’s at (it is in my view, although without the tech, the services can’t be efficient).

It was a little sad how the meeting ended. The NY crowd was sadly bemoaning how they are less loved and appreciated than their Silicon Valley brethren when it comes to capital and company site selection.  Companies get funded on an almost 2:1 basis in Northern CA than in the Big Apple, a phenomenon the audience in the room blamed equally on a potential backlash against the Yankees’ 27 world championships (Go Giants!) or Californian’s inability to get the NY sense of humor.  However, I am quite sure that the answer lies in the crappy weather, and as I told one of my east coast counterparts just this morning, the words, “Well I have to get home because we are going to get another 12 inches of snow” will never cross my lips as they did hers just before I started mocking her.