Why Invest in Healthcare Startups?

The 5 Why Series: Why #2

The Blueprint for Innovation

The future of healthcare is very bright. Bioverge was created to embrace the convergence of biology and technology, a movement that is guiding the industry forward, resulting in incredible innovations and the emergence of entirely new fields along the way.

“By recognizing convergence as a transformative trend, we hope to offer a new vision for the future and build awareness of new opportunities…we see convergence as a blueprint for innovation

These advances promise to help humanity prevent, manage, and cure disease, promote healthy behaviors, increase life spans, and otherwise enhance our health. The best part is that the movement has only just begun.

Here are a few of the exciting technology trends making this convergence possible and that Bioverge is particularly excited about:

Smaller. Faster. Cheaper. Connected.

The reduced size, cost, and increased computing power of hardware, the proliferation of connected devices, and the decreasing cost of software development have led to an emergence of innovations in the fields of digital health, medical devices, diagnostics, health IT, drug delivery, and research tools.

Digital health startups raised over $6B in equity financing in 2016, representing a 5-year (2011–2016) compound annual growth rate (CAGR) of 32%, and investment into the sector is showing no signs of slowing down. Traditional investors in this space have been VCs such as Rock Health and Khosla Ventures or corporate tech giants such as Qualcomm and GE, however, health insurers and pharmaceutical corporates are now joining the fray.

Annual Digital Health Financing History (Global)
Source: CB Insights.

Today, it is possible for physicians to diagnose and care for patients remotely and for an implanted device to imitate a healthy pancreas in diabetics. It’s possible for individuals to measure and track their health data at home, such as heart rate/rhythm, stress levels, and sleeping patterns, for this to be automatically analyzed for abnormalities, and for a summary report to be sent to their doctor.

It’s possible for patients to be reminded to take their daily medications, and for a smart pill to notify their doctor if they forget or if a particular course of treatment is not having its intended effect. It’s even possible for a robot to perform minimally invasive surgery and for a researcher to observe an exciting event by microscope and choose to digitally save and share the result with colleagues across the world.

Companies such as AliveCor, Scanadu, CrowdMed, Spire, Proteus Digital Health, and Echo Labs are among some of the players leading these advances.

As we continue down this path, smaller, more powerful, and more precise sensors and devices will continue to proliferate, enabling us to non-invasively monitor and manage our health in exciting new ways.

The Emergence of Genomics & Genetic Engineering

In recent years, the cost of genetic sequencing has dropped precipitously, from $100M in 2001 to $10M in 2007 to under $1K today. This rate of reduction is evening outpacing Moore’s law, which governs the rate of decreasing cost and increasing processing power discussed above, widely regarded as the spark behind the digital revolution.

The reduction in cost of genetic sequencing has far outpaced Moore’s Law
Source: NIH. The Cost of Sequencing a Human Genome

As the cost of genetic sequencing continues to decline, this will lead to novel insights into the impact of an individual’s genes on their personal state of health.

For example, today, it is possible for consumers to have their genes sequenced and analyzed to learn about their personal genetic risk factors pertaining to predispositions to disease and overall health. It’s possible for couples planning to start a family to learn whether they or their unborn children might be carriers of various genetic diseases, such as cystic fibrosis or Down Syndrome. It’s also possible for individuals to be tested to learn more about how their genes can influence their risk for certain diseases, such as Alzheimer’s, Parkinson’s, and breast cancer.

Companies such as Illumina, 23&Me, Counsyl, Color Genomics, and Foundation Medicine are continuously innovating and leading advances in these areas.

And with the development of modern gene therapy and gene editing tools such as CRISPR, a sort of genetic scissors, we are at the forefront of an era that is enabling us to make on-demand changes to our genetic makeup and even engineer new organisms from scratch using synthetic biology.

For example, in a world first, a teenager with sickle cell disease was cured by gene therapy, having achieved complete remission after an experimental gene therapy at Necker Children’s Hospital in Paris. “Since therapy was applied, he hasn’t had any pain, any complications. He is free of any transfusions. He plays sports and goes to school” said Dr. Philippe Leboulch of Professor of medicine, University of Paris.

Another recent scientific study eliminated HIV in mice using CRISPR. Since CRISPR/Cas9 can cut out any genetic code in the body with scissor-like precision, including HIV-1 DNA, it may be possible to stop the virus from being able to make copies of itself.

Scientists have found they can successfully eliminate the HIV virus from mouse cells using gene editing technology
Source: TechCrunch. Scientists have eliminated HIV in mice using CRISPR

Companies such as Editas Medicine (NasdaqGS:EDIT; market cap $700M) and Intellia Therapeutics (NasdaqGS:NTLA; market cap $525M) both had successful IPOs based on the promise of translating the CRISPR/Cas 9 platform into human clinical studies.

And with synthetic biology, researchers have demonstrated the ability to produce novel enzymes optimized for enhanced drug manufacturing and the development of organic plastics and biofuels.

These developments will increasingly better our understanding of the human genome and its role in our individual health, leading to insights and interventions that have the potential to help us stay healthy and live longer.

More Data

With the proliferation of low cost sensors, genetic sequencing, and software comes data. In fact, 90% of the world’s data today was created in the past two years.

More data is great, but it is only useful to individuals, patients and their physicians if it can be structured and analyzed for actionable insights, something that used to only be affordable for the largest organizations. Fortunately, advances in artificial intelligence (AI) and emerging tools for the analyses of large data sets have enabled us to keep up with this proliferation and level the playing field. Algorithms enable us to sift through weeks of continuous health data and even integrate unique sources of data, to identify abnormalities, develop insights, and generate cohesive reports.

There are over 100 companies applying machine learning algorithms and predictive analytics to reduce drug discovery times, provide virtual assistance to patients, and diagnose ailments by processing medical images, among other things. Two unicorns have also emerged in the space: China-based iCarbonX and oncology-focused Flatiron Health.

Over 100 artificial intelligence startups have emerged in healthcare
Source: CB Insights. From Virtual Nurses To Drug Discovery: 106 Artificial Intelligence Startups In Healthcare.

Today, algorithms are being used to analyze medical images, such as MRI and CT scans, to aid physicians in complex patient diagnoses. They are making it possible to scan through weeks of continuous heart rhythm data to identify arrhythmia events and large databases of anonymous patient health data to draw novel insights.

Patient cancer cells can be rapidly screened against hundreds or even thousands of potential drugs and drug combinations, and algorithms used to analyze these results and suggest a personalized patient treatment. And with the latest advances in machine learning, the performance of these algorithms can actually improve over time.

Companies such as iRhythm, Notable Labs, 23&Me, and Kaiser are innovating in this space.

As the underlying technology develops and healthcare providers, insurers, as well as the industry leaders, compile and share larger and larger data sets, these concepts will continued to be applied to draw novel insights that can be used to positively impact individual and population health.

Investment Ecosystem

From 1980 to today, life science companies have represented ~20% of all venture investment in the U.S. (~$12 billion annually). In fact, if you look specifically at the biopharma sector, the number of financings has been steady since 2009. This is in direct contrast to the explosion of financings seen in the software space, which is currently ~250 per quarter (for first time financings).

The number of biopharma financings has been steady since 2009, in direct contrast to the explosion of financings in software
Source: Booth, Bruce. “Of Abundance And Scarcity In Venture Capital.”

Despite this, groundbreaking innovations are emerging from academic medical research centers, private companies, and government labs at an unprecedented pace.

Medical innovations also help to decrease overall healthcare costs. For every $1 invested in newer therapies, ~$7 is saved in other costs (hospitalizations, inability to work full-time, live independently). Furthermore, medical innovations save 9x estimated cost when the value of increased work force participation is factored in.

The philosophical commitment and enthusiasm that has drawn entrepreneurs to the life science space persists, and venture investors (early stage investors) remain passionate about investing in it. In fact, from 2006–2016, healthcare VCs have outperformed the broader asset class.

Source: Booth, Bruce. LifeScie VC: “Biotech Venture Capital Mythbusting Redux.”

Biopharma net IRR has outperformed the venture capital asset class by >500 basis points for realized (exited) investments. Including unrealized investments, the combined net IRR for biopharma deals still outperforms the asset class by >250 basis points.

Industry Outlook

From a macro perspective, growth in the life sciences sector is closely tied to global healthcare expenditures, which are expected to reach $8.7T by 2020. This growth will be fueled by the prevalence of chronic and communicable diseases and increasing demand from an aging population.

People rally behind improving health, wellness, and curing disease
Source: Giving USA 2016, the Annual Report on Philanthropy.

Chronic diseases are becoming increasingly prevalent, assisted by rapid urbanization, sedentary lifestyles, changing diets, and rising obesity levels. Obesity alone is estimated to cost the US roughly $344B annually in medical related expenses, accounting for 21% of healthcare spending. Additionally, the number of diabetes sufferers is expected to grow from 415M to 642M by 2040.

By 2020, it is projected that 50% of global health care expenditures ($4T) will be spent on cancer, cardiovascular and respiratory diseases. And by 2030, 1/5 Americans (72M) will be 65+.

Further, the U.S. healthcare market is inefficient and ripe for disruption.

Impaired efficiency of U.S. healthcare vs. rest of world
Source: “PER CAPITA HEALTHCARE COSTS — INTERNATIONAL COMPARISON

These rising costs would be unsustainable without the industry gravitating towards entirely new business models enabled by advances in science and healthcare technology.

Conclusion

The future of healthcare is very bright. Today, we are already witnessing a number of the aforementioned industry shifts: from reactive disease management and marketing gimmicks to a focus on affordability, value, preventative care, and the promotion of wellness. From generalized, “one size fits all” healthcare to the personalization of medicine.

We are seeing increasingly engaged and informed patients who are self-monitoring and taking control of their own health. And we are moving away from hospital-based care to other lower costs sites, and viewing an increase in mobile health and remote patient care.

For those you who are as excited to embrace the convergence of biology and technology as we are, we sincerely hope you’re join us in guiding the industry forward and supporting incredible innovations and the emergence of entirely new fields along the way.

-The Bioverge Team