How Do Health Investors And Payers Separate The Tools From The Toys?

The health care sector does not behave like other industries when it comes to money. First, attracting investors – especially in the early stages - is minimal, and the odds of capitalizing on a blockbuster drug or device is becoming ever slimmer. Second, because the U.S. health system does not incentivize it, payers do not rush to financially support or reimburse the waves of new technologies flooding the market. Third, companies entering the market often fail to stand out from the noise of competitors, meaning that getting noticed by investors or being able to commercialize well is near impossible.

In fact, according to Asher Rubin, Global Head of the Life Sciences and Healthcare Industry Team of Hogan Lovells, when separating the tools from the toys in digital medicine, some of the first questions asked by potential investors are, “How will it be approved, or not? How will it be reimbursed? And will the industry even care enough to pay?” Therefore, health investors remain risk averse - and if the recent past has taught us anything, it’s that there are far too many options and an ever-changing industry that will ensure this trend continues.

Because landscape transformations due to technological advancements and policy shifts have made health care financing a Wild West compared to other industries, products and devices of real value have a hard time communicating their importance above the noise. The upside is that the products, devices and apps of impact have led to digital health and medicine progress in the last five years, attracting potential investors and payers. But the downside is that there are so many new items making similar claims, even the experts can’t determine the difference.
At the recent Digital Medicine Connect conference in Boston, VC’s claimed they see the value in getting ahead of growing trends like digital health and mobile medicine. But, they are taking cues from third-party payers like insurance companies (particularly in states with one primary insurer like Blue Cross Blue Shield or Kaiser) to see where the returns might come from.

They are also searching for products that are ready to be commercialized to the public, and past the R&D trials, as they are more likely to succeed. This means being funded early is very difficult for startups. That is, unless they embrace the new world where M&A is replacing R&D, and the startup is willing to go in as a partner with the investor for commercialization. And we’ve been seeing this more frequently as larger company’s like J&J and Google are willing to put money into supporting health startups, but also partnering with them to roll out packages of products.
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While VCs have never played in the health sector the way they traditionally do, the importance, interest and potential gain in the emergent health tech space is proving that they make good partners. And for startups, partnering with investors in novel ways can create all kinds of new opportunities to learn from their expertize. Not only from financial investment, but also mentorship, network, intellectual property and contributions to help make commercialization successful in today’s market. Which in turn decrease the risk for third-party payers and those who reimburse for new technologies.