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BFD Expert Voices - Health Tech Deals

BFD Expert Voices

Artificial intelligence in health care is the topic du jour, but a majority of investors aren't going all in on AI, according to a recent GSR Ventures survey, Aaron writes.

Why it matters: These survey respondents remain cautious and want to see who will be the winners and losers and which applications will make for the best ROI.

Details: The results come from a survey of 40 leading health care technology VCs.

The sectors that the survey participants believe are most impacted by generative AI are health care data and analytics and tech-enabled services.

Investors believe that the clinical areas with the most promise for startups are oncology, followed by cardiology.

By the numbers: 71% of respondents said ChatGPT/GenAI is changing their investment strategy somewhat or a little.

Only 17% of investors said they were willing to say generative AI changes their investment strategy significantly.

78% said valuations will be the same +/- 20%. However, slightly more investors believe valuations across health technology will continue to fall next year.

Zoom in: Expectations around valuations for seed stage digital health companies is split.

40% said their expectations remain the same, while 42.5% said it had decreased by 20%.

For Series A, 64.3% said expectations on valuations had dropped by 20%, while 21.4% said it had increased by more than 40%.

Expectations for Series B were mixed, with 43.9% saying they anticipated a decrease of 25% to 50%, nearly a third (29.3%) saying they saw it dropping by more than 50%, and about a quarter (24.4%) saying they saw it declining 0% to 25%.

Valuations for private digital health companies in 2024 compared with today, 31% said it increased by 20%, and 31% said it would decrease by 20%. 26.2% of respondents said it would stay the same.

What they're saying: "We expected that generative AI innovations had impacted the digital health investment community and our poll results certainly confirmed it, with nearly 1 out of 5 respondents attesting that it is 'significantly' influencing their strategy," says Justin Norden, a partner at GSR Ventures.

"It will be exciting to witness over the remainder of 2023 into 2024 the many new generative AI healthcare startups that enter the market."

1 big thing: Getting a bead on AI

Illustrated collage of a computer with a hundred dollar bill in the middle surrounded by various shape

Prescription services giant Surescripts acquired ActiveRADAR, a company that identifies lower-cost medication alternatives, chief data officer Lynne Nowak tells Erin exclusively.

Why it matters: Partially owned by two of the nation's largest pharmacy benefit managers (PBMs), Surescripts is acquiring in ActiveRADAR a company focused on lowering prescription drug costs.

How Surescripts works: Surescripts' software is used by prescribers, pharmacists, payers, PBMs and patients to access data on prescription benefits, medication history and prescription routing.

How ActiveRADAR works: Formerly known as RxTE Health, Minneapolis-based ActiveRADAR identifies lower-cost prescription options that are therapeutically equivalent to brand and generic drugs.

The company's reference pricing model was featured in a 2020 study published in the Journal of the American Medical Association that found the model increased prescriptions for the lowest-cost drugs and drug alternatives and was linked with reduced employer spending and lower cost-sharing by employees.

What they're saying: "I think it's safe to say that this is probably a good signal of ... potential acquisitions," says Nowak. "I think we're really looking to grow and expand."

Details: Nowak declined to disclose financial terms of the deal but said Surescripts is bringing on all of ActiveRADAR's staff — roughly 11-50 employees, per LinkedIn.

"I think it fits very nicely in what the PBMs are offering and should be offering to their patients," says Nowak. "The challenge is [while] most PBMs offer alternatives ... it's really challenging for them to keep them up to date. ActiveRADAR actually updates our databases every week."

The intrigue: Surescripts recently settled a 2019 FTC lawsuit that accused the company of using illegal methods to maintain monopolies within the electronic prescriptions market.

The suit also accused Surescripts of mandating customers' long-term exclusivity and punishing them for buying medications from a competitor by raising prices.

The settlement blocks Surescripts from "engaging in exclusionary conduct and executing or enforcing non-compete agreements with current and former employees."

Be smart: Surescripts is half-owned by two pharmacy lobbying organizations — National Community Pharmacists Association and the National Association of Chain Drug Stores — and half-owned by CVS Caremark (which represents 33% of the PBM market share) and Express Scripts (24%), per Fierce Healthcare.

The big picture: The PBM industry has been targeted in recent years for its role in driving up drug costs.

Three companies command 80% of the drug market, and, per experts and research, control drug prices while acting as brokers between insurers and consumers.

Dominant PBMs direct patients to the mid- or large-scale pharmacies they own, which experts say block most competitors from operating within their networks and making it harder for customers to use them.

PBMs are also paid based on the price of medications, though a number of bills currently moving through Congress are attempting to change that.

2. The BFD: Surescripts acquires ActiveRADAR

Illustration of money pouring into a prescription bottle.  

Hoping to compete with the dominant players, venture-backed pharmacy and PBM startups have proliferated in recent years. For example:

PBM startup SmithRx, which runs claims through algorithms seeking lower-priced medications, last March filled a $20 million Series B round.

Former OptumRx CEO Mark Thierer last April reentered the drug pricing fray with a $35.4 million Series A raise for Waltz Health, a startup that lets users search for the lowest-cost medications.

Mark Cuban's Cost Plus Drug Co. launched in January promising steep discounts on 100 generic medications with prices that include a flat 15% fee and a $3 charge for pharmacists' labor.

3. State of play: Pharmacy and PBM startups

Illustration of a person retrieving a newspaper titled "State of Play" from a mailbox.

Want more health tech deals? Check out the Axios Pro Deals Tracker beta.

•  TJC is in talks to buy Tidi Products, a Neenah, Wis.-based medical device maker, from Roundtable Healthcare Partners for at least $900 million, per Reuters. https://axios.link/40urpy6

• Thurston Group-backed ARC Health acquired GROW Counseling, an Atlanta-based mental health group. https://growcounseling.com/

• Ascend Partner-backed Medical Specialists of the Palm Beaches acquired Colton and Kaminetsky, a Boca Raton, Fla.-based concierge medical practice. https://www.mspbhealth.com/

• Cathay Capital made a majority investment in Parkview Dental Partners, a Sarasota, Fla.-based DSO. https://parkviewdp.com/

• Main Capital Partners made a majority investment in Lux Scientiae, a Boston-based provider of health care communications and hosting tools. https://luxsci.com/

• Sentinel Capital Partners made a minority structured equity and junior debt investment in the home care division of Sodexo, an Irvine, Calif.-based provider of international home care. https://www.sentinelpartners.com/

• CooperCompanies (Nasdaq: COO) completed its $300m acquisition ($200m upfront) of select Cook Medical assets focused on obstetrics, Doppler monitoring and gynecology surgery. https://axios.link/3SqlPun

4. Deals o' the day

• Kavita Nair, formerly president of Herself Health, became market medical director, Midwest region, with Optum. https://www.optum.com/

• Bobby Murphy, formerly VP of payer sales at Twill, joined RightMove Health as VP of payer partnerships. https://www.rightmovehealth.com/

5. It's personnel

🚫 Walgreens, VillageMD slash bonuses amid cost cuts — Bloomberg

⚖️ Calibrate users regained weight after struggles getting meds — Insider

💰 Patients don't know how to navigate the U.S. health system — Vox

6. Your daily dose

Illustration of a Axios brand medicine bottle that says "your daily dose" next to a spoon.

🥩 Aaron is pumped for the four-day workweek and has dinner reservations this week at Bad Roman and Mono + Mono.

✅ Thanks for reading, and extra thanks to newsletter editor George Moriarty and copy editor Jay Bennett. Please ask your colleagues, friends, and family to sign up.

November 06, 2023

1 big thing: Getting a bead on AI