Palo Alto, CA – December 8, 2017  As a technologist, scientist, or entrepreneur, there has never been a better time to kick our intellectual curiosity into hyper-drive. The level of disruption, led by technology, is at a pace and scale unseen before today, and that trend is accelerating. It is an incredibly exciting time for consumers/customers, and an extremely unnerving time for incumbent companies, who are in the cross-hairs of next-generation digital health entrepreneurs looking to retire the old guard. This is the first in a series of short blogs intended to analyze the very dynamic digital health sector, with a focus on the US market. The idea is to start at 30,000 feet, looking from a demographic, regulatory, and technology-centric context. Over the coming weeks and months, I will take a deeper dive into various sub-categories, outlining challenges as well as opportunities through the lens of a payers/enterprises, providers/physicians, consumers/employees, health care systems, and regulators. These two trends – the excitement for novel, game changing technologies and hungry entrepreneurs, as well as the threat faced by existing players in the health care domain – will lead to an unprecedented wave of consolidation and M&A activity in the digital health sector over the coming years, some of which is already under way. We, at Woodside Capital Partners, are excited to be at the leading edge of this impending tectonic shift.

We are living through interesting times in US healthcare, to say the least, and I am not even talking about policy issues that have been in the media headlines for months. While many people generally have a sense of the challenges facing different constituents within the US healthcare system, most may not understand the utter magnitude of the underlying problems. The fact of the matter is that US healthcare is already a train wreck, and soon it will be a train wreck on fire. Population and life expectancy are increasing; healthcare costs are spiraling out of control; drug development is becoming costlier (and passing those costs onto consumers); obesity as well as lifestyle-related chronic disease is rampant; most Americans, broadly speaking, have no real retirement savings to handle health care costs later in life; and with a population that is living longer after retirement without savings, the stress will inevitably break the system at some point. Many would argue that the system is already broken. Looking at core demographic data drives home the magnitude of the issues facing the country in the near and mid-term.

• U.S. population has grown from 213 million in 1980 to 323 million in 2016
• The US population (323 million) is aging: US population aged 65+ is projected to more than double from the current 46M to over 98M by 2060, catapulting them to 24% of the US population, up from the current 15%
• Life expectancy in the US has increased steadily since the 60’s, currently at 78 years. For first time in decades, life expectancy dipped between 2015 and 2016
• Healthcare spending in the US was $3.35 Trillion (with a “T”) in 2016, and for the first time surpassed $10,000 per capita ($10,535 to be precise)
• Healthcare spending is 17.1% of US GDP; the closest developed country (France) spends roughly 11.5% of GDP
• Cost of developing an FDA approved drug now stands at $2.9 billion, roughly 150% increase (adjusted for inflation) from 2003
• 37.7% of all adults in the U.S. are obese. The rate of obesity has more than tripled in the last four decades, and an astounding 70% of American adults considered overweight or obese. 12 million children in the U.S. are obese (17% or roughly 1 in 6). More alarming are the numbers by age groups (Ages 2-5 at 8.9%; Ages 6-11 at 17.5% and Ages 12-19 at 20.5%)
• As of 2012, approximately half of all adults had at least one chronic condition (heart disease, stroke, Type 2 diabetes), and that number is only increasing
• Millken Institute predicts that by 2023, chronic disease cases will rise by 42%, affecting 230 million people at a cost of $4.3 trillion in treatment and lost productivity
• Infectious disease pandemics used to occur every 10-30 years, but in the last 15 years, there have been five major pandemics – SARS (2003), H1N1 Bird Flu (2007), H1N1 Swine Flu (2009), MERS (2012) and Ebola (2014). Growing global population, global movement/travel, growth of megacities etc. have all contributed to that trend
• 72% of young millennials aged 18-24 have less than $1000 in savings; 31% have nothing at all
  Nearly half of US families have NO retirement savings. Median for all US families is $5,000, and median for those with some savings is $60,000.
• 5% of the US population accounts for nearly half the spending (the elderly, frail, extremely ill)
• In 2016, to reach a goal of having a 50% chance of covering healthcare expenses in retirement, a 65-year-old man would need $72,000 in retirement savings and a 65-year-old woman would need $93,000.

To increase the chances to 90%, those numbers increase to $127,000 and $143,000, respectively
Given the above, it’s clear that the situation is critical and needs triaging. While the demographic data and overall healthcare situation in the US is certainly concerning, the silver lining is that there has never been more effort, technology, and capital being deployed to address the problems. This is precisely where innovators, entrepreneurs, technologists, and scientists come into play, and their involvement is coming to fruition in meaningful ways. When massive problems surface, entrepreneurs use their passion, innovation, and intellectual horsepower to address them. Venture capitalists are right behind them, following in droves and bearing large checkbooks. Let’s examine trends in digital health funding as a proxy for the extent of innovation taking place across various segment of healthcare, especially digital health, where the lion’s share of investment is taking place. Positive metrics in digital health include:

• Digital health global funding has increased from $537 million in 2009 to $6.1 billion in 2016. Half way through 2017, there has been a record $3.5 billion invested in US healthcare startups
• The number of financings has increased from 147 in 2009 to almost 916 in 2016 (peaking in 2015 with 1,016 financings). 188 US digital health startups have received funding as of mid-2017
• Cost of sequencing the human genome has gone from $2.7 billion in 2003 to Illumina’s announcement earlier this year that their machine that should deliver a whole genome for less than $100 (current cost is around $1,500)
• First gene therapy drug (Kymriah for treating Acute Lymphoblastic Leukemia) was approved by the FDA this year, highlighting a significant technical milestone as well as a regulatory mindset shift
  102 million smart watches and fitness trackers were sold in 2016, as people become increasingly interested and motivated to take control of their lives and lifestyle.
• Interestingly, the fact that life expectancy in general has continued to increase over the decades is not necessarily due to the people taking care of themselves (as shown by the obesity rates), but rather through advancements in medical care, early detection of certain chronic conditions and a move towards more personalized medicine and treatment

Given the level of financial and strategic investing activity in digital health, there are several sub-segments where multiple companies have been amply funded, leading to an over-crowded competitive landscape. The result will be the typical cycle of mortality (of the bottom few), success on a standalone basis (for the top players) and consolidation through M&A for many of the rest. Therefore, the spike in investments over the past few years, both in terms of number of startups and quantum of capital, has already led to a robust M&A environment in digital health that will only accelerate over the next few years.
The underlying foundation for much of the innovation discussed has to do with data – data is the catalyst transforming health. Healthcare is in the process of morphing from reactive (approaching a physician once symptoms occur) to pre-emptive (devices and apps being used pro-actively for real time physiological measurements) to predictive (AI and genomic data) and, eventually, personalized (holy grail of truly individualized analysis, diagnosis, and treatment based on physical, clinical, genomic data). I will tackle that evolution in future articles, diving into various segments (consumer, payer, provider, and infrastructure) of digital health innovation and highlighting impactful trends in industry-wide financing and M&A activity, ensuring you can get to high ground when the tsunami hits.

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Vini Jolly is a versatile and experienced business executive with over twenty years of both strategic and operating roles across a variety of industries, from networking and digital health, to pharmaceuticals and genomics. Vini brings deep experience in product strategy, marketing, sales and business development in small and large companies and across a variety of technologies and sectors.

Vini Jolly
Executive Director
Woodside Capital Partners, LLC
[email protected]
(650) 513-2755

Sources:
www.prb.org – Population Reference Bureau
http://www.prb.org/Publications/Media-Guides/2016/aging-unitedstates-fact-sheet.aspx
https://www.pbs.org/newshour/health/new-peak-us-health-care-spending-10345-per-person
https://data.worldbank.org/indicator/SH.XPD.TOTL.ZS
http://stats.oecd.org/Index.aspx?DataSetCode=SHA
https://archive.ahrq.gov/research/findings/factsheets/costs/expriach/
https://www.gobankingrates.com/saving-money/data-americans-savings/
https://www.cdc.gov/nchs/hus/index.htm
https://www.cdc.gov/chronicdisease/overview/index.htm
https://www.cdc.gov/obesity/data/childhood.html
https://www.cdc.gov/nchs/data/databriefs/db219.htm
http://www.milkeninstitute.org/publications/view/321

The State of American Retirement: How 401(k)s have failed most American workers

https://www.ebri.org/pdf/notespdf/EBRI_Notes_Hlth-Svgs.v38no1_31Jan17.pdf
https://census.gov/newsroom/press-releases/2016/cb16-214.html
http://csdd.tufts.edu/news/complete_story/pr_tufts_csdd_2014_cost_study
http://www.sciencedirect.com/science/article/pii/S1201971215001836
https://www.startuphealth.com/marketing/insights

Digital Health Funding 2017 Midyear Review: A record breaking first half

Illumina wants to sequence your whole genome for $100

https://www.fda.gov/NewsEvents/Newsroom/PressAnnouncements/ucm574058.htm
(IDC Worldwide Wearable Device Tracker. March 2, 2017)
https://www.idc.com/getdoc.jsp?containerId=prUS42342317

About Woodside Capital Partners
Woodside Capital Partners is a global, independent investment bank that delivers world-class strategic and financial advice to emerging growth companies in the technology and life sciences sectors, as well as institutional technology research services marketed as techView. With a strong track record in M&A, strategic partnerships and private placements, Woodside Capital Partners has been providing worldwide investment banking services since 2001 with leading domain experience in software, Internet services, electronic communications and materials, and healthcare. Woodside Capital Partners is headquartered in Silicon Valley, with an office in London. Securities offered through Woodside Capital Securities LLC, member FINRA/SIPC. For more information, please visit www.woodsidecap.com

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