The Seventh Annual Fenwick & West Digital Health Investor Summit profiled a sector that continues to attract record levels in investment, further matures and consolidates, and that is leveraging the newest technologies in blockchain and artificial intelligence to improve the practice and delivery of health care. Speakers included Rock Health’s Bill Evans and Goldman Sach’s Peter van der Goes, who discussed the possibility of an investment bubble and outlook for 2019, and Ruchita Sinha of Sanofi Ventures, who talked about blockchain in digital health. Fenwick’s Kristine Di Bacco moderated a panel on machine learning and artificial intelligence in healthcare with guest speakers Brandon Ballinger, co-founder of Cardiogram; Alison Darcy, founder and CEO of Woebot Labs; and Christine Lemke, co-founder and president of Evidation Health.
Just over a year ago, we reported about the rise of the mega-round in digital health investments. At that time, we tallied nine investment rounds valued at more than $100 million in the first half of 2017. Deals in H1 2018 surpassed that with a total of 14 such megadeals, as we reported in earlier posts for Q1 and Q2. The surge has continued in Q3, with 11 rounds north of $100 million including five valued at more than $300 million and one hitting $550 million.
But while mega rounds were rare occurrences in 2017, today they are becoming more common. So is it fair to say that $300 million is the new $100 million? Is there another superlative after “mega”?
Private investment in digital health continued apace in the second quarter of 2018, based on our latest look at deal flow. As the sector has matured, growth in investment levels quarter-over-quarter and year-over-year appears sustainable for the foreseeable future.
Likewise, the closing of a handful of megadeals each quarter is becoming the rule rather than the exception. The second quarter saw seven megadeals for $100 million or more. That is right in line with the first quarter, when we also recorded seven rounds of $100 million or greater.
The top investees in the second quarter were diverse, ranging from biopharmaceuticals to artificial intelligence to primary care. This diversity may be a sign that investors are looking beyond the low-hanging fruit of infrastructure and patient engagement, or even diagnostic applications, to areas such as primary care where opportunities for digital disruption are less obvious.
It is also interesting to note that over half of the investment rounds of $100 million or more went to companies based in China. We’ve seen a steady increase in investments in Chinese digital health companies over the past few years. But this is the first time that we have seen them account for half of the top deals—including the three largest rounds for $200 million or more.
Here’s a summary of the seven largest deals of the quarter:
Two trends stood out in our analysis of private digital health investments in the first quarter of 2018: bigger deals and more investment in companies targeting the regulated portion of the health care market.
As the digital health sector matures, Rock Health reports that investors seem more comfortable with larger and later-stage deals. The year 2018 kicked off with seven investments of $100 million or more (megadeals), three of which were valued at $200 million or more. And while investors once shied away from companies subject to regulation by the FDA or other agencies, increased regulatory guidance appears to be boosting confidence. The three largest deals—those for $200 million or more—were all made in the diagnostics arena. In all, of the top 10 investments for the quarter, half were clinical diagnostics.
Diagnostics: The Top Value Proposition
The largest megadeal of the quarter was a $240 million Series E investment in HeartFlow. This diagnostic firm has developed a technology that reduces the need for more invasive diagnostic procedures, such as angiograms, among cardiac patients. Baillie Gifford, Wellington Management and existing investors participated in the round.
Helix, developer of a consumer-facing human genome platform, took in a $200 million Series B round that included DFJ Growth, Illumina, Kleiner Perkins, Mayo Clinic Ventures, Sutter Hill Ventures and Warburg Pincus.
SomaLogic also received a $200 million investment in the first quarter. The company is the developer of a proteomic technology that can identify small protein changes that can provide early diagnosis of disease states. iCarbonX, Madryn Asset Management and Nan Fung Group participated in this private equity round.
Tempus is a precision medicine company that uses a machine learning health care data analytics platform to enable physicians to deliver personalized care to cancer patients. Kinship Trust Company, NEA, Revolution Growth and T. Rowe Price all participated in the Series D Round that raised $80 million and brought the Chicago company to unicorn status.
Genetron Health also develops precision medicine products targeting cancer patients that include risk assessment, early screening, molecular pathology diagnosis, medication guidance and prognosis monitoring. It received a Series C investment for $61 million. Shenshang Xingye Fund, V Star Capital and the Zhongjin Kangrui Medical Industrial Fund participated in the round.
Rounding out the megadeals for the quarter was Oscar. The online health insurance network received a late-stage investment for $165 million. 8VC, CapitalG, Fidelity Investments, Founders Fund, General Catalyst Partners, Khosla Ventures, Thrive Capital and Verily Life Sciences participated in the round.
PointClickCare, developer of Saas cloud-based Electronic Health Record software, took in a $146 million private equity investment from Dragoneer Investment Group.
And rounding out the $100-million-plus investment rounds for the first quarter was a Series D investment in Collective Health, provider of a cloud-based self-insurance platform. Founders Fund, GV, Maverick Ventures, Mubadala Development Company, NEA and Sun Life Financial participated in the $110 million round.
As the digital health industry matures, we should expect that large, late-stage investments will become more routine. And as investors and companies gain experience working with clinical, regulated applications, such deals should also become more common as well.
Coming off a year that saw a record number of new drug approvals, significant scientific breakthroughs and a year-end tax reform package that both significantly lowers corporate taxes and provides the long-awaited tax repatriation holiday, it’s not surprising that biotech investors, executives and advisers were in a good mood as they gathered in San Francisco this year for the J.P. Morgan Healthcare Conference.
The skies may have been cloudy, but spirits were high, fueled by expectations for a resurgence in U.S. M&A deals, continued growth in healthcare venture fundraising, and the promise of big data and other technologies.
Good Numbers Fuel Optimism
Three reports shared during the conference bolstered spirits. Silicon Valley Bank reported that healthcare venture fundraising hit an all-time high in 2017 at $9.1 billion. While final venture investment figures aren’t in yet, the bank estimates that the total amount invested in the healthcare sector will also reach a record-breaking $15.5 billion.
The report also notes that IPOs were up as was their pre-money valuation. The only downside according to the report was that M&A activity in the biopharma sector slowed in 2017.
However, EY’s M&A Outlook and Firepower Report strikes an optimistic tone about biopharma M&A in 2018. The report says that thanks to tax reform—particularly incentives to repatriate profits from overseas—M&A activity in the life sciences sector should surge in 2018. According to EY, the top 10 U.S. life sciences companies alone have approximately $160 billion in cash overseas, some of which the accounting firm expects will be used to make acquisitions in the U.S.
On the digital health front, Rock Health characterized 2017 as a record-smashing year in its year-end report. Venture funding totaled nearly $6 billion and there were a record number of mega-deals valued at $100 million or more.
Biotech Matures, but Opportunities Remain
But all the good news did not hide the fact that there is still much to be done. Digital health needs to further integrate into the mainstream of healthcare delivery. In its mid-year report, Rock Health said digital health entered the “middle innings” in 2017. Many believe digital technologies will move into the mainstream of healthcare delivery in 2018—particularly with strong support from both the U.S. Food and Drug Administration and Centers for Medicare and Medicaid Services.
With healthcare artificial intelligence solutions still in their infancy, there’s also plenty of room for development in AI. There have been pilots and trials with impressive results, particularly in the area of diagnostics and decision-support tools. But many investors, including Venrock, believe for the time being that AI is best deployed to improving the administrative side of healthcare.
Meanwhile, tech companies will continue to look for opportunities to leverage the giant datasets being generated in the healthcare sector. Great potential exists in the area of applying analytics to the risky business of drug development. At the same time healthcare incumbents will continue to consolidate vertically, such as the CVS and Aetna deal and the recent announcement that a quartet of healthcare systems are joining together to create their own generic pharmaceutical company.
Biotech Comes of Age
The consensus in and around San Francisco’s Union Square was that 2017 represented a breakout year for the biotechnology industry. With major clinical successes in areas such as CAR-T, gene therapy, immune-oncology, cell therapy and gene editing, many see 2017 as the year that biotech really came of age. As the investors, analysts, executives and consultants headed home at the week’s end, they have every reason to believe the momentum of last year will continue well into 2018.
Fenwick corporate lawyer Julia Forbess discussed biotech investment and financing trends with the BIO Buzz Center at the 2017 BIO Investor Forum.
“For 2018, we’re still expecting to see investment in core areas—oncology, orphan drugs and neurology. One thing that could be new is the number of tech investors interested in diagnostics and other tools,” she noted.
Forbess represents emerging technology companies in a variety of transactional matters with an emphasis on VC financings and exits through mergers, acquisitions and IPOs. She also represents public companies in secondary market financings and regulatory compliance.
At a symposium and webinar presented by Fenwick & West and Mewburn Ellis, we asked U.S. Patent and Trademark Office and European Patent Office examiners to provide perspective on the preparation and prosecution of patent applications in the areas of precision medicine and bioinformatics, disciplines that are at the epicenter of rapidly changing law on patent eligibility of software and medical diagnostic inventions. In this post, we share some of their tips for applicants in both the United States and Europe.
At the September 21, 2017 symposium, Fenwick’s Kevin Kabler moderated the panel. Sharing insights* into patent eligibility and obviousness considerations in the U.S. were speakers Marjorie Moran (USPTO) and Andrew Whitehead (Fenwick). On the European side, our guests were Georg Wimmer (EPO) and Frances Salisbury (Partner, Mewburn Ellis, UK).
Following are edited highlights from the program.
Q: What is considered a bioinformatics invention by the EPO?
A: Examples of bioinformatics inventions can include a method of determining a genotype, or a method of diagnosing based on the presence of one or more biomarkers. Generally, bioinformatics inventions include at least one step that is carried out on a computer, where the technical purpose of the invention as a whole relates to some sort of biological or health-related aspect. These types of inventions, as long as they comprise at least one so-called technical feature—like a physical step of measuring or an execution by a computer as well as algorithmic mathematical steps—are often called mixed-type inventions.
Q: What type of considerations exist with respect to exclusion to patentability in Europe?
A: In addition to other considerations under novelty and clarity, the two most common hurdles for bioinformatics-based inventions before the EPO are the exclusion from patentability, governed in the European Patent Convention under Article 52, and inventive step, governed under Article 56. Patent applicants trying to address these two hurdles often fall victim to two pitfalls: one is insufficient detail in the claims and the other is insufficient detail in the original application.
Q: In the United States post-Alice, what are the key takeaways when addressing an eligibility challenge?
A: Our approach to addressing eligibility rejections in the U.S. is generally similar regardless of whether the application has an Alice-type rejection or a biological or diagnostic Myriad or Mayo-type of rejection. What helps get claims to patent eligibility is specificity in the claim. It is not so different from the EPO where what matters is your actual “technical purpose” of the invention and how the specificity of your claim helps achieve that technical purpose. Unlike the EPO, however, simply having such specific steps performed by a computer often is not sufficient to achieve eligibility in the U.S.
To get to eligibility, it has proven effective to tell U.S. examiners what the improvement is and provide evidence that the claims achieve that improvement. Examiners look to your specification, so specificity in the disclosure is important as well. If the application illustrates a sufficient improvement relative to the art, then often no further steps are needed. However, we do have a concern for those claims where the end result is merely the acquisition of information alone. Currently, claims along the lines of “data in, perform analysis, information out” are generally going to be difficult to obtain in the U.S. in the face of an eligibility rejection.
Fenwick’s Sixth Annual Digital Health Investor Summit started on an upbeat note with Rock Health’s Megan Zweig sharing the venture fund’s mid-year funding report. After the uncertainty brought by the 2016 presidential election and the political drama surrounding the future of the Affordable Care Act, it would not seem surprising to see investors take a step back from digital health. As it turns out, investment in the sector by the middle of 2017 hit $3.5 billion—a record in terms of both the number and size of deals.
Zweig credits investor resilience in part to the shift to value-based care and the rise of consumerism in healthcare. While these trends may have been set in motion by the passage of the Affordable Care Act, they have been embraced by both payers and patients and are likely to be central to the healthcare market going forward.
Peter van der Goes of Goldman Sachs reported that public healthcare investors have shown the same resilience. He noted that the market for healthcare IT rose significantly in the election’s aftermath along with the broader market. Publicly traded stocks in the sector took a hit after the failed attempt at healthcare reform, but even if investors don’t see a reason to take valuations higher, they don’t seem to be abandoning the sector either.
Where Have All the IPOs Gone?
So far the number of exits, however, has not matched the increases in investment during the year’s first half. There have been no digital health IPOs so far in 2017. Nevertheless, Zweig indicated that Rock Health anticipates the market for IPOs may return soon. The IPO pipeline includes seven digital health “unicorns,” and another dozen well-capitalized companies are waiting in the wings as well.
Van der Goes said he expects M&A exits to continue at a steady pace in the sector, noting that buyers are focused on assets they can scale. Larger deals appear to be increasing with four deals valued in excess of $1 billion so far in 2017 (compared to three for all of 2016). The total value of deals year-to-date stands at $10.8 billion in comparison to a total of $20.6 billion in 2016 (which included IMS’s $13.2 million acquisition of Quintiles).
Partnering Beyond Providers
Van der Goes said that acquirers continue to be sponsors, healthcare strategics and some horizontal IT players. He expects that going forward the pool of buyers for digital health companies will likely expand. He noted that pharmaceutical companies (which need to leverage data to improve their R&D productivity), payers (beyond United Health, an active acquirer), and others (including Alphabet, IBM, GE and McKesson) will become more active in the space.
Speakers on the summit’s corporate development panel represented several different approaches to partnering and acquisitions. Steve Sweeny of Medtronic said that his company oftentimes partners with an eye to an acquisition, noting his team doesn’t like to “create value to see it walk out the door.” On the other hand, David Icke of BD said an acquisition can follow from an investment, though not necessarily as a general rule. In the case of Illumina, Srini Kodali said his firm was open to “developing joint IP in the right area and could spin it out.”
Pivoting to B2B
Digital health companies are increasingly pivoting to a B2B model, said Zweig in the opening presentation. In a recent survey by Rock Health, 61% of companies that launched with a B2C model had converted to a B2B or B2B2C model.
Rebecca Lynn of Canvas Ventures echoed that observation in her interview with CNBC’s Chrissy Farr during the closing session. “Customer-facing companies have all pivoted to B2B,” Lynn explained, adding that we see a similar trend in the FinTech space. She noted that consumers have a tendency to take an ‘ignorance is bliss’ approach when it comes to investing in tools to improve their health—particularly in healthcare where consumers don’t pay related costs directly.
The Allure of AI
The panelists expressed varying degrees of skepticism at AI-centric deals. David Icke quipped that AI has come to stand for “algorithm included.” Lynn said she is somewhat suspicious of startups that claim “AI can solve everything.” She said AI can solve up to 80% of any healthcare problem, but there likely will always be a need for a human component.
Conversely, she said services companies are not necessarily bad investments as long as there is a process that can be scaled.
As the digital health sector matures we expect to continue seeing more and larger deals, greater diversity in both private and public investors, and business models that continue to be refined as startups gain market experience and understanding. Businesses will continue to leverage Big Data and AI in digital health opportunities. But entrepreneurs should keep in mind that much of healthcare is a service business and the best solutions to healthcare problems may also require a human component or intervention.
It looks like the FDA is moving forward—and swiftly—with the digital health plan articulated in FDA Commissioner Scott Gottlieb's June blog post, previously outlined in this post. Closely tracking the commissioner’s post, the Center for Devices & Radiological Health released an action plan about its Digital Health Program and posted a notice for comment for a Software Pre-Certification Pilot Program.
The pilot program is a first step in the FDA’s reimagined digital health product oversight approach. What makes it stand out from the FDA’s prior regulatory approach is its aim "to develop a new approach toward regulating this technology – by looking first at the software developer or digital health technology developer, not the product."
Under its firm- and developer-based approach, the CDRH could "pre-certify" eligible digital health developers who "demonstrate a culture of quality and organizational excellence based on objective criteria, for example, that they can and do excel in software design, development, and validation (testing). Pre-certified developers could then qualify to be able to market their lower-risk devices without additional FDA review or with a more streamlined premarket review."
In his blog post, the FDA’s Scott Gottlieb announced that in August companies can submit a statement of interest that includes the qualities listed above and request participation in the pilot to FDAPre-CertPilot@fda.hhs.gov. The FDA’s Digital Health Team will evaluate submissions and select companies that reflect the broad range of software developers later in the month. “A critical component is that we will include small and large companies, traditional and non-traditional medtech companies, and products that range in risk,” Gottlieb said in his post. (Read more about how the CDRH is recruiting participants to the pilot program.)
The FBI arrested Shkreli in December 2015, and the U.S. Attorney’s Office for the Eastern District of New York charged him with securities fraud, securities fraud conspiracy and wire fraud conspiracy for interrelated schemes “to ensnare investors through a web of lies and deceit.” The schemes, allegedly executed over a five-year period, involved defrauding investors in two hedge funds founded by Shkreli. The funds, MSMB Capital Management LP and MSMB Healthcare LP, focus investments in the healthcare sector. The indictment alleged that Shkreli induced investors to invest in the hedge funds through material misrepresentations and omissions about prior fund performance and the amount of assets under management, among others. Shkreli allegedly induced approximately $8 million in investments from 21 investors between the two hedge funds.
Shkreli was also charged with a scheme to defraud Retrophin and misappropriate its assets to pay off disgruntled investors of the hedge funds, who were threatening legal action due to Shkreli’s false representations about the performance of the funds. Retrophin allegedly entered into “sham consulting agreements” that were actually settlement agreements with the investors. Prosecutors claimed the Ponzi-like scheme caused Retrophin and its investors to suffer a loss of more than $11 million.
Shkreli’s attorney, Evan Greebel, was also charged with wire fraud conspiracy for his role in the Retrophin scheme, but will face a separate trial at a later date. The U.S. attorney’s office noted his arrest reflected its commitment “to hold accountable corporate executives and licensed professionals who betray their positions of trust in order to fraudulently enrich themselves.”
The U.S. Securities and Exchange Commission has brought parallel civil charges for fraud. In 2003, the SEC purportedly also looked into a hedge fund Shkreli worked at for insider trading after he correctly predicted the stock price of a weight-loss drug would fall, but the SEC was unable to find wrongdoing.
Unrelated to the trial, Shkreli made headlines in 2015 as CEO of Turing Pharmaceuticals, when he increased the price of the drug Daraprim from $13.50 to $750 a tablet. The drug is an antiparasitic that is used to treat toxoplasmosis, often in HIV-positive patients.
The jury selection process for Shkreli’s trial took several days, and over 200 potential jurors were dismissed from selection. During closing arguments, the prosecution told jurors that Shkreli repeatedly lied to investors, and reminded them that lying to people knowingly and intentionally to get their money is fraud, even if they are paid back years later. The defense argued investors did not lose any money, but in fact some even profited, and Shkreli did not intend to defraud anyone.
On the second day of deliberations, the jury asked what “fraudulent intent” meant, and asked clarifying questions about the definition and scope of assets under management. The only other question the jury asked was on the first day of deliberations, when they inquired what time they should conclude deliberating at night.
Shkreli did not testify at trial, but was active on social media throughout it, describing his case as a “silly witch hunt perpetrated by self-serving prosecutors.”
Shkreli was convicted of one count of conspiracy to commit securities fraud in connection with Retrophin, and two counts of securities fraud in connection with MSMB Capital and MSMB Healthcare. He was acquitted of two charges of conspiracy to commit securities fraud and three charges of conspiracy to commit wire fraud. Shkreli has yet to be sentenced and could serve up to 20 years in prison, although legal experts say he will likely face much less time. Shkreli told reporters he was “delighted” with the jury verdict.
*Lauren Border is a summer associate in Fenwick’s litigation group.