9NOVEMBER 2020Services (CMS) expanded reimbursement, reduction (hopefully to be permanent) of state licensure barriers, and the lock-down requiring dramatic adoption of virtual on-demand care. Consumers and employers are scrambling to utilize novel modalities to engage with providers.While the dramatic reduction of service revenues to providers will undoubtedly compromise technology budgets, there is a market momentum that traditional care delivery models must change in response to current conditions. A recent American Hospital Association report estimates the four-month total through June 30 for lost revenues to be $202.6 billion. Research analysts at The Chartis Center for Rural Health estimates over 450 of the 2,000 rural hospitals in America are now at risk of closing. Tragically, this past week only 14 percent of adult ICU beds were available in Florida given the resurgence of Covid cases due to idiotic state re-opening pressures.Rock Health identified 52 M&A transactions of healthcare technology companies, and while slightly lower than the 2019 pace, it still suggests a robust appetite for these innovative solutions. This is particularly notable in light of overall M&A activity which declined more than 50 percent globally and was down a staggering 90 percent in the U.S. according to Refinitiv. MobiHealthNews tracked 34 M&A transactions in the healthcare technology sector in 1H20, 23 of which were in 2Q20 for an announced transaction value of $1.2 billion (only 5 disclosed purchase prices so not a terribly useful number). There is likely to be increased consolidation given the large number of start-ups created in the healthcare technology sector as emerging winners become more evident.The Rock Health Digital Health Index of public stocks increased 30 percent in 1H20 as compared to Leerink's Healthcare Tech/Service Public Company Index which was only ahead 0.6 percent for the year, but was up a robust 32 percent in 2Q20 (although relatively flat in June at an increase of 1.8 percent). Market valuations have been reasonably resilient as well. The Leerink index trades at 5.7x and 4.7x revenues for 2020 and 2021, respectively. According to FactSet, 2Q20 revenues and earnings for the S&P 500 index are projected to decline 11.5 percent and 43.5 percent, respectively, which would be the greatest year-over-year decline since the onset of the Great Recession in 4Q08. The healthcare sector earnings are only expected to decline about 10 percent in 2Q20.To underscore the "relatively" healthy state of the healthcare technology sector, it is informative to look at the job losses and subsequent re-hiring. According to Bureau of Labor Statistics data, 43k lost healthcare jobs in March; that number spiked to 1.4 million in April, but May and June saw significant recoveries of 315k and 358k jobs, respectively. Overall, there are 15.6 million U.S. healthcare workers today which implies that net job loss (so far) during the pandemic of approximately 5 percent.One other item: The Paycheck Protection Program (PPP), which over two installments is nearly $670 billion in size (~$130 billion has yet to be distributed), extended loans to 265 healthcare technology companies. While the disclosure requirements established by the Department of Treasury make it virtually impossible to tally the total amounts, only four companies took between $5 - $10 million, 15 took between $2 - $5 million, and 43 took between $1 - $2 million, suggesting a relatively modest amount of PPP loans went to this sector.While a 3Q20 event, Walgreens' bold $1.0 billion investment in VillageMD underscores the profound role innovative healthcare technology and tech-enabled models will play in transforming the business of healthcare. That is not lost on venture investors, and more importantly, great entrepreneurs who look at the nearly $4.0 trillion of medical expenditures (per CMS estimates) that must be improved upon. Expect continued strength in funding and the consistent creation of important valuable new companies.This is thankfully nothing like the recent history in the energy sector, which is forecasting 2Q20 earnings to be down more than 105 percent. Oil prices started the year at more than $60 per barrel, dropping below $0 per barrel (!), before ending 2Q20 at $40­an increase of 92 percent in the quarter. Head-spinning. While the dramatic reduction of service revenues to providers will undoubtedly compromise technology budgets, there is a market momentum that traditional care delivery models must change in response to current conditions
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