It has become rather cliché but COVID-19 has accelerated digital trends.
Work is now completed from home via Zoom; we shop online at Zalando, and order coffee digitally from the Starbucks app. The healthcare sector is no different and is currently undergoing its own digital transformation. This is a theme to which AGT has significant exposure and has benefited from this year.
The (digital) Doctor will see you now
The prospect of virtual “telemedicine” has been around the corner for the best part of a decade. However, with cumbersome regulations about state licensing and reimbursement issues (in the US), the inertia of large public health systems (in Europe), not to mention reservations from both physicians and patients, it had never quite caught on.
COVID-19, however, has served as a lightning rod for change. Politicians, payers, physicians, and patients have seen the digital light. According to a study from McKinsey, the number of consumers having used telehealth services in the US skyrocketed to 46% in April 2020 – from just 11% in 2019.
Kinnevik – the Swedish holding company in which AVI Global Trust (AGT) is invested that makes early stage investments in digitally enabled businesses – has significant exposure to this theme, having dedicated an increased portion of its portfolio to digital healthcare in recent years. Most notably Kinnevik were early investors in Livongo, the US-based chronic disease management company. In August it was announced that Livongo will merge with Teladoc, the leading US telehealth company. The combined company will have an unparalleled care offering, making it a compelling partner for corporates, health plans and hospital groups. End users will have their holistic health needs met, in a personalised and digital format.
New tech, new ideas
Kinnevik are also investors in Babylon Healthcare, another leading operator in the digital health ecosystem that we are especially excited about. Babylon’s sales are due to grow in the region of 4x this year, and potentially 5x next year, budgeted to reach ~$900m sales in 2022. To gain more exposure to Babylon, AGT invested in VNV Global, another Swedish holding company, which also owns a stake in Babylon that accounts for a very sizable portion of its NAV (32%). Like Teladoc, Babylon offers the ability to video-call with doctors, but it also – through the use of big data and artificial intelligence – offers solutions to digitally diagnose problems without the use of a human doctor – yielding significant cost savings.
Founded by Ali Parsa in London, Babylon currently operates in the UK in partnership with the NHS, as well as South East Asia where they have partnered with Prudential, and Rwanda, where they offer universal coverage in partnership with the government. Earlier this year they launched in the US, which will be a key market for growth going forward.
Politicians, payers, physicians, and patients have seen the digital light
In the US, healthcare spending runs at close to 20% of GDP (compared low double digit levels in other developed nations). With demographics pushing this spend up, a whole host of initiatives to rein in costs and improve efficiency are being pursued.
One particularly prominent method is the move toward value-based care – where health providers share in the risk (and reward) of the provision of care, as opposed to being paid on a volume basis – thereby better aligning interests to lower costs. As Charlie Munger says, “show me the incentive, I’ll show you the outcome”.
Babylon will increasingly be able to take on value-based contracts and benefit from their ability to reduce costs. The market here remains relatively undeveloped and fragmented, with Babylon one of the few providers able to offer such a scalable and data driven model. Kinnevik have also made other investments in the health market through VillageMD and CityBlock, both of which are currently unlisted.
As is often the case with inflection points in technological adoption, there has been a flurry of capital markets activity. Since the announcement of the Teladoc-Livongo merger in August, telehealth competitor AmWell Corp and GoodRx, the pharmaceutical price comparison company that also owns telehealth platform HeyDoctor, have held IPOs.
Venture capital activity has been elevated. Goldman Sachs reported that during the second quarter health care was the fastest growing area of VC, with funding dollars increasing +61% year on year. Teladoc-Livongo has set the standard for scale and breadth of offering, but further consolidation and deal making seems likely. In such an environment skilled and supportive active owners – such as Kinnevik and VNV – will add value. We remain excited about the prospective of future growth and returns in this rapidly evolving market.
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