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Tech slump is testing even healthcare, the most resilient of sectors | PitchBook

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It was perhaps apt that I had a migraine on one of the days I spent covering JP Morgan‘s healthcare conference this past week in San Francisco. I’ve suffered from this benign, but often debilitating, condition for a big part of my life. Over the years, I’ve spent tens of thousands of dollars out of pocket—a fraction of what it cost my health insurance—trying to manage the pain.

At a time when tech executives are bracing for a slowdown in revenue growth, many at the JPM conference sought to remind investors of the economic resilience of their sector by emphasizing that illnesses, either acute or chronic like mine, don’t disappear during economic downturns. JP Morgan said in its earnings call on Friday that the bank’s economists are expecting a mild recession to hit in the fourth quarter of this year.

However, most digital health and device companies aren’t expecting revenue pressure. The same goes for pharmaceuticals with FDA-approved drugs. “Healthcare spend is mostly fixed,” as one investor told me this week.

The objective for these companies has always been to capture a bigger slice of the enormous “fixed” pie, which in 2021 accounted for over 18% of US GDP. Nevertheless buzzwords like “margin expansion” and “path to profitability” were the phrases du jour heard from established public and VC-backed companies alike.

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About 8,000 people attended the JPM conference, including leaders of the world’s biggest pharma, insurance and digital health companies. There were also presentations by more than a dozen VC-backed biotech, healthtech and device startups.

Leaders who didn’t push their companies to grow at all costs in 2021 and earlier made it plain they felt especially vindicated by their decisions.

Seth Blackley, CEO and co-founder of Evolent Health, a previously VC-backed software company that helps hospitals transition to value-based care fee models, proudly said that Evolent focused on EBITDA margin growth even when that wasn’t in vogue.

It turns out that no matter how resilient healthcare businesses may be to the economy’s cycles, they’re still subject to market valuations. And those valuations got out of hand for tech-enabled companies during the tail end of the boom cycle.

“Three years ago, we decided the only thing that mattered was growth and not unit economics,” said Hemant Taneja, CEO and managing director at General Catalyst, speaking on a panel about strategic investing. “What used to be [valued at] 20 times ARR is now three times ARR in healthcare services. Startups have to be creative with figuring out how to grow their valuations because these multiples aren’t going to go back to where they were.”

Taneja envisions a good deal of consolidation ahead in part because there are now “too many” solutions on the market, and employers are reluctant to add more offerings as they look to manage their costs.

That could be a boon for cash-rich companies like Headspace Health, a meditation app and teletherapy services provider, which said at the JPM conference that it is looking to scoop up smaller players. Headspace acquired Ginger in October 2021, creating a combined company valued at $3 billion.

However, healthtech startups looking for a home are less likely to receive an acquisition bid from digital health companies that recently went public in a down market. Many, such as GoodRx, have had their stock battered. The prescription drug shopping site has said it will refrain from making acquisitions.

The big theme of the conference was how to deliver care to patients efficiently. In most cases, that means using data and novel diagnostics to identify diseases early, relying on digital tools such as telemedicine and remote-patient monitoring, and addressing medical staff shortages by having primary care physicians play a bigger role in patient management.

I for one am hoping that the healthcare sector will weather the downturn and that consumers of the medical system won’t be affected by potential cost cuts. After all, healthcare is essential in good times and in bad.

Featured image by Jenna O’Malley/PitchBook News

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