Healthcare startups are flush with cash, but investors are starting to worry

New York healthcare companies continued to attract hundreds of millions in venture-capital funding last year, but some private investors said they are growing more concerned that the investments aren't resulting in either mergers and acquisitions or initial public offerings.

Investors are particularly concerned about the lack of exits in the digital health sector. Although there were dozens of life-sciences IPOs last year, no digital health companies debuted on the public markets.

During a panel this week hosted by NYC Health Business Leaders, Dr. Bijan Salehizadeh, managing director at Rosslyn, Va.-based NaviMed Capital, said he expects to see investment in health technology companies decrease next year, worrying that the current market is "overheated."

"I hope for the state of the ecosystem it decreases, so that we don't get into a dangerous place with digital health," Salehizadeh said. "We need more entrants to buy digital health companies."

One of the issues is that health tech startups often lose money initially—which makes it more difficult to find a buyer or declare an IPO, said Imran Babar, vice president of Manhattan-based OrbiMed.

Last year 79 healthcare companies in the city raised $703 million in venture-capital funding, according to a report from NYC Health Business Leaders, a group of 3,000 health care professionals.

The report highlighted conditions in the city that foster startups, such as access to capital, proximity to major universities and support from local and state government. Drawn from the Pitchbook database, it included companies in the healthcare categories of devices and supplies; services; technology systems; pharmaceuticals and biotech; and other healthcare.

The largest New York City deals last year included behavioral health startup AbleTo's $36.6 million funding round and the $34 million funding round secured by Phreesia, a patient-intake software maker.

Ezra Mehlman, principal of Manhattan-based Health Enterprise Partners, noted that it typically takes a few years for merger-and-acquisition activity to follow increasingly large venture-capital financing rounds. Not many of those deals have materialized.

"If you dig into the M&A that did occur in healthcare IT, it's characterized by sleepy incumbents gobbling up point solutions at sub–$100 million valuations, with the exception of a few outliers each year," Mehlman said.

One of those exceptions: Doctor.com, a company in Manhattan that helps providers book appointments and manage their online presence, acquired Connect Healthcare of Decatur, Ga., for an undisclosed sum in December.

Data analytics was identified as one hot area of interest for investors, but Mehlman cautioned that people need to consider the customers for such software offerings.

With hospital chief information officers managing expensive implementations of electronic health records and insurer consolidation leaving fewer customers, analytics solutions designed for pharmaceutical companies might be the most attractive, he said.

"The budget seems to be there much more [for pharma companies] than on the healthcare provider and payer side."

"Health care startups are flush with cash, but investors are starting to worry" originally appeared in Crain's New York Business.