Distilling our health and bio journey
We have been fortunate to partner with some of the most inspiring entrepreneurs in healthcare and biotech in our time investing in the space. Glen Tulman at Livongo and subsequently Trascarent, April Koh and Adam Chekroud at Spring Health, Toyin Ajayi at Cityblock, Chris Gibson at Recursion and Viswa Colluru at Enveda, just to name a few.
Livongo's sale to Teladoc in 2020 remains to date the largest exit in healthtech and our first investment in 2016 in many ways represented the inception of our healthcare investing practice. Today, there is much more to come and I have never been more excited about our value creation potential in health & bio.
At the Capital Markets Day, I had the opportunity to step back and present a synopsis of our journey building health & bio into Kinnevik's largest sector by NAV exposure and was delighted to have the founders of Cityblock, Spring Health and Enveda join me on stage.
We had scintillating discussions from innovation in Medicaid amid a changing regulatory environment, opportunities to elevate patient care in mental health using machine learning, and de-coding life's chemistry to develop better and safer drugs.
Here's a brief recap-we looked back at the history of health & bio investing at Kinnevik, how the strategy has evolved over time, why founders love working with us and what the future holds.
Investing in the US from Europe
First, I explained why we invested so heavily in the US given how unique a proposition that is as a European based investment firm in an intensely competitive local landscape. At Kinnevik’s scale it’s pertinent to build exposure to the US. The country is the dominant force in global health innovation, the largest single market due to its scale but also twice the European expenditure as a share of GDP. Almost half of that spend is commercially sponsored which led to faster adoption of technology products often developed by private venture backed companies. The US counts over 100 health unicorns, an order of magnitude larger compared to Europe.
The US has a number of pressing health challenges as chronic conditions rise. We pointed out how obesity, mental health and oncology, among others, are growing at 2-4x population growth and patients are in dire need of more accessible, affordable, more convenient solutions. As an example, over 40% of the US population is obese today (up from 28% in 1999, National Center for Health Statistics) which puts the healthcare system under further strain, including rising comorbidities in cardiovascular disease. The bright spot is GLP-1s have had a major impact in reducing prevalence, albeit at a high cost and not without side effects. All our portfolio companies touch one or several of these conditions through prevention/early detection, precision intervention or the development of better and safer drugs.
Kinnevik's investment journey in Health
Since making our first health investment in 2016 (Livongo), we have taken a staged approach which has allowed us to build precision in our strategy, particularly as the sector has (and continues to undergo) rapid change. Our commitment to digital health pre-dates the COVID-driven wave of new investors. By identifying potential and investing early, we avoided the volatility that came when many temporary investors exited the sector. This foresight and trust in our strategy has allowed us to thrive during more challenging market periods and release significant capital during the 2021/22 bubble.
We have assembled a top-notch team, with Maria Maras specialized on tech enabled services in healthcare since 2019 and recently joining her is Ala Alenazi who has a Ph.D in molecular genetics from Cambridge University turbocharging our efforts in bio.
Looking at the portfolio
Digital health funding peaked in 2021 at USD 29bn invested, about 6x the USD 4.7bn when we started investing in 2016, and since normalized at the USD 10bn level. The over investment led to weak returns bar some outliers. We remained especially disciplined with regards to distribution and invested heavily into channels we knew were both expanding and enduring over the long term. In commercial markets, we recognized the rise in self-insured employers purchasing their own custom fit benefits directly from technology enabled provider groups. Livongo – focused on diabetes care - was one of the first to burst onto the scene and established direct contracting. We since invested in several world-class companies delivering fast access to high quality care in mental health, substance use disorders, weight health and oncology by investing in Spring Health, Pelago and Transcarent.
At the same time, we observed the change in reimbursement in government sponsored markets accelerating its shift from fee for service to value-based care. Today, 40% of government spend – such as Medicare and Medicaid - sits in managed care contracts, doubling since we started investing in the space. Our core company Cityblock is a pioneer in value-based care focused on Medicaid and Dual eligible members, consistently delivering NPS over 75, 10x the engagement rate of a typical health insurer, and 20% cost of care reductions.
In 2022, we expanded into Bio, as we cemented our conviction of AI’s transformative potential in drug discovery, evidenced at the time by breakthroughs such as AlphaFold’s protein structure prediction. Today, large language models can annotate complex biological and chemical data, and GPUs matured to process vast datasets like Recursion’s 50 petabytes of cellular imaging data. Along with advancements in gene editing and protein engineering, these tools are revolutionizing drug development. We are convinced that the life sciences are on the precipice of enormous productivity gains as artificial intelligence and machine learning techniques permeate the industry. Our portfolio companies Recursion and Enveda are at the forefront of global health innovation delivering industry leading results in time and cost to develop new drug candidates and already assembled some of the most expansive patent portfolio’s in the AI drug discovery space.
Why the future looks bright
From 2016 when we made our first investment in health & bio to today, Kinnevik has invested over USD 1 billion in the sector, achieving a 32% IRR. The health & bio portfolio now makes up 37% of the entire Kinnevik portfolio.
Today, we are strategically positioned to address large and expanding challenges in health & bio. We are an ideal partner to the most ambitious founders in the space due to our permanent capital base, strong balance sheet, and conviction to address the hardest, most meaningful problems. We are not only equipped to drive growth for Kinnevik but also to deliver positive change for patients, providers, and the healthcare ecosystem over the next decade and beyond.
