High Inflation High Interest Rates and the Impact on HealthTech

The whole world is facing a unique and unprecedented economic and financial scenario that is affecting everybody’s pocket and life. According to the latest McKinsey Global Survey on economic conditions, respondents see inflation as a growing threat to the global economy and continue to view geopolitical instability and supply chain disruptions among the top threats to both global and domestic growth. Supply chain disruptions round out the Top 3 global risks, followed by volatile energy prices and rising interest rates. The US consumer price index rose by 8.5 percent from March 2021 to March 2022, a 40-year high. Inflation hit 7.5 percent in the eurozone and 7 percent in the United Kingdom. Some 60 percent of advanced economies grapple with year-on-year inflation above 5 percent.1

The high inflation is forcing most central banks to increase interest rates to figures unseen in the last 10 years. The expectations of higher interest rates are negatively the levels of investments and funding worldwide. According to the 2Q22 report by CB Insights State of Venture, quarter-on-quarter global funding fell 23 percent to US$108.5 billion in 2Q22, the largest quarterly percentage drop in funding in nearly a decade.

The health industry has received huge amounts of capital during the pandemic. According to the 2Q22 report by CB Insights State of Venture, the health sector received US$32.6 billion in 2020, 52 percent higher compared to US$ 21.5 billion received in 2019. The investment in 2021 continued, growing to US$59.3 billion, 82 percent higher than in 2021. The sector has been affected by the current scenario but it is still receiving significant levels of investment, even higher than before the pandemic. According to the mentioned report, quarterly digital health funding was down 32 percent QoQ in Q222 but it still totaled US$17.6 billion across 1,255 deals in the first half of 2022.

The health sector became very relevant during the pandemic not only because of the imminent need to fight COVID-19 but also because the pandemic changed consumption habits and preferences. Wellness, healthier lifestyles and prevention became a priority for everybody. Additionally, the health sector proved to be very vulnerable, with huge potential for digitization and for implementation of new and more efficient business models. The health sector became an industry with huge potential.   

Investment in the health sector has been used for implementing new business models, including patient-centric healthcare, virtual healthcare, ambulatory services and home care. Reinventing business models and building new sources of revenue have never been more important for the healthcare industry. The pandemic started the long road to transforming the industry, and there is need for continued transformation and investment.

Funding and investment, however, are more selective in the current macroeconomic scenario. The investment focus will no longer be on growth and high valuations. Companies that are successful in raising funds in the healthcare sector will need to have a proven and profitable business model. Companies with cash will have a competitive advantage compared to those requiring immediate funds. Funds will follow proven and successful business models, looking for profitable and scalable businesses. We believe there is huge potential and need for investments in the health sector in order to deploy the new business models that have been successfully implemented during the pandemic and that can be rolled out across the whole market, both in the private and the public sectors. Investment will value those businesses that can survive with low levels of cash burn, like camels, instead of businesses with the potential to grow quickly into something farther from reality, like unicorns. We are in the era of investing in camels and not in unicorns, unlike the previous 12 to 24 months, when the focus was on unicorns. Cost reduction and efficiencies will be drivers of investment in the sector and digitization and healthtech initiatives can clearly contribute to more profitable business models, with short paybacks (e.g., less than 12 months). The implementation of well-being programs for employees is becoming mandatory to attract and retain talent. These programs also rely on new and successful business models in healthcare that allow democratization of health services and that will sustain demand and the growth of the sector. The public sector will also implement healthcare models that improve efficiencies and allow them to provide services to a wider population.

In summary, I wanted to bring attention to the current levels of investment into the health sector, the change in the trend that we have seen compared to the previous quarters, and how the new scenario can jeopardize the development of alternative healthcare delivery models. The health sector attracted huge levels of investment during the pandemic that have generated new efficient business models that can be rolled out across the whole industry. The increase in interest rates and the reduction in investments will undoubtedly negatively affect the development of these new business models but we are confident that sustained demand and continued need for higher efficiencies and digitization will continue driving investments in the sector. Companies will have to demonstrate to investors that they can implement successful and profitable models. Accelerated growth regardless of profitability will no longer be an option to attract funds. Companies with low levels of debt and high amounts of cash will capture a bigger share of the e-health market in the new landscape. We will see players exiting the market because of lack of liquidity, and also, we will see a consolidation in the market. Investors will look for camels that can survive longer in the desert with limited resources. Unicorns will need to demonstrate a real ability to survive in the real world and not only in the sky amid clouds and rainbows.