Venture capitalists seeking to profit from innovations in health care are turning to startups that make smartphone and tablet applications for doctors and hospitals.
Two years ago, patients would be surprised to see their doctors pulling out an Apple Inc. (AAPL:US) iPhone to check their blood sugar, or cardiogram results. Now they’re finding such practices commonplace as investment in the kinds of companies that make health information apps rose 78 percent in 2011 to $766 million. Qualcomm Inc. (QCOM:US) has started a $100 million fund, Insight Venture Partners is putting $40 million into a startup and Oprah Winfrey is dipping in as well, with her company investing in a website that helps doctors and patients interact.
“We’re at a sea change,” said David Jahns, managing partner of Galen Partners LP, a Stamford, Connecticut-based private equity firm that invested in a company called Sharecare.
Demand for apps that let doctors and nurses see test results quickly and monitor vital signs remotely, combined with a push from government and insurers to collect better data to contain rising medical costs, is propelling investor interest in an array of health information technology, Jahns said.
“We really have to improve our costs,” he said. “The best thing that our country can do is invest in technology that gets better outcomes with fewer procedures.”
Timothy Kreth, a cardiologist at TriStar Summit Medical Center in Hermitage, Tennessee, uses an application from AirStrip Technologies that lets him view emergency room patients’ electrocardiograms on his iPhone.
“It’s more convenient for the patient,” Kreth said in a telephone interview. “I can look at it and determine some of the subtle nuances the emergency room doctor maybe could not. It gives us the opportunity to make diagnoses quicker.”
Kreth and the five other cardiologists have used the AirStrip technology for about six weeks at his hospital, which is part of HCA Holdings Inc. (HCA:US) Previously, emergency room doctors faxed cardiologists the EKGs, Kreth said.
AirStrip, based in San Antonio, Texas, was the first investment from the $100 million Qualcomm Life Fund that formed in December. Qualcomm Life doesn’t disclose how much it invests, though typically puts down $2 million to $5 million, Jack Young, who manages the fund, said by telephone.
Richard Wells, a managing director at Insight Venture, defines the burgeoning market as software as a service -- scheduling technology for doctors, patient-monitoring data for hospitals and online wellness tools for corporate health plans.
“In a way it’s like outsourcing,” Wells said in a phone interview. “You don’t need IT guys, it’s all done for you.”
Qualcomm had invested in health previously through its $500 million Qualcomm Ventures that funds a broader range of tech startups. Now the San Diego-based wireless communications- equipment company markets a cloud-computing platform that can connect medical devices and applications over the Internet, a specialty Young said will be mutually beneficial when Airstrip moves into home care for patients discharged from the hospital.
“We’ll continue to see this caliber of investing,” he said. “The ecosystem is slowly but surely taking off.”
Investment in health information technology has doubled since 2006, and rose 78 percent in 2011 from 2010, according to the National Venture Capital Association. Funding totaled $184 million in 27 deals in the first quarter of this year, according to Mercom Capital Group, an Austin, Texas-based consultant to health-care companies.
Industry venture investments of $2 million or more per deal are up about 30 percent this year, with most startups getting an average of $11.8 million, said Halle Tecco, chief executive officer of Rock Health, a seed accelerator for health technology startups.
As information technology reaps the benefits, investment in traditional medical-devices makers, though still magnitudes larger than medical app investments, has stalled to $2.8 billion in 2011, from $2.9 billion in 2006. Devices, unlike most information technology, are subject to a regulatory review where companies must show that a product is reasonably safe and effective before sales can begin.
The timing of the Food and Drug Administration reviews has become too unpredictable for some early investors, Thomas Gunderson, senior analyst at Minneapolis-based Piper Jaffray & Co., said in a telephone interview.
“If they’re supposed to make investments and they think it’s going to take six years to get the returns on their investments, that’s one thing,” he said. “If it’s seven, eight or 12 years, that’s unpredictable and they’re backing away.”
The FDA is considering stricter standards for medical apps that directly diagnose or treat conditions. The agency released draft guidelines in July that said some mobile apps pose a potential risk and may have to meet medical-device quality standards before being sold for use with smartphones and tablets.
For now, insurers are still embracing the proliferation of new technology that helps hospitals and doctors keep better records or operate their practices in a less costly way.
The shift is being aided by government efforts to arm doctors with more data and coordinate care to reduce health costs, said Jahns.
The U.S. economic stimulus package in 2009 set incentives for health-care providers to adopt electronic records, and President Barack Obama’s 2010 health-care system overhaul pushed providers further to cut costs and improve services.
“Anyone who can save money goes to the front of the line” for investment, Gunderson said.
Galen Partners led a $14 million investment in WebMD founder Jeff Arnold’s newest project, Atlanta-based Sharecare. The company began in 2010 in partnership with Dr. Mehmet Oz of Oprah Winfrey fame -- Winfrey’s Harpo Studios is also a backer.
Sharecare has built searchable drug, supplement and wellness databases and provides online tools for doctors to connect with potential patients. On the consumer side, the company’s website provides thousands of answers to health questions by experts from hospitals, care provider associations and companies such as Pfizer Inc. (PFE:US), the world’s largest drugmaker, and pharmacy chain Walgreen Co. (WAG:US)
The website’s landing page includes a bar where users can enter any health question they conjure with some clickable prompts such as “Can I burn extra calories eating celery?”
“For us, we want to get to scale and become the front door to online health,” Arnold said in a telephone interview. “Basically, to health care the way Facebook is to the way people make lifestyle choices.”
UnitedHealth Group Inc. (UNH:US), the largest U.S. health insurer by membership, had its employees use Sharecare for a 12-week “Move It & Lose It Challenge,” Tyler Mason, a spokesman for the Minnetonka, Minnesota-based company, said in an e-mail.
Arnold wants to open Sharecare up to other entrepreneurs to give patients access to electronic medical records, allow people to schedule doctor appointments and provide a home for data from apps that are operating like traditional devices, such as blood sugar management systems.
Wells of Insight Venture said desire for digitization to control health costs will continue to spark venture capital interest. Insight in March invested $40 million in Kinnser Software, which gives home-health providers access to patient records and the ability to enter data digitally on the site or using an app on a tablet.
“This keeps going for a while,” Wells said.
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