Bill Taranto, president of Merck Global Health Innovation Fund, tells MobiHealthNews what interests Merck when it comes to investing in digital health and what health technology companies need to focus on to garner venture capital funds in 2023.
MobiHealthNews: What do you look for in a digital health company when considering making an investment?
Bill Taranto: So our investment thesis is kind of broken into sort of three parts. The first is that we have this sort of concept that data is currency … in the future healthcare market. And so we want all of our companies to be sort of data companies, generally speaking.
The second is that point solutions don’t work in healthcare. We think that it really needs to be interconnected, where companies work together to try to bring a more integrated solution. So we look for companies that help us think about that integrated solution.
Then finally, we start with a use case. It might be something Merck’s trying to solve. For example, they want to identify more patients, or it’s something else in healthcare that we’re trying to solve, like … how do we prevent stroke and heart attacks? But the theory starts with the use case, and then from that, what we say is, “Well, can we find a digital health company that helps us solve that use case?”
But the problem you run into with digital health is that there’s no single company that can solve 100% of that problem. So, what we try to do is identify something we call an anchor tenant – a company that can solve a big piece of that use case – and then we try to just make that investment.
MHN: Have the recent economic uncertainties and banking issues affected Merck’s investment strategies?
Taranto: It doesn’t affect our strategy directly. It affects the portfolio companies more strictly. We’re like anybody else, and we’re sitting on 38 portfolio companies, and not all of them are raising capital. We did a pretty good job of making sure we had a good cash runway.
But what’s happening with the market today, and SVB [Silicon Valley Bank] is just a piece of the puzzle, but where they play an important role was they were the most friendly bank to our industry, but them going under is going to cause some issues around the debt that’s out there.
You may recall in ’20 and ’21, companies raised capital at really enormous valuations. And they found out in 2022, they couldn’t raise. The P&Ls [profit and losses] did not support those valuations. So it forced the company to either do one of two things: They could do insider debt or do bank debt. The problem that SVB’s caused is that the industry is going to tighten their screws on the companies around the covenants associated with that debt.
MHN: A lot of companies went public through a merger with a special purpose acquisition company in 2021, and some of those companies are now having a lot of difficulty. Was it a bad idea for some companies to go public with a SPAC?
Taranto: I think it was because part of the problem is sort of the general structure. So, I don’t blame companies. Look, when you’re desperate for money, if there’s capital available, you go for that capital. But the problem is, it’s another way to go public, but it doesn’t solve your problem that you don’t have, maybe, a good P&L. You’re not making the revenue you want to make.
It doesn’t fix your company. It just gave you access to capital. That’s the first thing you really have to do, part of it is being honest with yourself and what your situation is, but fix your company.
Then try to figure out, what is your story going forward? What is the thing that gets me to believe in you that you have an inflection point? It’s getting the narrative straight. That’s what the companies need to do better is tell their story. When they’re not honest about their P&L and what the situation is, they don’t tell the right story.
So part of it is really fixing the fundamentals of your company, which a lot of companies don’t think about. And part of where that comes from is they don’t watch their cash well. They’re not good stewards of the money which have been invested in them. They spend very quickly. They hire too fast.
But this is evident of what companies do. They don’t quite look at their burn rates and their cash flow in a way that preserves it and gets them to the next level. And that’s what you really have to sort of do in this market is accept the down round. Dilution doesn’t cause bankruptcy, lack of cash causes bankruptcy.
MHN: Is there anything else you want to add?
Taranto: I’m always an optimist. Yes, we’re in a bit of a down market, but this is cyclical, right? And you got to embark with optimism. You can do things to get yourself positioned for a raise and part of it is that story.
The second is, digital health is a great place. We’re really doing a lot. We’re cutting costs, we’re creating efficacies, we’re creating efficiencies, but most importantly, we’re saving and improving patient lives. That’s part of your story. It’s not just about your P&L.
Howard Rubin will offer more detail during the HIMSS23 session “Increasing Access to Care for Rural and Underserved Communities.” It is scheduled for Tuesday, April 18 at 3 p.m. – 4 p.m. CT at the South Building, Level 1, room S105A.