Survival of the fittest for health tech

If this is the era of Big Tech and Big Pharma, providers of health tech should be on a roll. Some are. US-based Hims and Hers, having lifted sales by two-thirds last year to $872mn, expects to turn its first annual profit this year. Shares are up more than 40 per cent in the couple of weeks since it reported.

This is a broad church, spanning online doctors through medical big data platforms to AI-assisted diagnosis and robotics. Operators range from traditional drugstores such as Boots of the UK — which has launched online doctor services for certain conditions — through to a plethora of start-ups in the US and Europe. China, with the likes of WeDoctor and Ping An’s Good Doctor, pipped many to the post.

At the basic end, telehealth providers diagnose and fill prescriptions. Going online spares blushes: not for nothing is there a focus on the likes of baldness, weight loss, erectile dysfunction and sexually transmitted diseases. Generic pills and potions arrive in chic minimalist packaging.

Yet, as Hims and Hers well knows, it can be a sickly business. The pandemic-sparked boom petered out as people reverted to conventional surgeries and pharmacies.

Stars of the boom time, such as the US’s Carbon Health, tell an all too common story. In 2021, it was buoyed by funds from the likes of Blackstone Horizon and big ambitions in US primary healthcare. But the bubble burst and the operator — which also has physical clinics and had been active in Covid-19 testing and vaccinations — last month conducted its fourth round of lay-offs.

High interest rates and investors’ newfound insistence on profitability scarred business models. A crowded market place means hefty customer acquisition costs. So, too, did the end of the pandemic. Hims and Hers, notwithstanding its size, spends half of revenues on marketing. 

In the US, where the platforms are often the resort of those without insurance, consumers are price-sensitive and choice means they can afford to be fickle.

Regulatory scrutiny is increasing. Hims UK was obliged to pull an ad. Noom, billed as a modern approach to wellness and healthy lifestyle, suffered a backlash after users claimed it triggered eating disorders. Cerebral, which focuses on mental health, quit writing prescriptions for Adderall and other stimulant drugs used to treat ADHD following a probe by the US Drug Enforcement Administration.

Long-term risks, notes PitchBook healthcare analyst Aaron DeGagne, include heavyweights muscling in. Amazon, which paid $3.9bn for One Medical in 2022, is an obvious future competitor but so too are big retailers such as Walmart.   

Early-stage investors are increasingly leery. Across the broader digital healthcare sector, private funding last year dropped to $13.2bn, according to CBInsights, just one quarter of the 2021 figure. The number of exits also fell sharply to 156, all bar five of which were via M&A.

With a handful of companies expected to go public over the next 18 months, selectivity is key. British start-up Babylon is a cautionary tale: it went public in the US in 2021, commanding a valuation of $4bn. But mounting losses and a funding shortfall forced the company into a restructuring last year, wiping out shareholders.

But medtech remains one of the biggest growth segments within life sciences in the UK. There are 3,460 medical technology sites (some businesses may have more than one), and a further 1,440 servicing and supplying them, according to government data for the year to April 2022.

Bulls can point to signs of improving health. McKinsey sees sales growth for overall medtech at well above pre-pandemic rates, with digital healthcare, cardiovascular health and robotics heading the list. Best of all, perhaps, is that having been through the wringer, start-ups such as Carbon Health are leaner. As every doctor knows, that generally means healthier.

Europe’s carbon price crash looks like market myopia

Boom and bust cycles are a feature of the economy. It should be no surprise that the carbon market is no exception. The cost of emitting CO₂ in Europe has crashed over the past year, sowing the seeds of a future carbon crunch. 

The price of CO₂ allowances under the EU emissions trading system has halved since February 2023, to just €52 a tonne. The market is oversupplied for one good reason: the bloc is belching out far less CO₂ — 1.2bn tonnes this year, estimates commodity data and analysis provider ICIS, compared with 1.4bn tonnes in 2022. Less cheeringly, there are also plenty of allowances sloshing around because the EU is auctioning off extra lots to help pay for the energy transition. 

That all sounds like the workings of a functioning market. But not one that manages to look very far ahead. The EU has committed to cutting the supply of ETS permits 62 per cent by 2030, which should already lead to a 200mn-tonne reduction in permits available by 2027 compared with today.

Meanwhile, quite a lot of Europe’s missing CO₂ is cyclical, rather than structural. Almost half of ETS emissions come from the industrial sector, which has been hobbled by high energy prices. As the European economy picks up momentum, emissions should start growing again. 

Most of the remaining ETS emissions cover the power sector, which is on a better trajectory, with a greater share of generation coming from renewables. Given low gas prices, gas-fired power plants have edged out dirtier coal production.

There is a cyclical element here, too. Lower demand for electricity — down almost 7 per cent between 2021 and 2023 — is a consequence of the price spikes in 2022 and should reverse. 

All of this makes for a muted emissions reduction trajectory. The amount of CO₂ emitted in 2026-27 is expected to be roughly the same as today. Given the mandated drop in the availability of permits, the market may well be tight, to the tune to a few hundred million tonnes of CO₂ permits.

The current low carbon prices will exacerbate the coming squeeze by reducing the pressure to invest in new abatement technologies. Carbon capture, for instance, requires a CO₂ price of more than €100/tonne to stack up. Hydrogen may well be higher than that. 

Imperfect markets are a fact of life. But volatility is particularly concerning in CO₂ trading, given it is supposed to provide signals to incentivise structural, long-term projects.

The EU has put in place systems to absorb oversupply gradually. The lesson from the current crash is that it remains too clunky to deliver the required impetus to decarbonisation.