In quest for next windfall, tech funds look to healthcare

Some of the best-known technology investors are looking beyond their tried-and-true Internet plays to bet on healthcare data as the next growth market.

Venture capital firms and portfolio managers of large mutual funds are among those investing in companies that gather and analyze healthcare data, all in hopes of tapping into the shift to electronic record keeping and consumer acceptance of personal health tracking devices. Unlike biotechnology firms, which are often hit-or-miss based on the success of drugs under development, investors say these health technology firms tend to have a reliable path to profits by selling services and data to insurance companies, doctors and hospitals.

Overall, venture capital funding for healthcare technology firms is up 176 percent so far this year, at $2.3 billion, versus the same period last year, according to Rock Health, a San Francisco-based seed funding firm. Most of the funds have gone to companies focused on payment management and data analytics.

In contrast, funding for biotechs, a sector whose rally this year has prompted the Federal Reserve to warn about a potential bubble, has increased just 28 percent this year through June 30, compared with the year-ago period.

Andreessen Horowitz, Qualcomm Ventures and Google Ventures are among the venture capital firms that have invested in healthcare technology firms this year, according to Rock Health, while Intel Corp, General Electric Co and Medtronic Inc have acquired digital health companies.

Mutual funds are moving in the same direction. Among all growth funds, healthcare investments have increased 14 percent over the last three years, to make up 16 percent of portfolios, according to Lipper, a Thomson Reuters company. The average actively managed technology mutual fund has doubled the portion of its portfolio in healthcare companies over the last three years, but to only 4 percent, Morningstar data show.

Fund managers are finding health technology a reason to like even industry leaders such as Apple Inc. Over the last year, Apple has hired several senior medical technology executives who focus on sensor technology that can monitor health, ranging from blood-sugar levels to sleep quality.

The company is expected to unveil an updated iPhone and a so-called wearable device on September 9, each of which will include health sensors that power its HealthKit operating system to share data with health providers such as Mount Sinai and John Hopkins and electronic health records company Allscripts Healthcare Solutions Inc.

"The line between what is healthcare and what is technology has become blurred," said Robert Stimpson, the lead portfolio manager of the Black Oak Emerging Technology fund. Apple makes up the second largest portion of his portfolio.

Healthcare technology can be just as risky as other areas in the rapidly changing tech sector. Yet fund investors say that aging populations in the United States and Europe, along with the transition to digital health records mandated by the U.S. Affordable Care Act, should provide a growth catalyst for the industry.

Skip Aylesworth, manager of the Hennessy Technology fund, now devotes a quarter of his portfolio to health technology companies because he expects growth in U.S. healthcare spending. He recently bet on drug distributor McKesson Corp largely because of its division that provides IT services to hospitals and physician offices, and has higher profit margins than those of the entire company, he said.

Other well-known technology funds are taking large bets on healthcare. The $3.7 billion Waddell and Reed Science and Technology A Fund and the $5.6 billion Ivy Science and Technology fund each have about 14 percent of their portfolios in healthcare funds. Zachary Shafran, the lead portfolio manager of both funds, holds companies such as health insurer UnitedHealth Group Inc, device maker Boston Scientific Corp and generic drug maker Teva Pharmaceuticals Ltd along with Facebook Inc.

"Medical technology, biotechnology, medical records and pharmaceuticals are among the greatest innovators and early adopters of new science and technology, so we are paying particularly close attention to companies in those areas," Shafran wrote in a recent note to investors.

Kevin Spain, a general partner at Emergence Capital Partners, said he has invested about $40 million in health tech startups, including Augemedix, which is developing applications that would allow a doctor wearing Google Glass to access a patient's health records on demand. He expects more startups to focus on health technology in the future, largely because of the potential to disrupt established companies.

"Health care is a massive market," he said.

(Reporting by David Randall; Editing by Linda Stern and Richard Chang)