Social Impact Healthcare Fund (SIHF)Impact Report

August 2016

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Copyright © 2016 by Social Impact Healthcare Fund / Elmar StegmeierAll rights reserved. This report or any portion thereof may not be reproduced or used in any manner whatsoever without the express written permission of the publisher except for the use of brief quotations in a book review.

www.socialimpacthealthcarefund.com

PHINEO gAG has assisted the Social Impact Healthcare Fund as independent Impact Advisor in compiling this report.

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1. CEO OverviewOrganisational Summary

The Social Impact Health Fund (SIHF) is a Luxembourg-based Impact Investing fund focusing on investments in the healthcare industry. The Fund is currently in fundraising stage with a target of EUR 20m. The capital will be invested as equity capital in 8-10 healthcare start-up companies throughout Europe. The portfolio companies are expected to reach marketability during the investment period.

The investment scope of the Fund will be broad, including any type of innovative healthcare products and services in areas such as diagnostics, medical devices, pharmaceuticals, healthcare services, and healthcare IT. Investments in not primary health-related products (i.e. “lifestyle medicine” or health infrastructure / hospital buildings) are excluded from the scope, however. The Fund will focus in particular on investments targeting multi-complex or chronic diseases (areas difficult to assess and currently underserved in European healthcare systems). The Fund’s portfolio companies have to show measurable social impact in line with the IHIM (Integrated Healthcare Impact Mapping) methodology, which measures patient orientation in healthcare products and services.

The SIHF has been initiated by Elmar Stegmeier, founder of IHIM Consulting, an Impact Consultancy for the healthcare sector, and by Dr. Christian Schneider, partner at Vesalius Biocapital. Elmar Stegmeier has over 15 years of experience in healthcare as start-up entrepreneur, executive consultant and manager in healthcare foundations and associations. Dr. Schneider joined the founding team with his over 25 years of experience in the healthcare industry, of which 15 years as a venture capital executive, first at PolyTechnos and since 2008 at Vesalius Biocapitals. He is currently raising his fourth fund in this field.

Figure 1: SIHF Initiator

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The SIHF will be managed by a team combining VC fund management as well as healthcare and impact experience. The management company is expected to be founded in October 2016. The management company will be governed by the Fund’s board of directors, in which major investors hold a seat. The Fund will additionally be guided by an advisory board comprising functional experts from research, academia, foundations etc. to advise the Fund’s management team as well as its investment committee on themes such as regulation, technology, health economy or ethics. Investments decisions will be taken by the investment committee, consisting of five external independent investment experts.

Figure 2: SIHF Governance Structure

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We do not only demand that our portfolio companies put patient orientation at the heart of their activities and measure their impact, but will also rigorously report on the social impact generated by our portfolio. This is our commitment to our investors, portfolio companies and supporters as well as to patients and society.

To reach our goals, we rely on strong partners helping us to pursue our mission. One of these partners is the Social Stock Exchange (SSX) that supports us in making our Fund visible for impact investors. In line with Social Stock Exchange’s regulation, the SIHF is committed to publishing an annual impact report to inform investors, supporters and stakeholders about the social impact generated by the Fund’s investment activity.

Commitment to Social Value

The SIHF aims to achieve a positive social impact for the patients as well as greater efficiency, transparency and cost savings for healthcare systems through the Fund’s investment activity. In our view, investment in innovation and key technologies is an important leverage for changing the mind-set of the healthcare industry, society and politics towards patient orientation. We believe that patients should be at the centre of all considerations within healthcare systems, and that patient orientation should no longer be just a "nice to have".

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2. Social Purpose and ContextMission Statement

The SIHF’s philosophy is “patients first”. Therefore, our mission is to anchor the development and implementation of innovative products and services for the healthcare sector in the needs of, and benefits to patients, thus bringing more patient orientation to the healthcare system overall.

Patient orientation comprises, for us, the evaluation of all measurable outcome indicators which result from a medical product or service and which have a positive effect on patients’ lives.

By fostering innovation which puts the patient at the centre of products and services, we aim to:• increase the quality of medical services for patients, • improve the patient’s quality of life, • augment transparency in the healthcare sector,• stimulate efficiency in complex national healthcare systems, • lower healthcare cost and promote affordable healthcare services.

Through our investment activity and the resulting improvement in the healthcare systems, we believe we can ultimately contribute to the positive socio-economic development of the countries we invest in. Our claim is to invest in solutions for today’s challenges in healthcare to reach the best possible value for the patients, the healthcare system and society.

The SIHF is built around the IHIM methodology, an impact analysis method (see appendix) which has been developed to evaluate patient orientation in complex multi-sectoral healthcare systems. We will use this methodology throughout the whole investment process (due diligence, monitoring and management of portfolio companies and exit). Through this tool we ensure that the Fund will follow its impact mission thoroughly. In order to maintain our mission and prevent mission drift, we • diligently select investment candidates that are able to demonstrate patient

orientation and where the social impact generated goes in lockstep with the economic success of the start-up,

• thoroughly manage our portfolio companies through outcomes indicators (key performance indicators - KPIs),

• educate and advise them on the design and marketing of patient-oriented products and services throughout the investment period, and

• support out portfolio companies in their thrive towards patient orientation through networks and external communication.

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Context

Healthcare systems throughout Europe are governed by opaque sectoral structures and multi-layered financing / reimbursement systems. This leads to inefficiencies and high cost on one hand, and low quality of medical care for the patients on the other hand. Additionally, an aging society with a rising number of chronically and multimorbid people (i.e. suffering from more than one health condition) reinforces this situation. According to the European Commission, the share of the European population aged 65 and over will rise from 18% today, to 28 % in 2060, with those aged 80 and above increasing from 5% to 12%.1 Since an increase in age goes along with increased individual health risks, a common effect of ageing populations is a higher prevalence of mental and physical health problems, especially chronic diseases, such as arthritis, respiratory illness, heart disease, diabetes or cancer. German studies show that 50% of the population aged 65-74 years are affected by at least one chronic disease, 19% are affected by 5 or more diseases.2 The ageing population together with the use of more individualised, costly innovative treatment methods is forecast to lead to a substantial increase in healthcare cost across Europe in the medium-term.

This increasingly challenging situation puts pressure on the systems’ actors, i.e. the patients, healthcare providers, health insurance companies and ultimately governments and society as a whole.

We believe that the key to solving this crisis is a patient-oriented approach to healthcare innovation. Given the complexity of national healthcare systems, patient orientation can be quite difficult to assess, however. Therefore the SIHF relies on the IHIM methodology which allows the Fund to allocate to start-up companies that can demonstrably achieve social impact for patients and society.

1 European Commission; The 2015 Ageing Report; 20152 Robert Koch Institut; Demografische Alterung und Folgen für das Gesundheitswesen; 02/2012

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3. WhoBenefitsThe SIHF provides equity capital to healthcare start-up companies developing patient-oriented healthcare products and services. The primary beneficiaries of SIHF’s activities are:1. the patients who benefit from an improved quality of healthcare products and

services as well as improved efficiency of the healthcare system and2. healthcare payors who benefit from cost savings caused by increased transparency

and efficiency of the healthcare system.

Patients

The benefits for the patients can best be demonstrated by using an example: A man suffers sudden symptoms of a stroke. The normal procedure nowadays is to bring the patient to hospital, where via elaborate and expensive measures – usually computer tomography (CT) – the type of stroke gets identified. Given that the first four to five hours after a stroke are decisive for the right therapy to start, the current diagnostic procedure is time consuming and often depends on free resources (personnel, CT).

The approach of the SIHF would be to fund the development of a biomarker that allows the distinction between different types of strokes via blood on the ambulance, thus saving precious time and providing the doctor in the hospital with relevant information. Because of the fast diagnosis and early start of the treatment, the probability for the patient to survive the stroke increases, whilst the length of time he has to stay in hospital shortens. In addition, it becomes less likely that the patient will become care-dependent after the stroke – with respective effects on the patient’s quality of life.

In short, the benefits of patient-orientated, improved healthcare products or services for patients include:• a positive experience and attitude towards the patient’s physical health,• a prolonged life expectancy / reduction in mortality,• a reduction in dependency, and• a reduction of unnecessary medical treatment.

The Fund itself has no direct contact to the patients, but will through the selection and management of its portfolio companies based on the IHIM methodology ensure that they centre their activities around patient orientation and reach out to the patients, e.g. through KPIs mandatory for portfolio company reporting that have to be collected by regular patient surveys.

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Healthcare Payors

The effects for individual patients expand to the healthcare system accordingly. Using the example above: applying the biomarker leads to an overall improvement of the stroke therapy and to considerable savings (no CT, shorter duration of stay in hospital, improbability of care-dependency). Thus patient-orientated healthcare provision brings improvements of the quality of the healthcare system, the transparency and efficiency of the healthcare system which ultimately leads to reduced healthcare cost.Depending on the national financing system, health insurance companies, other healthcare payors (such as state pension schemes) and / or private payors are the primary beneficiaries from reduced healthcare cost.

Again, the Fund does not have direct contact to this group of beneficiaries, but will encourage through its investment process based on IHIM KPIs that the portfolio companies continuously engage with healthcare payors.

Quantification of Beneficiaries

Given the very broad investment scope of the Fund both thematically and geographically, it is not possible to quantify beneficiaries at this stage. For instance, the Fund could invest in the above mentioned provider of the biomarker used for rapid stroke diagnosis, who launches his product in Germany where health insurance companies are payors and on the other hand fund the implementation of a new prenatal diagnostic test for pregnant women in the UK, which has to be paid for by the patients themselves. Once the Fund has made its first investments, we will provide quantification of the beneficiaries.

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Figure 3: SIHF’s Investment Process

4. Activities and OperationsCore ActivitiesCore activities of the Fund include:

• raising funds from social impact investors,• investing in healthcare start-up companies that generate and are able to demonstrate

measurable social impact through patient-oriented products and services,• monitoring and actively managing the portfolio companies’ social impact and

financial performance,• educating and advising these companies during the financing period on patient

orientation,• facilitating networking between portfolio companies and other impact-oriented

healthcare stakeholders, and• communicating the theme “patient orientation” and the companies’ social impact to

the wider public, especially to policy makers.

Investment Process

The Fund follows its strict “patient first” philosophy throughout the entire investment process, which is shown in figure 3.

The first step within this process is a preliminary impact assessment of potential portfolio companies, followed by in-depth due diligence according to the IHIM ("Integrated Healthcare Impact Mapping"), a proprietary impact methodology for the healthcare sector. A detailed description of the IHIM methodology can be found in the appendix.After the investment committee has taken a positive investment decision, a reasonable number of outcome indicators (KPIs) for each investment candidate are defined, which will be reported to and evaluated by the Fund on a quarterly basis. The SIHF will provide the respective impact information on its portfolio company to its investors in an annual report. Throughout the investment period, the Fund will monitor and actively manage the impact performance of its portfolio companies, e.g. through its voting rights and seats on portfolio companies’ boards. Furthermore it will educate and advise portfolio companies on patient orientation during the investment period until their exit from the portfolio.

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Outcomes

The Fund’s activities and operations are based in the Theory of Change laid out in figure 4.

Figure 4: SIHF’s Theory of Change

The social impact of the SIHF will be created at the level of its portfolio companies. Therefore, outcomes indicators (KPIs) to reach the impact will be determined for each portfolio company upon investment, on which it will have to progress and report over the investment period. The Fund is currently in the fundraising stage (prior to first closing) with no investments made yet. As a result, the outcomes and the related indicators (KPIs) can only be assessed on a theoretical basis at this point. Also, some of the indicators discussed below might be more relevant for some of the future portfolio companies than for others. It might also be the case that new, additional indicators have to be chosen to assess the social impact of a portfolio company depending on the nature of its business activity.

Outcome 1: Positive experience and attitude towards patients’ physical healthThe Fund aims to foster the development of healthcare products and services that yield positive patient experience and the patient’s positive attitude towards their health. Indicators include subjective well-being, positive experience of the treatment, patient’s satisfaction with their state of physical health and the patient’s ability to manage their health condition. The portfolio companies are expected to collect data on these indicators from patient surveys.

Outcome 2: Increased (healthy) life expectancy / reduced mortalityBy providing equity capital to healthcare start-ups, the Fund aims to improve the (healthy) life expectancy and / or reduce mortality compared to the standard treatment. Indicators include the (healthy) life expectancy, mortality rate and the health-related incidents following a treatment. The Fund will therefore encourage its portfolio companies to collect respective data from national medical statistics, healthcare providers (hospitals, doctors) or patient surveys.

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Outcome 3: Reduced dependencyThe Fund is committed to reduce the patient’s dependency after a medical treatment through its investments in healthcare start-ups. Indicators include the functional ability of the patients (e.g. days of employment, other activities) as well as their subjective feeling of control of their daily life in relation to their health condition. Data on these indicators will be collected by the portfolio companies from national statistics (e.g. employment statistics) as well as patient surveys.

Outcome 4: Reduced unnecessary medical treatmentBy funding patient-oriented healthcare start-up companies, the SIHF aims to reduce unnecessary medical treatment compared to standard treatment applied for a certain health condition. Related KPIs include the time spent under medical treatment / in hospital / in home care, the frequency of treatment-related interventions and the number of healthcare providers involved. Data sources include national medical statistics, healthcare providers (hospitals, doctors) or patient surveys.

Outcome 5: Reduced healthcare costThe SIHF is committed to reduce overall healthcare cost by fostering the creation of patient-oriented healthcare products and services. The Fund will therefore closely monitor to what extend its portfolio companies’ products and services contribute to cost savings for public health insurance companies, other healthcare payors (such as public retirement schemes) and private payors compared to alternative treatment methods. The data will be regularly collected from official payor statistics in the respective geographies the portfolio companies operate in.

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5. StakeholdersThe SIHF seeks to improve the healthcare systems in Europe by investing in patient-orientated healthcare start-ups. Several stakeholders inside and outside the healthcare system are affected by the fund’s activities or associated with its performance.

Stakeholders within the healthcare system

The Fund will not engage directly with stakeholders in the healthcare system, but via its portfolio companies.

PatientsPatients are the primary beneficiaries of the products and services from SIHF’s portfolio companies. Through innovative products or services they benefit from better medical outcomes and an improved quality of life compared to current treatment methods. By providing patient-oriented start-ups with capital, the SIHF enables patient-centred innovation. The Fund will ensure that they centre their activities on patient orientation and reach out to the patients accordingly, e.g. through KPIs mandatory for the portfolio company to report on, which have to be collected by regular patient surveys. Patient feedback will also help to improve product and services as well as social impact generation.

Healthcare providersHealthcare providers (hospitals, doctors, therapists) are in most cases the primary interface between the new patient-oriented product or service and the patient. The providers are to treat their patients with the best possible quality, but need to consider financial and structural limitations. Therefore, they have to make the best treatment decision based on the individual needs of the patient, the availability of products or services, and these limitations. Utilising the experience of its founders, SIHF is able to fund and advise healthcare start-ups in how to optimally make patient-orientated products and services available to healthcare providers. It will additionally encourage its portfolio companies engage with healthcare providers and make them a key contributor in the impact process (e.g. through trainings). Also, healthcare providers’ feedback will help to improve the portfolio companies’ products and services and thus increase social impact.

Pharmacies and medical product retailersPharmacies and medical product retailers are equally important stakeholders, as they routinely educate patients about the use of the products. Therefore, they play a vital role in an end-to-end patient-oriented process and have to receive proper information and training from the healthcare start-ups to be able to contribute to the maximal benefit for the patients. Again, the Fund will encourage the regular collection of feedback from pharmacies and medical product retailers to improve the process of impact generation.

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Health insurance companies / other healthcare payorsHealth insurance companies and other healthcare payors (such as state pension schemes) are the primary payers for medical products and services. For them, transparency about patient orientation and economic benefits of an innovative product or service is crucial. Moreover, cost-benefit transparency provided by SIHF’s portfolio companies will enable them to help reduce the expected increase in healthcare cost caused by an ageing, more chronically ill and multimorbid society. The Fund will encourage the portfolio companies to continuously engage with healthcare payors, measure the social impact the portfolio companies contribute and integrate payors’ feedback in order to unfold the full impact potential of portfolio companies.

Other stakeholders

In contrast to the stakeholders mentioned above, the Fund, will directly involve with the following stakeholders.

Patient-oriented healthcare start-upsThese companies develop and provide innovative, patient-oriented products and services. They focus their corporate philosophy, strategy, quality management process and corporate communications towards patient orientation and are able to show measurable social impact. The SIHF will provide equity capital to these “social purpose” start-up companies, which often find it difficult to attract appropriate (“like-minded”) financing partners. Additionally, the Fund will provide education and training to its portfolio companies, helping them to unfold their maximum impact potential.

Fund investorsSIHF’s investors seek to generate financial as well as social returns on their investment. The SHIF offers them the opportunity to participate in attractive investments in the fast-growing healthcare market, whilst improving the lives of millions of patients and helping shape more efficient healthcare systems. Through their investment they enable patient-oriented innovation in developed European healthcare systems. The SIHF will inform them about the financial performance as well as the impact outcomes on an annual basis.

SIHF’s and portfolio companies’ employees For the SIHF’s as well as for the portfolio companies’ employees, it is important to recognize and understand the value of the products and services provided through their own as well as their organisation’s work, in order to contribute to the impact goals of the portfolio companies and the Fund as a whole. By applying the IHIM methodology, they will be able to trace the social impact of their work on a regular basis.

Civil society and policy makersInterest groups, associations and policy makers, which have direct or indirect influence on decisions in national healthcare systems require transparency on cost and benefits of new treatments provided by SIHF’s portfolio companies, in order to foster informed decisions to the benefit of the healthcare system and society in the respective country.

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6. Evidencing Social ValueEvidence

The social impact of the SIHF will be created at the level of its portfolio companies. Therefore, individual impact KPIs will be determined for each portfolio company upon investment, on which it will have to progress and report over the investment period.

As the Fund is currently in the fundraising stage, the social impact generated and the related indicators (KPIs) can only be assessed on a theoretical basis at this point. Therefore, the indicators shown below are only indicative and will change according to the business activity of future portfolio companies. For the next impact report, however, we will be able to show actual data of the portfolio companies.The indicators below are based on the Integrated Health Impact Mapping (IHIM) Methodology (see appendix).

Figure 5: Potential KPIs

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Current management and future plans

Based on the key performance indictors identified above (or others to be defined upon investment), the healthcare start-ups will report their social outcomes as well as their financial data on a quarterly basis to the Fund. The Fund will evaluate and summarise the data and inform investors in an annual report on the performance of the portfolio. Additionally, the SIHF plans to publish an annual impact report in order to renew the listing at the Social Stock Exchange (SSX).

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7. Other issuesRisks / Opportunities Analysis

Short-term risks: Given the very early stage of the Fund, the following potential risks have been identified:• Fundraising risk: The founders might fail to raise the Fund due to low interest from

committed social investors.• Team risk: The initiators might fail to set up an appropriate team and investment

committee able to implement the Fund’s European investment strategy.

Long-term risks: Once the Fund is set up and starts to invest, a number of additional risks might occur:• Deal sourcing risk: The Fund might not be able to identify enough attractive and

innovative patient-oriented start-ups. This might be due to inappropriate deal sourcing strategies or the reluctance / refusal of healthcare start-ups to work with social impact funds.

• Impact risk: Portfolio companies might either not be able to generate the expected social impact or the healthcare system might not be receptive to patient-oriented innovations (e.g. discussion in Germany about protection of data privacy vs. implementation of new electronic health insurance card).

• Financial risk / investment risk: The portfolio companies might fail to launch their products or services successfully and therefore not be able to achieve the financial results expected.

Since only portfolio companies are selected where social impact goes in lockstep with economic result, the financial and the impact risk are interrelated and have to be addressed accordingly.

These risks have to be mitigated by the founder’s existing networks in the European healthcare industry experience as well as their experience in managing European life sciences funds.

Negative Externalities

In the current stage of the Fund, no negative externalities have been identified. Once the Fund becomes operational, negative externalities will be assessed by the Integrated Healthcare Impact Mapping Methodology and reported in the annual impact reports.

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8. Appendix: The Integrated Healthcare Impact Mapping MethodologyIntegrated Healthcare Impact Mapping (IHIM) is a new impact methodology for medical products, services or companies developed by the Fund’s founder Elmar Stegmeier. Figure 6 gives an overview of the IHIM method which is based on the SROI methodology used by the REDF (Roberts Enterprise Development Fund, US) and has been further developed and adapted to the healthcare sector.

The IHIM assessment consists of five modules as shown below: 1. Impact mechanism: An IOOI-framework is used to analyse the social impact / level

of patient orientation of products, services or the company as a whole. Important parameters that influence the level of social impact are identified, that will help to steer the portfolio company during the investment period.

2. Influences: This module is based on a market and stakeholder analysis and evaluates all external parameters (e.g. legislation, ethical principles) relevant to the product, service or business.

3. Company Resources: The module “company resources” is similar to a detailed due diligence that evaluates the product, services or company e.g. regarding the technological, financial or legal robustness of its innovation. The due diligence is centred around patient orientation.

4. Outcomes: The IHIM evaluates medical, economic as well as health system related outcomes. In this module, KPIs for the investment candidates to track patients’ improved quality of life as well as improved, affordable healthcare services are identified.

5. Impact: Finally, the IHIM shows the social impact of a product, service or the whole company delivers for the patients, the healthcare system and ultimately for society.

Figure 6: The IHIM Methodology

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Following this in-depth, five-step analysis, the social impact will be mapped (e.g. graphically illustrated) against its origination within the healthcare system. This mapped impact profile can be compared to other (competitive) products or services or other (competitive) companies.

Figure 7: Example of IHIM Mapping

The IHIM Methodology has three distinctive features: 1. The IHIM works with a strict Impact-Output-Outcome-Impact (IOOI) impact

methodology focused on patient orientation, which has been supplemented by additional modules considering the economic perspective of a product, service or company.

2. It can be used to analyse products, services or companies within complex healthcare systems, allowing to clearly identify, influencing factors, parameters, dependencies and impact mechanisms.

3. The methodology is very flexible as it can be used for products and services as well as for the whole company.

The Fund will use the IHIM methodology for the evaluation of social impact during the due diligence of potential investment candidates as well as for the monitoring and managing the portfolio companies during the investment period. Based on the IHIM analysis done during the due diligence process, individual outcomes indicators (KPIs) will be set for each of the portfolio companies on which they report their social impact during the investment period.