Digital health has been a strong investment sector since its emergence over a decade ago. Year after year, start-ups consistently demonstrate the real-world benefits of innovation, and our healthcare system continues to develop new solutions to provide better care to more people at lower costs. I keep pursuing it.
Technology is constantly advancing and regulators are more welcoming of digital health. There’s no question as to whether the sector is heading forward with a strong tailwind. Just how fast they are moving.
Unsurprisingly, the tailwinds are only mild at the moment, as stock markets remain volatile and many acquirers and investors have cash on their hands. According to friends at Rock Health, he will invest $10.3 billion in digital health startups in the first half of 2022, down significantly from his $15 billion invested in the same period in 2021. In total he’s worth $29.1 billion. And in 2021, he said, after 23 digital health startups debuted on the public market, no startups in the space went public in the first half of this year.
But it’s important to put these numbers into context. Last year was a record breaker across the board for digital health. The number of deals, total investments, mega rounds over $100 million and acquisitions with price tags over $500 million reached all-time highs. More broadly, much of the last year was considered a bull market, with inflation, restrictive monetary policy and war not yet looming over the horizon.
Adjusted for this situation, digital health finds itself on par with other powerful sectors of the economy. It has undergone a correction many analysts consider healthy, and its fundamentals are showing signs of overcoming it until the dark clouds begin to part.
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The first half of the year saw a sharp decline in deals between the first quarter, when $4.1 billion was invested in digital health startups, and the second quarter, when $2.9 billion was invested. This is at least in part because many of the first quarter deals were structured in his final quarter of 2021 before the market turned down.
Interestingly, RockHealth analysts noted that while veteran digital health investors remained steadfast during this period, “non-professional” investors took a step back. This is good news for veteran digital health VC-backed startups and an overall bullish signal that the most knowledgeable investors are sticking with the sector.
Mental health and biopharmaceutical R&D, two of the strongest areas in recent years, continued to perform well in the first half of the year, with $1.3 billion and $1.6 billion inflows into those areas, respectively.
It also saw $1.2 billion invested in clinical workflow solutions that can take the friction out of daily operations at a time of increasing burnout among physicians and medical teams. $1.4 billion has been invested in disease-monitoring technology that can also reduce the burden on doctors.
Round sizes declined in the first half as company valuations fell across most tech sectors, not just digital health. Compared to the 2021 average, the size of series B rounds decreased by 25% in digital health startups, while series C and D rounds decreased by 22% and 12%, respectively.
However, many of these funding trends could change direction quickly as investors sit back on record amounts of capital, and digital health remains one of the hottest sectors. .
And while M&A activity has cooled since last year, an average of 16 digital health startups were acquired each month in the first half of this year. Analysts, including Rock Health, say the acquirers aren’t leaving, they’re just saving cash during volatile times. Fenwick’s M&A highlights in the first half include Nurx’s merger with Thirty Madison, Klara’s acquisition by ModMed, Calm’s acquisition of Ripple Health, and the combination of Castlight Health and Vera Whole Health.
Tech giants are included among the acquirers. Even in this relatively quiet time, Amazon agreed to pay tech-enabled primary care provider One Medical his $3.9 billion.
Regulatory Forefront
With many eyes on the ups and downs of the market, the actions of government agencies in the first half of this year show that digital health technologies are becoming more tightly integrated into healthcare systems and consumers’ daily lives.
During the pandemic, Medicare and Medicaid Service Centers temporarily expanded access to telemedicine for tens of millions of people. This summer, the U.S. House of Representatives voted to formally extend the provision for several more years. This could represent a significant expansion of digital health technology if passed by the Senate and signed into law by the President.
Additionally, there is pressure on providers and insurers to make healthcare data interoperable and easier to navigate, following the next deadline set for the 21st.st Century Cure Act. Electronic medical records and other data siled in various databases must be accessible, transparent, and easy to share, creating opportunities for healthcare IT start-ups.
The FDA is also pioneering new regulatory pathways for digital health, including in the area of digital therapeutics.
While the first half numbers look more like the first half of 2020 than the first half of last year, digital health is still in the midst of a massive boom. Some analysts expect it to continue to grow at an annual rate of 28%, making it a $240 billion market by 2026. years ago.
But there’s no reason why digital health should fall short of even the most optimistic predictions. Key drivers of its adoption remain unchanged, including the need for health care providers to provide low-cost, high-quality care and the need to reach underserved populations. And the technology is getting better and better.
For the rest of 2022, deals are likely to either skyrocket or slow down. But no matter what happens this year, digital health will continue its upward trajectory.