Funding for digital health broke another record this year, but is the trend sustainable?

As digital health companies raise mind-boggling capital once again, the question arises: what happens when the music stops?

So far, digital health companies are set to raise more than $ 28 billion this year, Megan Zweig, chief operating officer of Rock Health, said in a Zoom interview. This is a record amount and significantly higher than in previous years. For some background: last year digital health companies raised $ 14.5 billion by the Rock Health count, while in 2019, this amount was $ 7.9 billion.

Experts polled by MedCity News don’t expect the frantic pace of 2021 to continue next year, but do expect to see funding amounts similar to what we saw in 2020. An expert predicted a number below which venture capital investments in the sector will not fall.

“It will still be above $ 16 billion, in my opinion,” said Chris Moniz, director of healthcare practice at Silicon Valley Bank, focusing on healthcare technologies and devices.

Investments, valuations are heating up
As investments increase, so do digital health valuations. What would once have been a Series B is now a $ 25 million Series A, said Steve Tolle, partner at HLM Venture Partners. He noted that some caution is in order given the high valuations – people should be skeptical if a startup with less than $ 10 million in revenue throws another round at a valuation of $ 300 million.

“We’re a company that doesn’t like to buy into this high value hype,” he said. “We will do this if we truly believe the business has great potential.”

A few factors contribute to this. On the one hand, the pandemic has prompted many people to use virtual care for the first time, although use has stabilized as Covid-19 lingered and telehealth is increasingly seen as an enhancement, rather than a substitute for in-person care. .

Second, private equity firms have taken an interest in digital health, leading massive rounds in early stage companies. For example, Tiger Global has been prolific. He co-led a recent $ 600 million investment in musculoskeletal care startup Hinge Health, and also co-led with Blackstone a $ 304 million funding round for the platform. Medable decentralized clinical trials.

In addition to raising more capital, startups also raise more frequently.

“It is true that it has become a more competitive market for investors, to find the right deal at the right price,” Zweig said, noting that investors need to think about what else they can offer a startup. , from business development support to operational advice.

Lots of IPOs, but mixed returns
There was no shortage of exit opportunities for digital health companies in 2021. In addition to a plethora of mergers, several companies went public, both taking the traditional route and merging with specialist acquisition companies (SPAC).

Zweig said it was a good signal, indicating a sustainable digital health market after a lull a few years ago.

In early December, around 29 digital health companies went public, according to Silicon Valley Bank’s Moniz. There were only 12 IPOs in 2020.

However, not all of these actions behave well. In 19 companies tracked by MedCity News that went public in the past two years, all were down since their first day of listing.

A few companies are still above their IPO value, with Doximity valued at more than double its IPO price of $ 26 and Oak Street Health up 51% from its IPO price. $ 21 IPO. But the two have traded in recent months compared to previous highs.

Some companies have had much worse results. Talkspace stock, for example, was trading below $ 2 on Tuesday, after plunging from its IPO SPAC to $ 10 a share after poor results and the departure of its key executives.

Overall, every company that went public through an SPAC was valued at less than $ 10, the standard share price for these types of trades. Due to the way they are structured, most benefits for investors comes before the company goes public.

“It’s hard to say if this is specific to the company or the nature of the PSPC mechanism,” Moniz said of the drop in the share price.

Tolle was less convinced that it was only because of the route these companies took to public markets.

“It doesn’t matter whether it’s a traditional IPO or an SPAC; if the fundamentals of the business are challenged, you are not going to perform well as a stock, ”he said. “A lot of companies took advantage of this window of time, believing they could jump in and ride the wave.”

Even for those who have gone public through traditional mergers, the health tech industry is on the decline overall.

“Do we think it’s because they are not good companies? No, I think it depends on the valuation situation, ”added Moniz. “Really high valuations are great when you’re private. But will public markets keep this premium? “

Differentiation is the key
As the competition grows, companies will have to work hard to differentiate themselves. This is especially true if they are selling through the same channel, such as self-insured employers.

For example, mental health startups might want to expand their offerings beyond self-guided cognitive behavioral therapy tools or meditation exercises, as evidenced by Headspace’s merger with Ginger. The size of the network will also become increasingly important.

“We have all of these health-related telecommunication companies, and there is a shortage of qualified providers,” Tolle said. “In my mind, it will be a battle over who has the best network. “

Digital health companies can also look to regulatory studies or labels to set themselves apart from the competition. Digital therapy companies in particular, like Pear and Akili, have sought FDA clearance to prove the effectiveness of their treatments as they seek health plan coverage.

“Here’s the science, here’s my results, here’s how you save costs – to go into business, that’s almost the price of admission,” Moniz said.

Aside from patients and payers, digital health companies must also stand out to another group of people: physicians. As healthcare apps and other digital tools proliferate, clinicians are inundated with new technologies and additional metrics to follow.

“I don’t want to lose sight of user burnout,” Zweig said. “I think this will be a very important challenge for innovators to keep in mind.

Even though the market is currently a bit bustling, there should still be plenty of opportunities for digital health companies in the future. The sector has attracted more interest from investors and there are many potential buyers. And improved technological infrastructure should make it easier for new businesses to start up and enter the market.

Photo: CaptureTheWorld, Getty Images