Digital health has been a powerhouse investment sector since it emerged more than a decade ago. Year-after-year, startups consistently demonstrate their innovations bring real-world benefits and our healthcare system continues to pursue new solutions to deliver better care to more people at a lower cost.
Technology is improving constantly, and regulators are growing more welcoming to digital health. There has never been a question of whether or not the sector has powerful tailwinds pushing it forward–only how fast they are moving.
Unsurprisingly, with the equity markets still volatile and with many acquirers and investors sitting on cash, the tailwinds are blowing only gently at the moment. The first half of 2022 saw $10.3 billion invested in digital health startups, according to our friends at Rock Health, a significant drop from the $15 billion invested over the same period in 2021. The H1 total puts this year on track to lag last year’s funding total by as much as $29.1 billion. And after 23 public market debuts of digital health startups in 2021, the first half of this year saw no startups in the space go public.
But putting these numbers in context is important. Last year was an all-out record-breaker for digital health. The number of deals, the total dollars invested, the number of mega-rounds of more than $100 million and the number of acquisitions with price tags of $500 million or more reached all-time highs. And more broadly, much of last year was considered a bull market, where inflation, restrictive monetary policy and war were not yet bringing dark clouds to the horizon.
When adjusted with this context, digital health finds itself in the same position as other powerful sectors of the economy: undergoing a correction that many analysts view as healthy, and showing signs that its fundamentals will see it through until the darker clouds begin to part.
Deals in focus
The first half of this year saw a steep drop-off in dealmaking between the first quarter, which saw $4.1 billion 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 Q1 deals were structured in the final quarter of 2021, before the market turned downward.
Interestingly, Rock Health analysts pointed out that veteran digital health investors stayed the course during this period, while “non-specialist” investors took a step back. This is good news for startups backed by veteran digital health VCs, and a bullish signal overall that the most knowledgeable investors are sticking with the sector.
Two of the areas that have seen the most strength in recent years—mental health and biopharma R&D—saw continued strength in the first half of this year, with $1.3 billion and $1.6 billion flowing to these areas, respectively.
And with physician and care team burnout on the rise, clinical workflow solutions that can remove friction from their day-to-day jobs saw $1.2 billion in investment. Technologies for disease monitoring, which can also take the strain off doctors, saw $1.4 billion invested.
Round sizes were down in H1 as company valuations—not just in digital health, but across most tech sectors—dropped. Compared to the 2021 average, Series B rounds dropped in size by 25% for digital health startups, while Series C and D rounds dropped 22% and 12%, respectively.
Many of these funding trends could change direction quickly, however, as investors have a record amount of capital sitting on the sidelines, and digital health remains among the hottest sectors.
And although M&A activity has cooled since last year, the first half of this year saw an average of 16 digital health startups acquired each month. Analysts, including those at Rock Health, say acquirers are not going away, just conserving cash during a volatile period. A few Fenwick M&A highlights from H1 include representing Nurx in its merger with Thirty Madison, Klara in its acquisition by ModMed, Calm in its acquisition of Ripple Health and Castlight Health in its combination with Vera Whole Health.
Tech giants are among the acquirers. Even during this relatively quiet period, Amazon agreed to pay $3.9 billion for tech-enabled primary care provider One Medical.
The regulatory front
While many eyes are watching the ups and downs of the market, moves by government agencies in the first half of this year show that digital health technologies are becoming more firmly embedded in the healthcare system and the daily lives of consumers.
At the onset of the pandemic, the Centers for Medicare and Medicaid Services temporarily broadened access to telemedicine for tens of millions of people. This summer, the U.S. House of Representatives voted to formally extend this provision for several more years, which may represent a major expansion of digital health technology if it is passed in the Senate and the president signs it into law.
Additionally, pressure is building on providers and insurers to make health data interoperable and easy to navigate, per upcoming deadlines set by the 21st Century Cures Act. Electronic health records and other data that sit siloed in various databases must become accessible, transparent and easier to share, opening up a range of opportunities for healthcare IT startups.
And the FDA is opening up new regulatory pathways for digital health, including in the area of digital therapeutics.
While the H1 numbers resemble the first half of 2020 more than they do the first half of last year, digital health is still in the midst of a massive growth spurt. Some analysts say it is poised to keep growing at an annual rate of 28%, making it a $240 billion market by 2026. And even if it falls short of that, it will be a far cry from the $1.7 billion market it was just 12 years ago.
But there is no reason digital health should fall short of even the rosiest predictions. The main drivers of its adoption—including the need for providers to deliver higher quality care at a lower cost, and the need to extend care to underserved populations—are not going to change. And the technology keeps getting better.
The rest of 2022 could see a jump in dealmaking, or maintain a slower pace. But whatever happens this year, digital health will continue on its upward trajectory.
