Economic Conditions Changing, but Digital Health Still Strong

Fenwick & West Life Sciences Group

Fenwick & West Life Sciences Group

The digital health sector emerged as a juggernaut during the COVID-19 pandemic, with almost $15 billion invested in privately-held digital health companies in 2020 and nearly $30 billion invested last year, according to our good friends at Rock Health.

Previous annual records—including the total dollar amount invested in digital health, number of deals and number of funding rounds larger than $100 million—were not just shattered in 2021, but completely left in the dust.

Rock Health points out that mental health remains the most-funded digital health clinical indication, with startups in the space raising more than $5 billion last year. Companies with technology to optimize and streamline R&D for biopharma and medical technology were the most-funded value proposition, with startups in that arena raising $5.8 billion.

For the past few years, the public health emergency of COVID-19 has served as rocket fuel for an industry that is dedicated to offering innovative, new ways of delivering care.

2021 ended on a particularly high note, with the fourth quarter alone seeing $10.8 billion invested in U.S.-based digital health companies. For sake of comparison, that is more than the collective raise of comparable startups in Asia (the second-largest global market) in all of 2021. Well over half of the Q4 deals in the U.S. were funding rounds of more than $100 million.

But 2022 began on a different note. Digital health startups may be innovating at the same impressive pace, but macroeconomic conditions—including inflation and looming interest-rate hikes—have put significant pressure on the investing landscape surrounding the industry.

Regardless of this year’s final numbers, there is ample evidence that the innovations of the digital health sector will be benefitting patients and the national economy for many years to come.

Solid Ground

As digital health has experienced turbo-growth, there have been fears of an economic bubble forming around it. Analysts have also asked whether the quick adoption of digital health products and services would continue after mass vaccination helped the U.S. get a handle on the pandemic.

But patients and healthcare providers are sticking with telemedicine and other innovations, the Rock Health 2021 Digital Health Consumer Adoption Survey noted, with 73% of patients saying they want to continue using telemedicine platforms. Analysts at Ernst & Young found that 80% of physicians want to accelerate the use of digital platforms.

And though publicly-traded digital health companies are not finding much success in the stock market yet, there are signs that investment dollars may keep flowing to privately-held companies this year.

Insurance coverage for prescription digital therapeutics grew last year, and startups are increasingly collecting clinical evidence to add further validation to their claims that their technologies help patients. Payers and providers are building payment models around digital therapeutics, and technology giants like Google, Apple and Amazon are still investing and making acquisitions in the broader digital health space.

At the same time, exit markets remain healthy. Accoding to Rock Health research, nearly one in four dollars invested in a digital health startup goes to a company that eventually exits via IPO, acquisition or merger. Researchers last gauged this statistic in 2019, when only 15% of the money going to startups went toward a company that found an exit.

The public markets may see considerable volatility this year, and the private markets will likely not be immune. There may be changes to the way venture capitalists deploy their funds and the ways that startups put that capital to use.

It will be interesting to see what 2022 brings. But one thing is certain: digital health solutions will outlast the pandemic, and continue to be an engine for our economy and a boon for patients.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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