Top Trends in H1 2016 Digital Health Investments

by Fenwick & West Life Sciences Group

Fenwick & West Life Sciences Group

A few months ago, following our fifth annual Digital Health Summit, the attendees made some predictions about product development and investment in the rapidly growing sector. Now that we are more than halfway through the year, we thought it would be interesting to see how those predictions fared against the investment results from the first half of the year. This data offers insight into developing trends and provides a valuable baseline again which we can judge future data.

Regulated Space

Prediction: More digital health companies will design products for the regulated space.

Trend line: In terms of digital health companies targeting the part of the market that is subject to regulation, our analysis found 8.5 percent of venture investment in the digital health sector by value in the first half of the year went to companies developing products or services that would likely be subject to regulation. Recipients of investment range from companies producing therapeutic, monitoring or diagnostic devices to developers of decision support software.

Eight percent is modest, but it may be the tip of an iceberg. MobiHealthNews recently reported that more and more consumer-facing digital health companies are signaling a shift in focus away from unregulated fitness and wellness space and towards clinical applications for their technologies.

And the San Francisco Chronicle reports that over 100 clinical trials listed on the website feature Fitbit trackers in addition to those trials using the Apple Watch, Jawbone, Garmin, Pebble and other devices.

At the dawn of the digital health revolution, some argued that fitness trackers were being marketed as a way for companies with long-range ambitions to produce devices with clinical applications to get to revenue in the short-term. If this trend plays out, those pundits may yet be proven right.

Health System Investors

Prediction: Healthcare systems will emerge as key digital health investors.

Trend line: Digital health venture fund Rock Health notes in its half-year report that corporate investors outpaced traditional venture funds in terms of the number of deals during the period. It calls out UPMC Enterprises, the venture arm of the University of Pittsburgh Medical Center, as a top corporate investor for 2016. At the beginning of the year, MedCityNews also noted that UPMC had stepped up its investment activity.

In addition to UPMC, we found almost a dozen healthcare systems making investments in digital health companies in the first half of the year, including Kaiser Permanente Ventures, Partners HealthCare Innovation, Intermountain Healthcare, University of Virginia Health System, MultiCare Health System, St. Joseph Health, Bayshore Healthcare, Children’s Medical Center of Dallas, Catholic Health Initiatives and HealthEast Surgery Center – Maplewood.

As healthcare systems struggle to improve their margins and outcomes and meet the requirements of the Affordable Care Act, they are natural strategics for digital health companies.

The Perseverance of Private Capital

Prediction: Private capital will continue to flow into the sector despite disappointing results in public markets.

Trend line: Many expected that after years of meteoric growth, digital health investing would decline in 2016 – particularly in light of the fact that nearly all publicly traded digital health companies are trading below their offering price. With only one digital health IPO so far in 2016 (NantHealth), public market sentiment may have deterred other IPO hopefuls, but it has not deterred private investors.

Rock Health reports just over $2 billion in funding through the first half of 2016 which the fund notes is on pace with 2014 and 2015. A healthy M&A market may be encouraging venture investors. Rock Health reports 87 recorded deals in the first half of the year accounting for $10.4 billion in disclosed dollars. This is a significant 73% increase over 2015.

If healthcare systems do emerge as key strategic investors, the number and value of M&A exits can only be expected to increase.

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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