What Bubble? Digital Health Funding Year In Review 2021

As digital well being funding breaks one other file in 2021, many consultants are asking, “What bubble?”

Coming off of just about two years of a worldwide pandemic that has modified how shoppers and clinicians search and supply well being care companies, it’s not shocking to see continued progress within the digital well being sector. And with well being knowledge now largely digitized because of digital well being data (EHRs), data blocking guidelines breaking down walled gardens, and growing shopper acceptance and demand for digital-first well being options, it’s possible that this progress trajectory will proceed in 2022, which brings up an essential query: are we in the course of the digital well being bubble?

One other 12 months, One other Digital Well being Funding Milestone 

As detailed in Rock Well being’s annual year-end report, digital well being funding amongst US-based startups soared to a file $29.1 billion throughout 729 offers in 2021, almost doubling the prior yr’s file of $14.9 million. With a mean deal dimension of $39.9 million, 2021 additionally noticed 88 digital well being offers over $100 million, together with 4 of the 5 largest since Rock Well being started monitoring in 2011, together with: Noom ($540M), Ro ($500M), Mindbody ($500M), and Commure ($500M).

2021 Digital Well being Funding Highlights 

Whereas digital well being investments crossed many purposeful areas and choices, startups within the biopharma and medtech R&D area held the highest funding slot, the place psychological well being and diabetes noticed funding will increase as properly. Digital well being infrastructure and interoperability startups additionally noticed an unbelievable quantity of traction final yr, securing $2.2 billion throughout 40 offers, together with corporations like Innovaccer, Redox, Ribbon Well being, Commure, Truepill, Wheel, and Zus Well being. 

Of notice, Rock Well being’s evaluation additionally discovered that healthcare marketplaces skilled a 3.2x year-over-year funding progress in 2021. This determine is in keeping with earlier investment trends seen for healthcare marketplaces and extra broadly multi-sided digital well being platforms; the pandemic strengthened the ability of digital marketplaces, their capability to attach and match beforehand disparate events and facilitate well timed transactions – for instance, matching medical expertise with services in want. 

“We noticed a rise in funding for health-related digital marketplaces, together with these for medical expertise,” famous Adriana Krasniansky, analysis affiliate at Rock Well being, “equivalent to nurse staffing platforms and marketplaces to match caregiver assist.” And as Covid-19 continues to ravage clinicians and supplier organizations which have hit their limits, each filling up care services with contaminated sufferers and taking out workers who’ve fallen sick, that is an space the business can anticipate to see much more momentum in sooner or later. 

As Rock Well being COO Megan Zweig says, “Doctor and clinician burnout is one thing that’s come up quite a bit just lately. There are positively options on the market. However it’s changing into tremendous acute and we’d like higher solutions to assist clinicians.”

The Nicely Of Alternative: Far From Tapped 

Whereas the digital well being {dollars} hold flowing, the properly of alternatives is something however tapped. “As extra corporations begin taking up threat and realizing they should have many extra choices to be one-stop-shops, they will want sizable warchests,” says Nikhil Krishnan, founding father of Out-Of-Pocket, a well being care publication and neighborhood. Krishnan sees screening and diagnostics as nonetheless a comparatively underinvested area given the worth they’ll create, significantly these options that may be self-administered by sufferers at house. 

Lisa Suennen – the Enterprise Valkyrie, fund chief for Manatt Digital and Expertise and Manatt Enterprise, and named certainly one of Enterprise Insider’s “9 Folks Who Make Or Break Your Digital Well being Startup” in 2021 – desires to see extra funding flowing in the direction of girls’s well being. “I’d like to see extra consideration to girls’s cardiovascular well being particularly,” notes Suennen. “We’ve got had a variety of consideration and funding associated to younger girls’s well being and fertility, however not sufficient centered on the inhabitants of ladies over 50.”

Suennen was additionally positively shocked by the numerous funding that went to pediatric-related corporations within the final yr specifically. Although nearly all of that funding went to behavioral well being corporations pushed by the rising tide of Covid-19, Suennen notes there have been additionally indicators of life in different pediatric care corporations. “Pediatric care has been a grossly underserved market and I hope this marks the start of a development to handle all youngsters higher – not simply these with uncommon ailments amenable to costly medication,” she says. 

Scott Barclay, Managing Director at Perception Companions, is worked up about deep tech utilized to infrastructure, synthetic intelligence (AI) utilized to radiology and pathology, additional alternatives round psychological well being, real-world proof and the acceleration of medical trials. Additional, Barclay notes that the Perception Companions crew just lately carried out a deep market evaluation and “uncovered 24 elements of the worldwide market the place we see society-impacting alternative that’s undiscovered territory.”

Jared Kesselheim, MD, Managing Companion at Transformation Capital, believes there may be nonetheless an enormous alternative in well being methods given knowledge is extra freely flowing with Digital Medical Information (EMRs) in place. “EMR adoption has been an extremely essential driver for this sector, and now that wholesome methods are past these costly and time-consuming EMR implementations, they’re all kinds of workflow and analytics instruments that sit on prime of the EMR,” notes Dr. Kesselheim. He additionally flagged pharmacy profit administration as being an space that’s lengthy overdue for main disruption. 

Of the pharmacy profit area, “It’s dominated by giant incumbents,” says Dr. Kesselheim, “utilizing historical expertise platforms to assist very opaque income fashions.” Transformation Capital just lately funded a enterprise known as CapitalRx that developed a brand new trendy platform to run a pharmacy profit supervisor (PBMs) and experiences seeing speedy progress. 

Digital Well being Market Nonetheless Comparatively Underinvested

There may be clearly nonetheless an abundance of alternative for digital well being progress and development within the business. However, are we in a bubble? Out-of-Pocket’s Krishnan says innovation within the healthcare sector has been traditionally underfunded, particularly relative to the gross home product (GDP) it consumes.

Healthcare is a $4 trillion sector of the US economic system, accounting for roughly 20% of the nation’s GDP. It’s additionally a sector that’s rife with inefficiency, with as a lot as $935 billion of that spend related to waste, fraud or abuse. One may assume that 20% of enterprise capital funding {dollars} would accordingly circulate to healthcare. But of the $329.9 billion invested by enterprise capital companies in the US in 2021, the $29.1 billion that Rock Well being reported as going to healthcare constituted simply 8.8% of the whole quantity invested. By means of this lens, it appears as if we’re very possible within the early levels of the digital well being growth.

Barclay at Perception Companions says digital well being continues to be in its relative infancy. “The inexperienced shoots of the previous 10 years are turning into new vibrant ecosystems which are rising, however younger,” he says. “We’re early in what could turn into a two-decade epoch of tremendous revolutionary concepts, sturdy founders with execution expertise bringing change to a $4T sector of the economic system that has been sclerotic and in lots of elements oligopolistic,” notes Barclay, who additionally wagers that the “nearly all of the most important digital well being corporations in 2040 public markets haven’t but been began.”

Macro Tendencies Impacting Digital Well being Market Exercise 

Whereas digital well being has seen some profitable firm exits, together with a file variety of IPOs in recent times, public inventory efficiency typically doesn’t comply with go well with, which has been trigger for hesitation for each corporations and traders. In line with The Healthy Muse, which tracks publicly traded digital well being corporations, 38 of 41 of those corporations’ inventory was down by finish of yr 2021, collectively yielding a -35% return whereas the S&P was up 27%.

“I’ve to imagine that the poor inventory efficiency of so many digital well being corporations would give some pause to the valuation escalation from the previous a number of years,” says Manatt’s Suennen, including that, “Generally, gravity works – the query is over what time period.”

Transformation Capital’s Dr. Kesselheim warns to not conflate share costs with firm well being or success. “Simply because they could have been priced too excessive to begin doesn’t imply these are unattractive corporations or that they’re buying and selling at weak multiples,” he says, including that even when contemplating the latest contraction in costs, these corporations proceed to commerce at hefty multiples. “One evaluation we reviewed just lately confirmed {that a} basket of digital well being shares are buying and selling at a mean 7.7x a number of of 2022 income.”

Dr. Kesselheim additionally notes how spectacular it’s that so many digital well being IPOs are occurring within the first place. “For the primary decade of my digital well being investing profession, we noticed zero to 2 IPOs in our sector per yr – now we’re seeing 15x that quantity or extra per yr.” He calls consideration to the truth that progress/tech shares have contracted prior to now quarter, with digital well being being impacted by the identical macro impact. Lastly, Dr. Kesselheim says the a number of contraction within the public market “will certainly make its method into personal valuations over time,” however notes that we’re within the early a part of that curve.

Although digital well being corporations will undoubtedly really feel valuation strain given public share value developments, it’s nonetheless early on, and the market continues to be seeing comparatively wholesome valuations. Moreover, as sustainable companies develop in reputation and the business continues its shift to value-based care, there are a variety of causes for digital well being corporations to really feel assured concerning the enviornment by which they’re competing. 

What’s Subsequent?

The tempo and stage of digital well being investments is inflicting a ripple impact throughout the marketplace for each digital well being firm founders and VCs trying to make investments. Krishnan of Out-Of-Pocket shared that founders are going again to the market extra regularly and trying to increase subsequent funding rounds sooner. Partly it’s because the dynamics of elevated capital and VCs within the area means offers can get finished extra shortly, which Krishnan notes “founders find it irresistible as a result of it lets them get again to [running] their corporations shortly.” 

VCs, then again, are taking steps like doing their due-diligence properly prematurely of even contemplating an funding in an organization. Non-healthcare traders proceed their bounce into healthcare and digital well being, seeing a possibility to associate and discover new fashions of collaboration. And given the state of the market, elevated competitors and a want to not be “left behind,” VCs are additionally discovering themselves able of getting to distinguish their companies, themselves, and what they’ve to supply healthcare and digital well being innovators. 

“Money is a commodity now. It places strain on enterprise capitalists to be more and more differentiated,” mentioned Rock Well being’s Zweig. “That might be regulatory or medical or business experience, an intensive community to assist enterprise growth, or the power to assist portfolio corporations place themselves for the following spherical.  I feel traders will get much more artistic with their worth positioning.”

For Transformation Capital, Dr. Kesselheim notes that the agency continues to take a position closely in optimizing its strategic community to higher join its shoppers with the decision-makers they’re trying to attain. Of notice, Julie Murchinson, Companion at Transformation Capital and former CEO of Well being Evolution, was the previous producer of the well-respected Well being Evolution Summit convention for healthcare CEOs; she can also be a main instance of the sort of business chief that digital well being traders ought to look to deliver on board. VCs in the present day should appeal to and retain expertise with the expertise, and who know who the choice makers are, within the segments by which they want to function — together with, and maybe most significantly, in healthcare and digital well being.  

If Barclay of Perception Companions is true, and the most important public digital well being corporations come 2040 don’t even exist but, then the most effective is really but to come back for each traders and digital well being innovators, and much more importantly, for clinicians and sufferers.