Investment in digital health companies is definitely slowing down, but experts contend that this trend shouldn’t be a cause for major concern.
Digital health’s Q3 saw the lowest quarterly funding total in the past 11 quarters, according to a Rock Health report released on Monday. Digital health companies raised $2.2 billion across 125 deals in Q3, down from $6.1 billion across 188 deals in Q1 and $4.1 billion across 141 deals in Q2.
At this pace, it is doubtful that this year’s digital health fundraising amount will reach even half of last year’s $29.2 billion total. However, that doesn’t mean we should panic, according to Ian Wijaya, managing director at investment bank Lazard.
“It’s vital to zoom out and remind ourselves that it was the 2020 and 2021 funding environments that were unusual, and that what we have been seeing so far in 2022 is a transition back toward a more sustainable asset pricing environment relative to interest rates, catalyzed by the Federal Reserve but also an increasing degree of discernment by market participants about what comprises a high quality, investable ‘must-own’ business,” he said in an email.
Deena Shakir, partner at Lux Capital, agrees. She pointed out that across sectors, most venture-backed companies that didn’t have to raise money chose not to, and many investors also decided to wait out the summer for ostensible volatility to become more stable by fall.
Shakir predicts that Q4 will be busier than Q3 in terms of investment activity and volume, but she does not expect the digital health sector to return to the “frenzied exuberance of 2021.” To her, there is still too much macroeconomic uncertainty and market headwinds.
A Deep-dive Into Specialty Pharma
A specialty drug is a class of prescription medications used to treat complex, chronic or rare medical conditions. Although this classification was originally intended to define the treatment of rare, also termed “orphan” diseases, affecting fewer than 200,000 people in the US, more recently, specialty drugs have emerged as the cornerstone of treatment for chronic and complex diseases such as cancer, autoimmune conditions, diabetes, hepatitis C, and HIV/AIDS.
In Q4, we’ll likely see a continuation of consolidation across the digital health sphere, according to Alyssa Jaffee, partner at 7wireVentures. She pointed to CVS Health‘s acquisition of Signify Health, as well as Signify Health’s own acquisition of Caravan Health as examples of such consolidation.
She added that more acquisitions are expected to come as well-funded players look to expand their products and services to existing customers. For example, Headspace‘s lateral acquisition of Shine — an app designed to be inclusive in providing mental health support to all — illustrates consumer demand for digital health companies to deliver culturally competent services that meet the needs of all patients, she pointed out.
Jaffee also cited Ro‘s acquisition of male fertility startup Dadi as another deal that demonstrates horizontal consolidation trends “to match companies with tangential specialty conditions and close product fit.” Ro started out focusing on erectile dysfunction, and it jumped on the opportunity to incorporate male fertility, a related specialty.
On another side of the consolidation trend, Amazon’s $3.9 billion purchase of One Medical is an example of a large player seeking to disrupt traditional providers and fee-for-service arrangements. We might see more of these types of deals as well, according to Jaffee.
However, it’s unwise for startups to continue to rely solely on “unsustainable consumer acquisition tactics,” Shakir said. In the next year or two, successful digital health companies will win out because of strong business fundamentals and paths to profitability, she contended.
Regardless of the market environment, Jaffee believes digital health companies that will always be successful are ones that focus on empowering an informed, connected health consumer. She said this is more crucial than ever as healthcare shifts to greater levels of consumer self-management.
“Companies focused on developing a sustainable, category-defining businesses with solid fundamentals and unit economics will be poised to weather economic downturns,” Jaffee said. “This, coupled with empathic leaders with a hunger for building and moving markets, will enable companies to thrive in uncertainty.”
Photo: abluecup, Getty Images
