Digital health funding hit $8.1 billion in 2018, surpassing 2017’s record-setting total of $5.7 billion by a tremendous 42 percent, according to Rock Health’s year-end report.
Last year, 368 digital health deals closed, only slightly more than the 360 in 2017. Consequently, the average deal size shot up to $21.9 million, compared to $15.9 million in 2017, according to San Francisco-based Rock Health. Half of all 2018 deals were seed and Series A rounds, suggesting investors continue to believe in new entrants as they double-down on maturing, later-stage companies, Rock Health noted.
In the first part of its two-part year-end report, Rock Health researchers Sean Day and Megan Zweig noted that 2018 was an entrepreneurs’ market. With capital readily available, young companies are raising larger rounds than ever before, more frequently than ever before, they noted. In the report, the researchers explored the possibility that digital health is currently in a bubble, noting that exit activity has been more measured.
“In digital health, the exit market has been sluggish. There hasn’t been a digital health IPO since iRhythm’s 2016 public offering, despite tech IPO activity picking up in 2018. M&A remains the dominant exit strategy, but has been slightly declining for the past three years, with 110 acquisitions in 2018,” the researchers wrote.
Day and Zweig note that digital health companies continue to be the most prolific group of acquirers of other digital health companies. “We believe this signals a trend toward consolidation in the next few years. To date, consolidation has taken a few forms,” the Rock Health researchers wrote, noting that there’s an emerging pattern of digital health companies acquiring to expand their portfolio of offerings.
The report cites Livongo acquiring Retrofit and its diabetes prevention program solution to grow their digital therapeutic offerings. In September, Welltok acquired Wellpass, continuing its acquisition spree of digital health companies (including Mindbloom and Predilytics). Additionally, ResMed closed out the year acquiring Propeller Health for $225M with the hopes of becoming “the global leader in digital health for COPD," the report notes. "This was just after ResMed announced a $750M deal to acquire MatrixCare, an EHR company. We also saw private equity firms combining point solutions into bigger players, just as Marlin Equity Partners acquired Virgin Pulse and RedBrick Health, bringing together two employee health and wellness solutions,” the researchers wrote.
What’s more, while some investors have expressed concern that overall healthcare consolidation will limit the number of potential buyers for digital health companies, the researchers noted that dramatic shake-ups among the biggest players will have an impact on the digital health market. These shake-ups, “including the entry of tech giants and vertical integrations such as that of CVS and Aetna, will necessarily drive more demand for digital innovation—not less—as these combined entities sprint to demonstrate synergies to shareholders and customers alike,” the researchers wrote.
The researchers concluded that digital health is not in a bubble, but, moving forward, Day and Zweig anticipate digital health funding will be increasingly tied to macroeconomic cycles. “If and when capital becomes harder to come by, digital health companies will have to prove that they can deliver on their fundamentals (and should start planning for this now).
High valuations and burn rates are signals that the funding cycle is nearing its peak. But we don’t think there’s a bubble to burst given the smart investors and entrepreneurs invested in finding paths to validation and revenue, the viable exit paths and consolidation on the horizon, and the large overall opportunity for innovation in healthcare,” Day and Zweig note in the report, adding, “But everyone should prepare for a moderation in funding—when it comes, the real value-creators in digital health will stand tall.”
