First, we’ve seen figures from StartUp Health and now we have those from Rock Health, which as you may know is focused on US deals only. According to their data, with 24 mega-deals so far – 2020 will be the largest funding year ever for digital health.
During the third quarter alone, $4B was invested in US-based digital health startups, bringing the year’s running total to $9.4B — that’s more than what used to be the largest annual sum of $8.2B in 2018. The average deal size in 2020 is $30.2M, or 1.5 times greater than the $19.7M average in 2019.
The COVID-19 pandemic has helped accelerate the digital health adoption by several years, attracting interest from consumers, entrepreneurs, and investors alike. This is despite the fact that future outbreaks, lockdowns, shifts in political power (and policy) all create uncertainty around recovery.
Rock Health took note of three major trends:
Trend #1: Mega-deals are on the rise
This was particularly the case in virtual care delivery, R&D enablement, and fitness & wellness.
As noted above, 24 digital health companies have raised mega deals of $100M or more through Q3 of 2020 — which is double the number of mega-deals (12) in 2018. These mega deals account for well over one-third (41%) of total digital health funding so far this year with connected fitness company Zwift raising the largest round so far — $450M in Series C funding.
Among the top-funded categories were:
On-demand healthcare services
$2.0B invested across 48 deals through Q3 2020, this category includes companies offering telemedicine services, prescription delivery, and at-home urgent care. The top three funded deals in this category are Alto Pharmacy ($250M), Ro ($200M), and Amwell (raised $194M and later went public to raise an additional $742M).
Includes companies that support life sciences research and development (R&D) such as drug discovery and clinical trial management. This category attracted $1.32B across 25 deals for an average deal size of $52.7M. The top three funded are XtalPi ($319M), Insitro ($143M) and Atomwise ($123M).
Fitness & Wellness
Includes companies dealing with fitness, nutrition, and sleep. This category saw investors pouring $1.26B across 21 deals for an average deal size of $59.9M. The top three funded deals are Zwift ($450M), ClassPass ($285M), and Tonal ($110M).
Additionally, funding for companies that digitally monitor disease ($1.1B) trailed closely behind funding for fitness & wellness companies so far this year.
Trend #2: Corporate investors double down on digital health
Sixty-four percent (64%) of this year’s investors have previously made investments in digital health-higher than any previous year. Institutional venture firms continue to account for the largest share of transactions (62%), with corporate venture capital (CVC) holding steady at 15% of transactions.
Corporate investors have made 149 investments in digital health across three quarters this year, which already exceeds the previous record of 145 investments across all of 2017. Quarterly investments by the four most active CVC groups — providers, technology companies, biopharma, and payers — are all trending upwards over the last 12 months. Provider CVCs lead the way with at least 12 investments per quarter in each of the last three quarters.
Technology companies’ quarterly deal count climbed steadily across the COVID-19 pandemic, from three in Q4 2019 to 17 in Q3 2020. Biopharma’s deal count jumped from an average of 2.5 investments per quarter across Q4 2019-Q1 2020 to an average of 12.5 investments per quarter across Q2-Q3 2020.
According to Rock Health, the sustained commitment of corporate investors in the digital health sector is a signal that healthcare incumbents and big new entrants view the pandemic as a pivotal “FOMO” moment in which unprecedented, instantaneous shifts in consumer demand and regulation are rapidly driving evolution and growth in the space. And they want to be a part of — and investors in — this transformative moment.
Trend #3: Digital health companies capitalize on the stock market’s recovery and relaxed regulations
- Accolade and GoHealth went public in July;
- Amwell, Outset Medical, and GoodRx went public in September;
- D2C platform Hims Inc. has struck a deal to go public by merging with a blank-check company, and
- MDLive’s CEO announced intentions to take the company public early next year.
These filings come on the heels of six digital health IPOs in 2019, leaving the 2017-2018 IPO drought in the rearview mirror.
The overall M&A activity is down in 2020 compared to prior years. There have been 63 acquisitions of digital health companies through Q3, and Rock speculates that potential acquirers may be conserving cash in light of the economic uncertainty created by COVID-19.
Teladoc, however, is not one of them. Surging stock prices made it possible for the virtual care platform to merge with Livongo — the transaction was paid almost entirely with shares (plus $11.33 per share in cash). The combined company will be a digital health behemoth whose tech-enabled workforce of physicians and health coaches can address a broad set of primary care, mental health, and chronic disease management needs.
Digital health companies continue to be the most frequent acquirers of other digital health startups, accounting for half of all M&A deals this year.
Notable transactions include Unite Us’s acquisition of Staple Health in the social determinants of health arena and Omada’s acquisition of Physera, which adds musculoskeletal care to Omada’s chronic disease management platform.
Pandemic-driven regulatory flexibility
In April, the FDA announced they “do not intend to object to the distribution and use of computerized behavioral therapy devices and other digital health therapeutic devices for psychiatric disorders” that otherwise may have had to undergo formal regulatory review. And, unsurprisingly, several companies have taken advantage of the relaxed regulations to release psychiatric digital health products into the market, including:
- Akili Interactive Lab’s EndeavorRx (ADHD); EndeavorRx has since received formal de novo clearance
- Pear Therapeutics’s Pear-004 (schizophrenia)
- Orexo’s deprexis (depression), vorvida (alcohol use), and OXD01 (opioid use disorder)
However, this policy is only “for the duration of the public health emergency related to COVID-19” and does not mention how the FDA plans on wrapping up the temporary regulatory allowance once the public health emergency is over. But recent activities signal the FDA is paying close attention to this sector, with the recently launched Digital Health Center of Excellence being the prime example.
What’s next for digital health?
According to Rock, the strength of 2020 investment to date matches this moment of unparalleled demand and opportunity for digital health. However, they note, we are just on the cusp of this momentum. As the pandemic continues to unfold, we are eager to see the industry come together to cement advancements already made this year, and continue on this trajectory.