Rock Health also sees private investors increasingly putting their money into early-stage digital health companies. About 57% of deals through the second quarter this year were in the earliest rounds of funding, compared with 49% a year before. “There's a deep bench” of digital health companies, Kraus said.
The revenue of digital firms being discussed as IPO candidates is not public, and they prefer to stay coy until they're actually traded. But investors don't necessarily mind meager revenue prior to an IPO. Castlight Health, which went public at the beginning of the year, for example, had only $13 million in revenue in 2013. Its stock skyrocketed on its offering day only to plunge back to earth in more recent trading. Castlight, which hit a high of $41.95, now trades around $12.07 a share.
Kraus's venture capital firm tracks 24 publicly traded companies in a health IT index, which has shown strong results compared to the market as a whole. Between January 2011 and July 2014, health IT companies have gained 86% in market value versus 66% for the Nasdaq and 56% for the Standard & Poor's 500 index.
Rock Health is a bit more subdued on the market potential for health IT firms. Its index shows the digital health sector underperforming the S&P 500 through the first half of 2014. By its reckoning, the sector had lost 10% of value.
Rock Health covered four recent market debuts—Castlight, a healthcare price transparency firm; Care.com, a caregiver search site; Imprivata, a health IT security site; and Everyday Health, an online digital health media firm. Rock Health concluded there was a mixed market reception following their launches, with two currently trading below their initial IPO share price levels.
There was also IMS Health, a firm collecting health data. Its recent share price of roughly $26.13 was slightly ahead of its debut price of $23.
Some observers point to the Food and Drug Administration's premarket regulations on some types of healthcare software as the main obstacle to the takeoff of digital health startups.
“The lower the level of regulation, the faster new ideas are going to able to hit,” prominent venture capitalist Marc Andreessen said in a fall 2013 interview with Pando Daily, a website chronicling Silicon Valley.
The strength of investors' interest in digital health is based on several factors, Kraus said. Government policies such as healthcare reform, payment reform and the federal incentives to adopt electronic health records have created a welcoming climate for entrepreneurs to try new models.
Private-sector trends also may fuel digital health entrepreneurialism, said Dr. Bob Kocher, a partner at venture capital firm Venrock and former Obama administration economist. Those include consumer-directed healthcare, narrow provider networks, and increased availability of information about treatment options, prices and quality.
Those factors “will make the commercial market more competitive,” Kocher wrote in a blog post. The growing sensitivity and awareness of consumers and employers about healthcare costs means that “all of the approaches used by employers to manage nonhealthcare spending categories will be ripe for translation by entrepreneurs to healthcare.”
In addition, a previous dearth of digital innovation means there are promising fields to colonize, Kraus said. He a major wave of digital health IPOs five to seven years down the road.
Which firms might go public next? Kraus lists 16 companies in the next two or three years. They include Redbrick Health Corp., which offers individualized health coaching plans; Evolent Health, which helps providers shift to value-based payment systems; ZocDoc, which allows patients to schedule appointments with doctors online; and Doximity, which calls itself “LinkedIn for doctors.”
Rock Health surveyed 36 investors about which companies they expected to go public. Besides ZocDoc, Evolent and Doximity, the top pick was Practice Fusion, a Web-based vendor of electronic health records, followed by Proteus Digital Health, a startup that uses sensors to track patients' reactions and adherence to medication regimens. Another was personal genomics firm 23andMe.
Industry analyst David Shaywitz's choices for companies most likely to go public are Proteus Digital Health; Practice Fusion; One Medical Group, a membership-based primary-care provider; and ZocDoc.
Before the current boomlet, Kraus says, the last big venture-backed, successful IPO was cloud-based EHR company Athenahealth in 2007. Healthcare “is too big an opportunity,” he said. “It's been too long lacking innovation.”