Health systems remain interested in investing in digital health startups, despite a slowdown in activity in 2017 from potential buyers.
While last year saw record-breaking investments in digital health startups, it was the second year in a row of declining digital health startup acquisitions and, more importantly, the sector saw no initial public offerings in 2017, according to Rock Health, a digital health investment firm based in San Francisco.
Health system venture capital units are still seeking both longer-term investment opportunities and innovative ways to solve the industry's chronic problems.
"I didn't know about the trend, so I guess I must not be concerned," said Tal Heppenstall, president of UPMC Enterprises and treasurer of its parent, Pittsburgh-based UPMC.
Last year's slowed activity may have been a bigger deal to VC investment funds that expect to see an exit after investing for one or two years, Heppenstall said. UPMC Enterprises, by contrast, expects to work with its portfolio companies over a much longer time frame. In fact, he said he welcomed the lessened dealmaking because that could mean good companies wouldn't be as expensive for UPMC to use as a customer.
Rock Health found that despite U.S. digital health venture funding approaching a "record-smashing" $6 billion last year, there were only 119 disclosed acquisitions of digital health companies and a "surprising" zero IPOs. In fact, Rock Health wrote there hadn't been a digital IPO since iRhythm in 2016. Healthcare providers still constitute a modest proportion of that funding; about 11% of companies funded in 2017 received investment from at least one provider, Rock Health found.
It's important to note that the IPO trend transcends healthcare: You'd have to go back to the 1960s to find a time when there were fewer companies listed on U.S. stock exchanges, according to Rock Health's report.
And digital health is still a relatively new space, with many young companies experiencing growing pains, so the trends aren't entirely surprising, said Megan Zweig, Rock Health's director of research and author of the report.
"Though investors are a little wary of these numbers, overall the sentiment is that this is somewhat to be expected," she said. "This is a long journey and we wouldn't have invested in healthcare if we wanted a super fast turnaround."
Digital health M&A activity declined 18% last year compared with 2016, a year that saw 36% fewer deals than 2015, when digital health M&A peaked, according to Rock Health.
However, another piece of good news in 2017 was a record number of so-called "mega-deals," which Rock Health defines as those that surpassed $100 million. Rock Health added the caveat that 2017 arguably saw more mega-deals simply because there are more mature companies in search of large investments than in previous years.