Digital health funding lags: Pitchbook

Digital health and healthcare IT companies continue to face a challenging funding environment.

In its quarterly reports published Wednesday, Pitchbook said high interest rates and limited debt availability are thwarting potential merger and acquisition and funding deals in healthcare IT and digital health.

Read more: Mental health startups face a buyer’s market

Here are five funding and investment trends to watch.

1. Deal value still trails 2022

Total deal value for venture capital funding in digital health was $900 million in the second quarter, compared with $1.7 billion in the year-ago period and $1.2 billion in 2023's first quarter. Telehealth and digital care management were the most funded areas, led by Author Health’s $115 million and Spring Health’s $71 million funding deals.

Healthcare IT startups, which include companies developing electronic health records, practice management, revenue cycle and analytics technology, raised $1 billion across 62 deals, down from $1.45 billion in 2022's second quarter and $1.3 billion in the first quarter of 2023. The top VC deal in healthcare IT was Aledade’s $260 million Series F funding round.

2. There are reasons for optimism

Digital health and healthcare IT companies should be optimistic heading into 2024, particularly if they sell to health systems, according to Pitchbook. While 2022 was the “worst operating income” year ever for health systems, 2023 has been better. Kaufman Hall’s hospital operating margin index has been on the positive side since March. Health system leaders are interested in tech to increase efficiency with a particular interest in generative artificial intelligence. Generative AI-focused companies raised $250 million, according to Pitchbook.

3. Interest in new technologies adds to positive vibes

Beyond health system financials, additional reimbursement pathways from the Centers for Medicare and Medicaid Services are creating more interest in remote patient monitoring companies in healthcare IT, the report said. In digital health, strong interest exists in tech-enabled care companies that are linking primary care to chronic condition management services. Deals in the space included Haldoc's $100 million Series D round and K Health's $59 million late-stage round. In general, analysts say macroeconomic trends are headed in a positive direction, which could lead to a better year in 2024 for both sectors.

4. Valuations are shrinking

Within digital health, there has been a higher number of debt financing deals and investments into companies that were for less money than prior financing rounds. Valuations are significantly shrinking. The report cites digital pharmacy company Truepill slashing the value of its shares, dropping its valuation 90% from a 2021 estimate of $1.6 billion. In healthcare IT, the share of angel, seed, and early-stage venture capital deals has dropped to 26.2% of all deals, compared with around 50% from 2020-2022.

5. There are few doors for an exit

Pitchbook analysts said there were no significant merger and acquisition deals or companies going public in digital health during the second quarter. For the entire year, there has only been $100 million in exit value recorded across nine deals. In healthcare IT, private equity firms completed 15 buyout deals in the second quarter compared with 32 in 2022's second quarter. Meanwhile, the 12 venture capital investor exits from healthcare IT companies in the first six months of 2023 compared with 35 exits in 2022 and 66 in 2021.