The digital health world continues to see a massive drop-off in venture capital funding and deal activity, according to a report from Pitchbook published Tuesday.
Here are five funding and investment trends highlighted in the market data and research company's quarterly report.
1. Funding is trailing the peak years.
Venture capital funding has a long way to go before it gets back to its peak. Total deal volume of $1.1 billion in the first quarter is pacing well behind the total of the last two years, which ended with $15.6 billion in 2021 and $7 billion in 2022.
2. IPOs and acquisitions are out for now.
There has been a lack of exits, either through an initial public offering or an acquisition, for digital health companies for more than a year. Since the start of 2022, only $500 million of exit value has been recorded compared with $15 billion in exits in 2021. The only one of note in 2023's first quarter was Weight Watchers' acquisition of telehealth company Sequence in March for $132 million. According to Pitchbook’s data, only two $100 million-plus deals occurred in the first quarter: a $375 million deal for Monogram Health and a $100 million deal for Carbon Health. Pitchbook said little chance exists of an immediate turnaround because of the challenging market for IPOs and the small number of acquirers in the industry with available capital.
3. The market dynamics could change.
There has been no single digital health IPO this year and 2023's almost half over. However, Pitchbook said some companies, including Noom, Ro, Everly Health, Biofourmis and Quantum Health, could be ready and waiting for more favorable market conditions. The report also said Instacart, which has made inroads into healthcare, and Headspace Health, a mental health unicorn, are other potential IPO candidates.
4. Ozempic, Wegovy are the next great hope.
The explosion in interest in drugs used for weight loss like Novo Nordisk’s Wegovy and Ozempic and Eli Lilly’s Mounjaro represents a huge opportunity for telehealth companies. Weight Watchers, digital health unicorns Ro and Noom and business-to-business telehealth provider SteadyMD are among the companies that may benefit, according to Pitchbook. Even with the shortages of Ozempic and Wegovy, the report said the weight loss market is telehealth-friendly because it doesn’t require clinicians to do anything complex. The report did note that a reduction of insurance coverage could reduce demand.
5. Direct-to-consumers companies rethink their strategy.
Talkspace, a digital therapy company, had success in switching the focus of its business from direct-to-consumer channels to enterprise customers such health insurance companies and employers. It's a strategic shift other telehealth companies are making because enterprise customers offer a “higher margin and stickier customer base” than selling directly to consumers, according to the report. Headspace aims to have 70% of its revenues come from enterprise customers in the near future. Potential roadblocks loom for this strategy, including cutbacks in spending from employers and slow adoption from health systems, according to Pitchbook.
