Vibes for digital health deals improve after slump
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After two years of doom and gloom, digital health deals are showing signs of life, with venture capital firms making more focused bets and interest rate cuts rekindling some of the COVID-era optimism around the sector.
Why it matters: The pandemic experience was supposed to be a boon for direct-to-consumer disease treatments, digital therapeutics and decentralized care.
- But adoption turned out to be much slower than expected, and massive failures such as Pear Therapeutics sent investors scrambling for the exits.
The big picture: The outlook could be improving for a few digital health companies — especially those offering novel uses of artificial intelligence.
- "Certain things are getting funded. Certain things are not getting funded. It's just a much tougher operating environment out there," Evercore ISI analyst Elizabeth Anderson told Axios on the sidelines of the annual HLTH conference in Las Vegas.
- After dealmaking hit its nadir last year, insiders say they are seeing more realistic valuations of companies and more signs that venture capital is flowing to startups that can demonstrate better outcomes, cheaper delivery of care or both.
A growing number of publicly traded digital health companies are going private or being bought out in response to reporting and regulatory pressures, per Rock Health.
- Others are drawing attention for how they address high-cost specialty care, manage complex populations, boost mental health or deliver value-based care with digital tools.
- Health tech investments have stabilized between $3.5 billion and $4.5 billion per quarter this year, per a recent report from Silicon Valley Bank. The bulk were in earlier, smaller rounds.
Yes, but: A lot of investors are shying away from tools sold to providers saddled with rising health costs and instead turning to pharmaceuticals or payers.
- Health systems and their investment arms that are placing bets are looking hard for clear evidence they'll get a return on their investment, especially when it comes to the glut of companies claiming to have innovative AI solutions, said Todd Schwarzinger, partner at Cleveland Clinic Ventures.
- "It's an evolving problem in this space: How are you really delivering value to the providers," he said.
Between the lines: With AI cornering most of the deals, health companies are adapting with new features for patient engagement, tools to manage chronic conditions and their own AI features, mostly concentrated around administrative functions and clinical workflows.
- That's largely because administrative tools deliver quicker returns with less risk to patients from a technology that is still very new and error-prone.
- "When you're thinking about some of the more high-touch aspects, like a lot of what gets done in hospitals, you can fantasize about it but it's just not ready yet," Dan Mendelson, CEO of Morgan Health, a unit of JPMorgan Chase, told Axios.
The bottom line: Speaking to a ballroom full of digital health entrepreneurs gathered in Las Vegas, Evercore's Anderson conducted a quick vibe check: Who thought it was easier to raise money this year compared with the same time last year?
- Only a few raised their hands.
