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As public markets begin to thaw, digital health executives and investors are at least hovering their feet over the water, even if not diving in yet, Axios' Claire Rychlewski writes.

Why it matters: A rising tide theoretically lifts all boats, but the math for a digital health IPO in today's market is markedly different from two years ago.

Catch up fast: Since the unicorn-ucopia of 2021, there have only been two notable digital health listings, and both were 2022 SPAC deals: Akili Interactive and Euda Health.

Valued at $1 billion at the time of listing, digital therapeutic Akili's market cap has since fallen to around $91 million.

Before even getting priced, southeast Asian telehealth provider Euda Health slashed its enterprise valuation from $583 million when announced to $172 million when it did price.

What's happening: "Parts of the equity market are open, such as biotech follow-ons." says Jon Swope, senior managing director at Leerink Partners. "The opening for tech and consumer IPOs will be a precursor to a digital health re-opening."

With debt financing still tight, more private equity sponsors are weighing monetizing investments via IPO, says Kevin Eisele, William Blair's co-head of equity capital markets for health care.

"We've got a couple of IPO bake-offs over the next couple of weeks," for companies looking to list by the end of the year or early next, Eisele adds.

Eisele generally cited near-term IPO ambitions for an unnamed health care navigation company, as well as a clinical staffing access company.

Zoom in: Digital health companies to watch, per Renaissance Capital senior strategist Matt Kennedy, include...

Bain Capital-backed cardiac diagnostic company HeartFlow

Tiger Global-backed lab tech company Benchling

Revelation Partners-backed health consultant Included Health

HealthQuest Capital-backed home testing business Everly Health.

What they're saying: "In the same way penguins wait for the first one to get into the water to take the risk of seeing if there are predators, the same is happening right now in the IPO market," says Sword Health CEO Virgílio Bento.

Sword, a digital musculoskeletal care company that's raised $324 million in venture funding per PitchBook, could pursue an IPO as soon as next year, depending on how choppy the waters look, he adds.

"I think it's a healthy change in the market, the expectations," says Kyle Talcott, CEO of mental health tech startup UpLift.

With a generally higher benchmark, we'll see "better companies going to IPO with stronger economics, and better performance once they do," Talcott adds.

The big picture: Any digital health company looking to go public should be profitable — or very close to it.

"Two, three years ago, there was much more leniency in terms of companies talking about a path to profitability," says Eisele.

Now, "the market's almost asking companies to be profitable at the time they go public," he adds.

"In 2020 and 2021, growth was king," Bento says. "Now, in 2023 and onwards, growth is still king, but it needs to be matched with profitability."

Between the lines: Gone are the days of accelerated listings and fly-by-night diligence, says Eisele.

"Jokingly, I would say that investors are actually doing diligence these days," he quips.

Public investors are making more conservative assumptions about market penetration, cost of capital, runway and revenue growth, he adds.

Valuations have become tricky to pin down, in part because the market struggles to make a distinction between true technology companies providing care, or "health care companies that use technology to make a process incrementally better," Bento says.

What we're watching: Political uncertainty ahead of next November could accelerate IPO timelines, Eisele says.

Health care will be a central issue during the 2024 election cycle, as the federal government battles over issues like Medicare for All, ACA subsidies and drug pricing.

Aaron Weitzman and Erin Brodwin contributed reporting.

1 big thing: Digital health preparing to test the IPO waters

Illustration of a red cross floating in water in a downpour

Ottawa-based blood testing upstart Vital Biosciences revealed it has $48 million in funding, including a fresh $18.56 million Series A round led by Lachy Groom and Northpond Ventures.

Why it's the BFD: Lest readers forget the initial premise of Theranos, the company's initial goal was laudable: Disrupt the $74 billion lab testing industry controlled by behemoths Quest and LabCorp, and put preventive care in patients' hands, Erin writes.

Flashback: Despite Theranos' spectacular fall from grace — complete with federal fraud convictions for both of its top execs — investors’ continued interest underscores the enthusiasm for eliminating traditional blood draws, Axios' Kia Kokalitcheva writes.

Details: Vital's backers include, notably, LabCorp, as well as 8VC, Sam Altman, Marc Benioff, Inovia Capital and Route 66 Ventures.

Funds are being used to finish developing Vital's technology and to launch clinical studies, per Bloomberg.

Zoom in: The company presented Monday at the annual meeting of the American Association of Clinical Chemistry — the same as Theranos did in 2016.

While Vital is headquartered in Canada, it maintains a U.S. subsidiary that employs roughly a dozen people.

The company's core piece of tech is a device that it claims uses 600 uL of blood (roughly a dozen drops) to evaluate 50 commonly used primary care biomarkers in 20 minutes.

Its tests would check for blood disorders like anemia, metabolic disorders such as high cholesterol or jaundice, and the presence of substances like vitamins or insulin.

The intrigue: This isn't team Vital's first lab testing rodeo. Several of its co-founders previously started diagnostic startups, with one of them, Elucid Labs, serving as the precursor to Vital and the other, Confer Health, going out of business.

What they're saying: Vital CEO Vasu Nadella told Bloomberg's Sarah McBride that Theranos' floundering continues to serve his startup as a giant warning.

"Theranos is also a singular example of what not to do. The debacle has been a lesson, Nadella said, in making only measured predictions and seeking out peer review.

"'The fact that Theranos happened raised the bar in a really big way,'" Nadella added. "'There's not a day that goes by where we don’t talk about Theranos multiple times.'"

💭 Erin's thought bubble: With Theranos serving as an example of precisely what not to do in blood testing, it's possible another startup will pick up where the company left off — with a great idea. Successful execution remains to be seen.

2. The BFD: In Theranos' shadow, Vital Biosciences snags $48M

Photo collage of a hand holding a slide of a drop of blood with red circles all around.

Vital isn't alone in its quest to create a Theranos that actually works. Other startups that have caught the attention of investors in recent months include:

Redwood City, Calif.-based Karius, which in 2020 collected $165 million in Series B funds led by SoftBank’s second Vision Fund.

London-based Osler Diagnostics, which last November raised $91.4 million in Series C funding from Braavos Investment Advisers, M&G and Oxford Science Enterprises.

Tel Aviv, Israel-based Sight Diagnostics, which in 2020 pulled in $71 million in Series D capital from CK Hutchison, Clal Biotechnology Industries and Longliv Ventures.

3. State of play: Blood testing startups

Illustration of a person retrieving a newspaper titled "State of Play" from a mailbox.

Looking for a deal story? Search the Axios Pro Deals Tracker beta.

• Ossium Health, a San Francisco-based bioengineering company, raised $52m in Series C funding led by CPMG, with Vivo Capital, First Round Capital, Manta Ray Ventures, Alumni Ventures, and Asahi Kasei also participating. https://ossiumhealth.com/

• Collectly, a Los Angeles-based provider of patient financial tools, raised $29m in Series A funding led by Sapphire Ventures with support from Y Combinator, Wayfinder Ventures, Burst Capital, Cabra VC and Davidovs VC. https://axios.link/3KcSkYh 

• Kasha, a Rwandan digital retail startup focused on women's health, raised $21m in Series B funding led by Knife Capital with participation from Finnfund, DFC, former Yahoo CEO Tim Koogle, Beyond Capital Ventures, Altree Capital, Bamboo Capital’s Bloc Smart Africa Fund and Five35 Ventures. https://axios.link/3KaW10q 

• Hale, a Berlin-based provider of digital tools for pelvic pain, raised $388,000 in a pre-seed round led by Vento with participation from B Heroes, Delirus Capital, StartupGym, Moonstone Fund and individual backers including Evidation Health's Luca Foschini. https://www.halecommunity.com/

•  One Rock Capital Partners sold Kova International, a Garden Grove, Calif.-based developer, manufacturer and marketer of in vitro diagnostic products and urinalysis, to LGC Group for an undisclosed amount. https://axios.link/3Kdvu2D

• Lone View Capital acquired a majority ownership stake in healthcare  Smartlinx, an Iselin, N.J.-based health care workforce platform for an undisclosed amount. https://axios.link/3rInlga

4. Deals o' the day

• Rick Abbott left a post as CEO of Lyn Health to become SVP of employer solutions at Priority Health.

• Alyssa Casey left a post as head of growth at Cityblock Health to become head of growth at Firsthand.

• Ayushi Shrivastava left a post as director of strategy and operations at Poppy Seed Health to become director of growth strategy and operations at Recora.

5. It's Personnel

🛒 Rite Aid is testing small stores in pharmacy deserts — Healthcare Brew

⚖️ Biden to crack down on inadequate insurance for mental health — CNBC

6. Your daily dose

Illustration of a prescription with a handwritten note saying "daily dose."

🏊🏻 Erin this weekend took a day trip to the nearby Yuba River and dipped in the refreshingly chilly water.

💟 Thanks for reading, and extra thanks to newsletter editor Claire Rychlewski and copy editor Mickey Meece. Please ask your colleagues, friends and family to sign up.

July 25, 2023

1 big thing: Digital health preparing to test the IPO waters