Digital health financing falls to two-year low in first half

The buoyant financing environment for digital health companies that took off during the pandemic looks like it has come to an end, according to new figures from market watcher Rock Health.

The influx of cash that flowed into the sector during the COVID-19 crisis has been followed by a correction that emerged in the first quarter of 2022 and deepened in the second quarter, according to its latest report.

All told, digital health companies raised $10.3 billion in the first half of the year, setting up an estimated figure for the full year of around $21 billion, which would be a big reduction on the $29.1 billion raised in 2021.

That's still 43% higher than the $14.7 billion in funding for digital health companies in 2020, ahead of the widespread adoption of technologies as an aid to delivering healthcare to people in lockdown, and according to Rock Health, ties in with an underlying trend of continued growth.

The high watermark of funding in 2021 is perhaps "standing out as an anomaly" against that prevailing trend, says the report, which points to global conflict and inflation concerns as other factors holding back investment.

There are some warning signals in the numbers, including most notably an absence of digital health companies going public – zero in the first six months of the year, coming after 23 over the course of 2021 – while a few formerly public firms, including Castlight Health, SOC Telemed, and Cerner went back into private hands.

The tougher environment has already led to the same companies announcing layoffs – for example weight-loss app company Noom which shed a quarter of its remote coaching staff – to try to conserve cash.

Others have deferred plans for a public exit, and that reticence is filtering back to investors who are spending more conservatively, but there's a silver lining:

"While things may feel tough in the near term, companies that lean into these belt-tightening measures stand to emerge from 2022 as more resilient businesses, better positioned to navigate market scrutiny when the time comes to make a public exit," says Rock Health.

Venture investors meanwhile also raised record funds last year, which could be deployed in the years to come.

There has also been a reduction in M&A activity from 23 per month in 2021 to around 16 in the first half of 2022, which "likely reflected buyers' nervousness" amid the choppy markets. "Deal teams may have been wary of M&A prices, due to mismatches between potentially high startup valuations set in 2021 and their actual performance and profitability," it adds.

It may be that some of the more crowded categories will see consolidation start to gather momentum, with larger players buying smaller competitors.

Looking at those categories, there was still a lot of interest in already well-funded areas like digital mental health and support for biopharma R&D, and an uptick for administrative and clinical workflow solutions.

"For us, historical digital health funding data presents a steady, optimistic view: from 2020 to 2022, the sector has demonstrated sustained gains, even amidst a tougher overall economy," write analysts Adriana Krasniansky and Ashwini Nagappan.

"With that in mind, we expect to see funding flow into digital health in H2 2022 at a pace similar to that of H1, levelling out on a fundamentals-driven track."