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Rock Health Report on Digital Health Funding

By February 2, 2018Commentary

I have to fight my tendency to just view all the digital health, mobile app stuff as hype.  Some of it may well have value at some point in terms of actual health and health outcomes.  So far the research isn’t very promising in that regard.  Nonetheless, investors keep pouring money into the sector, as presented in the Rock Health 2017 year-end report.   (Rock Health Report)   According to the report, about $5.8 billion was invested in digital health companies in 2017 in 345 transactions (using a broad definition of digital health), with an average transaction size of $16.7 million.  This compares to $4.4 billion and 324 deals in 2016.  There were 119 acquisitions of firms in this sector, but no initial public offerings, proving that perhaps you can’t fool the public, and M & A activity was down from 2016 or 2015.  On the other hand, digital health public companies had an average 31% stock price advance in 2017 versus 17% for the S & P 500.  The amount invested has tended to grow in recent years, but a greater proportion of the funding is going to more “mature” companies and there are more large funding rounds.  While early stage financings continue to represent most of the funding rounds, later stage ones account for most of the dollars, with the average D or later round going to $74 million, up from $46 million in 2016.  Of course some of those later stage rounds are instructive, Outcome Health got $500 million in funding before being revealed to be a likely fraud.  Peloton got $350 million to run endless TV and radio ads.

Consumer health information attracted the most funding, $1.6 billion in 41 financings; followed by clinical decision support and fitness and wellness.  Merger and acquisition activity was greatest among companies in the electronic medical record space.  The report suggests that digital health may be at a crossroads, where the number of deals and amount invested either begins to plateau or even decline, or investors see some substantial returns and begin to pour even more funding into the sector.  Early investors can always try to make money by the well-traveled cycle of hype that creates absurd valuations and allows for lucrative exits, but eventually a company has to create real value for customers and if it doesn’t, it isn’t going to be financially successful.  That is the real crossroads for most of these firms–can you actually make a difference in terms of consumers’ health, the quality of health care they receive, and/or health spending.

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