Digital Health Financing and Transaction Trends: A Great Year So Far | Sheppard Mullin Richter & Hampton LLP
As the world continues to change and adapt to the ongoing COVID-19 pandemic, the digital health sector has experienced tremendous growth and momentum only picked up in 2021.
According to the first half report on digital health financing and mergers and acquisitions 2021 released by Mercom Capital, the first half of 2021 ended with $ 14.7 billion invested in 372 digital health deals in the United States. , for an average size of $ 39.6 million. Fifty-nine percent of that funding came from 48 “mega-deals” involving more than $ 100 million each, including one of the largest investment rounds in digital health history: the 540 round. million dollars from Noom’s F Series. In total, 359 startups were funded.
Telemedicine and mental health
After about a year and a half of the COVID-19 pandemic, it’s no surprise that telemedicine led the fundraising activity, accounting for nearly 30% of funds raised in the first half of 2021 (around $ 4.2 billion ). For context, the next best-funded digital health categories in the first half of 2012 were well-being with $ 1.7 billion, mobile health applications with $ 1.6 billion, analytics with 1.5 billion dollars. billion dollars and clinical decision support with 1.1 billion dollars.
At the same time, however, the use of telemedicine has declined nationwide, according to FAIR Health monthly regional telehealth monitoring. The decline in telehealth use appears to be due to a return to in-person visits to hospitals and other health facilities.
However, this did not stop investors. According to Fierce health care, telehealth companies raised funds on 105 agreements, a 147% year-over-year increase from $ 1.7 billion raised in 79 agreements.
While telehealth use overall has seen a reduction, virtual visits for mental health issues, the number one diagnosis in telehealth, have continued to increase nationally and in every region. According to Fierce health care, claims for mental health benefits as a percentage of overall telehealth benefit lines continued to increase. Likewise, psychotherapeutic / psychiatric codes have increased nationally as a percentage of telehealth procedure codes, while assessment and management (E&M) codes have decreased.
Unsurprisingly, for digital health startups receiving funding in the first half of 2021, the most funded clinical indication was mental health. Ranked by funding amount, the next five best funded clinical indications were cardiovascular disease, diabetes, primary care, substance use disorders and oncology.
In June, startup Lyra Health, a provider of employee mental health benefits, raised $ 200 million in new funding to bring its valuation to $ 4.6 billion.
Lyra Health provides evidence-based care to support people in many aspects of mental health. Lyra Health’s Mixed Care Therapy combines video counseling sessions, one-on-one messaging, and provider-prescribed digital activities to support individuals in their daily lives. The treatment model, based on the principles of cognitive behavioral therapy, provides ongoing support between sessions.
Lyra Health also announced an expanded global strategy, to deliver care to people in more than 180 countries with the support of more than 85,000 mental health providers. According to Fierce health care, Lyra Health’s new global digital mental health platform would provide members around the world with one-stop access to all of Lyra Health’s care options and services, such as preventive care, mental health coaching, therapy and medication . Lyra Health plans to make the unified platform available in 2022.
âOne in five people struggle with mental health issues such as anxiety, depression or substance use disorders,â David Ebersman, CEO and co-founder of Lyra Health said in a statement. âDelivering mental health care to diverse employee populations around the world is one of the most pressing and complex issues for employers today, and this new funding will help Lyra accelerate our plans to provide complete global solutions. “
Direct to consumption models
The venture capital fund Rock health Attributes the changing health behavior of consumers to the COVID-19 pandemic as people have become more comfortable with using different virtual care and wellness products in their own homes. Some of the largest direct-to-consumer digital health offerings in the first half of 2021, including Noom ($ 540 million), Ro ($ 500 million) and Capsule ($ 300 million), demonstrate strong investor confidence in this business model.
Noom, which has seen one of the biggest rounds of investments in digital health history, is a weight loss app. âMost people want to eat healthier, exercise more, be less stressed and sleep better, but changing these behaviors is not easy,â said Saeju Jeong, co-founder and CEO of Noom in a commentary. Press release dated May 25, 2001, announcing Noom’s $ 540 million Series F funding. âThis round of strategic funding reflects our investors’ confidence in the immense opportunity we have to build a business by helping as many people as possible live healthier lives through behavior change. “
Capsule’s goal is to create a ‘one-stop-shop’ for digital healthcare where consumers can access Capsule’s digital pharmacy as well as an organized set of products and services, such as telemedicine or support. in mental health, all from a single app, according to business executives speaking to Fierce health care.
Rock health postulates that the main advantage of the direct-to-consumer approach is that it âallows companies to go upstream in the acquisition of consumers (marketing to individuals before entering the health system), to meet consumers where they are (outside of a clinical setting), identify the most pressing needsâ¦ and tailor the service for specific use cases, rather than the overall needs of corporate clients. However, with a limited total addressable market (when comparing consumer healthcare spending with corporate healthcare spending) and high customer acquisition costs, Rock health notes that such business models are not always conducive to achieving the scale and pervasive impact that healthcare innovation can deliver. In addition, these models often place the entire burden of paying for health care on consumers.
IPOs; Mergers and Acquisitions
Besides funding, the digital health sector also saw 12 initial public offerings in the first half of 2021. This is the highest number of IPOs in any first half of any given year. year since 2010, and there has been no IPO in the first half of 2020.
This year also saw a record number of mergers and acquisitions with 136 digital health deals, up from 83 in the same period last year. In the second quarter of 2021, there were 73 M&A transactions compared to 63 (14 disclosed) in the first quarter of 2021. By comparison, there were 42 M&A transactions in the second quarter of 2020. The companies Practice-oriented activities dominated M&A activity in the second quarter of 2021, with 43 of 73 M&A activity. transactions. Consumer-focused companies recorded 30 of 73 M&A deals in the second quarter of 2021.
Notable M&A deals in 2021 so far include: Microsoft’s $ 19.7 billion acquisition of Nuance, Datavant’s $ 7 billion acquisition of Ciox Health, and Preventice Solutions acquisition by Boston Scientific for $ 925 million.
Future opportunities and challenges
As investors accelerate the pace and volume of funding, Rock health suspects that digital health founders are more likely to find themselves navigating an extremely rich investment landscape. Fifty companies have raised several rounds in the last 12 months (end of the first half of 2020 to the end of the first half of 2021), i.e. double the 25 companies that have done so in the previous 12 months (end of the first half of 2010 at the end of the first half of 2020). Rock Health also advises founders to maintain a healthy sense of appraisal and investment cycles, and to create a circle of trusted operating and funding partners to inform decisions.
Additionally, Rock Health noticed that more than a quarter of all digital health companies funded in the first half of 2021 were startups catering only to consumers. This was the highest percentage in Rock Health’s ten-year tracking history, almost twice the mid-decade benchmark and five percentage points higher than in 2020.
The huge momentum of 2021 also introduces new risks for investors and entrepreneurs. Rock health notes that “the speed and amount of investment will test the current and future ability of the market to design and deliver digital health solutions and then transform them into sustainable businesses.”
Finally, the immense digital health activity in recent years may also lead to further consolidation through merger and acquisition transactions. According to Rock health, digital health companies remain the biggest buyers of other digital health companies, another indication that market consolidation is driving at least some of the recent fundraising activity.