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Growth in Consumer Digital Health

If there were an award for healthcare sector growth, the 2020 prize would go to consumer digital health. The pandemic powered increased usage of these services and investors took note, pouring money into telehealth-related companies. But does this race to invest represent irrational exuberance? Will the growth continue so that investments pay off? These are the questions that healthcare investors are asking.

Growth in Digital Health

COVID-19 spurred widespread changes in provider and consumer behavior relating to healthcare delivery—as more people embraced digital health solutions. The pandemic demonstrated many of the weaknesses in our current healthcare delivery system and accelerated usage of various digital health models, including virtual care and data-driven drug research.

However, increased consumer demand was not the only reason for a surge in digital health demand. Federal and state governments removed barriers for usage of digital health resources. Medicare started reimbursing video visits and the FDA allowed some companies to launch products without meeting all regulatory requirements.

The increase in usage was accompanied by an increase in investment. As Rock Health observed, “Across 2020, US digital health companies raised $14.1B in venture funding, the largest amount of capital deployed in a single year since Rock Health began tracking funding in 2011.” Experiencing a 15% growth in activity over the past three years, the sector completed a larger number of deals and raised more money for each deal. On-demand healthcare companies raised 2.25 times more capital in 2020 than in 2019, and the R&D segment grew three times.

Investment Differences by Subsector

Of the various subsectors in digital healthcare, Rock Health reports that “On-demand healthcare was the most funded value proposition in 2020, with $2.7B total funding across 68 deals.” The most popular investment targets often combined interactions between healthcare providers and patients with data provided by monitoring devices. For example, Teladoc’s acquisition of Livongo—the largest ever acquisition in digital health at $18.5B— suggests that investors favor a digital model that mixes face-to-face visits with health management programs.

Other subsectors of digital health also experienced rapid growth. Behavioral health companies, in particular, saw an increase in both utilization and investment. Mental healthcare increased 2.9 times compared to 2019. Doctor On Demand, for example, experienced a 109% increase in unscheduled telehealth appointments for behavioral health from February to April 2020.

Demand for at-home fitness care drove the fitness and health maintenance sector with $1.7B in total funding across 34 deals (compared to $1.2B in 2019). And, in the digital pharmacy sector, Amazon Pharmacy’s November 2020 launch promises to leverage their technical and customer expertise. Other online pharmacies are already experiencing a drop in stock prices. Companies that strive to make prescription delivery more like grocery delivery also experienced success in fundraising.

Telehealth Adoption

There are some reasons for investor caution. Telehealth adoption peaked in April 2020 at 14% of total outpatient visits. Since then, virtual visits declined to 6-7% of total, but this is still substantially more than the pre-pandemic utilization rate of 0.1%. However, there are reasons to believe that telehealth adoption will continue to grow. Most of the 2020 telemedicine was simply replacing the traditional face-to-face office visits of patients and healthcare providers with calls or video conferences.

While this practice model will always be in demand, the next wave of virtual care solutions is starting to pick up steam with consumers and investors. These solutions combine the usage of digital healthcare devices with asynchronous access to healthcare providers. When patients can monitor their health at home and contact their doctors with questions or concerns, it can significantly change the healthcare industry.

Will the Growth Continue?

On the other hand, rapid change and the rush to invest always raise questions about whether a sector can sustain meteoric growth. Are investors overly eager to invest in this area, and could that create a bubble? That would inflate valuations and draw new, inexperienced investors into the market. However, Rock Health reports that “market features in 2020 suggested that digital health is a maturing market, rather than a segment plagued by inflated expectations.”

There are a number of reasons for this conclusion. Repeat investors made up 60% of total digital health investors in 2020, a good sign of stability in the market. Digital health investment also had a healthy investment mix of early-, mid- and late-stage companies—although a larger amount of capital has been invested in later-stage deals so that mature products can meet urgent consumer demand. Another good sign for the market is that digital health infrastructure is maturing. This lowers the barriers to entry for new companies and allows speed and scale in the industry. Consolidation of clinical and digital capabilities has also accelerated and will probably continue.

In addition, the market has room for generalist and specialist digital healthcare providers to meet a diverse range of consumer demands. In 2020, generalist startup digital health companies were the most popular target for investment, enjoying $1.6B of funding compared with $804.3M for specialist companies. But, specialist models are increasingly popular, winning $242.6M of 2020’s early-stage investments compared to $49.4M for generalist startups.

Another area of investment opportunity is in behavioral health. While the mental health subdivision of the behavioral health category enjoyed substantial investment in 2020, two other subdivisions—substance use disorders and development disorders—remain under-invested and are a potential target for 2021 investors.

The pandemic and economic downturn have certainly hit the healthcare sector hard. However, careful investors can still find some silver linings in areas like consumer digital health.

Considering your healthcare investment options? Contact Bancroft for help!

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