First half digital health investment — a true rebound or a ‘dead cat bounce’? A Gimlety look at Rock Health’s H1 report.

First, your Editor assures our Readers that no felines were harmed or poorly thought of. It’s just words expressing concepts!

In ever-dapper Mr. Market’s picturesque and blunt language of finance, a ‘dead cat bounce’ is a temporary improvement, a short-term recovery that does not reverse the reality of the long-term downward trend, which resumes shortly thereafter the pick-me-up. It’s applied to assets, stock prices, market sectors, and even political polling. 

So…let’s debate the point. Is digital health investment in the US recovering, or taking a few lungfuls of air at the surface before sinking again?

Rock Health’s first half (H1) report. It is, like most of theirs, heavy on the optimistic ‘glass half full’ view. Its headline ‘Resilience Leads to Brilliance’ is certainly a catchy rhyme or meme, but in this Editor’s Gimlety View, an overstatement. It does look like the logjam in funding and M&A has broken, but where’s the brilliance?

Let’s take a cold look at the Rock Health findings for the first half (H1) of 2024. Rock Health only looks at US digital health fundings above $2 million and includes some companies those of us in the professional field do not consider ‘digital health’. FTR:

• US digital health startups raised $5.7B across 266 deals. Average deal size: $21.4 million.
• The action was in Series A and B raises, which were roughly comparable to prior years. Series C and D were anemic, with Series C especially lagging even anemic 2023.
• 40% of H1 2024’s fundraises (107 deals) were unlabeled; by quarter, Q1 47% and Q2 33%. This is only slightly down from the 44% for full year (FY) 2023.
• The top ‘value propositions’ for fundraising companies were disease treatment (including food as medicine), non-clinical workflow, R&D, clinical workflow, on demand healthcare and precision medicine. The first two are no change from FY 2023. The biggest shifts up from FY2023? Clinical workflow, on-demand healthcare, and precision medicine. These categories are not defined by Rock Health.
• The top ‘clinical indications’ are mental health, cardiovascular, oncology, weight management, reproductive/maternal health, and neurology. Again, the first three are basically little changed from FY 2023. The big upward shift was funding for reproductive health.
• “AI momentum underpinned deals in categories next on the list, including nonclinical workflow ($896M), R&D for pharma and medical devices ($737M), and clinical workflow ($639M).”
• Until Q2 2024, there had not been any into the public markets for 21 months. Starting in May and June, there were three: fetal monitoring Nuvo (public exit via SPAC (!!) in May) and two in June: revenue cycle management company Waystar and precision diagnostics Tempus AI.
• There were only 66 acquisition deals made in H1, about half between digital health companies. Private equity acquired 10 companies and 12 in “other”. 

In nearly every metric above, H1’s trends are comparable to 2023 extrapolated to a full year, as well as in line in numbers to pre-inflationary 2019–the investments in absolute terms are worth less. 

But overall, it is as if the boom of 2020-2022 never happened. And 2023 was marked by four tech bank lender bankruptcies and many high profile bankruptcies such as Babylon Health, Quil Health, and Pear Therapeutics.

Factor in the following for 2024:

• There are some healthy raises worth noting and they’re fairly steady–but they are far less than in the past.
• Layoffs are also prevalent and substantial at all levels, indicative of retrenching. And there is little real hiring versus resume collection.
• This is an election year like no other in the US, UK, and France, as well as political and terror turmoil worldwide. 
• Two active wars.
• Drying up of now unwanted Chinese capital that fed into Sand Road VCs
• The very underdiscussed FTC/DOJ pre-merger notification and Merger Guidelines–and a hostile FTC

Socially and physically, there’s little respite, from the fool’s spectacle of the Olympics to increased volcanic activity worldwide seen from Yellowstone to Italy. Natural disasters add to nervousness. 

As usual, there are two metrics missing from Rock Health’s analysis: companies in deep trouble or bankrupt. Granted, Rock’s report is about digital health investment, but considering what and why it fails is part of the investment picture. What comes after all those rounds and exits? Capital disappearance.

• Bankruptcies: Cue Health, Cano Health, Invitae, SmileDirectClub (late Dec 2023)
• On the way: 23andme, NeueHealth (probably 2025), Amwell (which avoided delisting by a reverse stock split)

There is also the shutdown of Walmart Health’s telehealth / remote health unit, formerly MeMD, acquired by Fabric. There is also the Veradigm mystery–delisted and as of May, up for sale, despite having positive revenue. Added context: the failure of melding retail health with clinic operations–Walgreens’ VillageMD, CVS scaling back Oak Street, Amazon folding Clinic into One Medical.

AI is also proving to be ‘not all that’. 

Conclusion: this Editor is leaning towards ‘dead cat bounce’ unless something drastically changes, as in improves.

Agree? Disagree? Comment below!

Referenced: Rock Health FY 2023 report, Rock Health Q1 2024 ‘flat spin’ report, Mobihealthnews