Digital health’s funding time machine dialed back to 2019–before the SVB implosion: Rock Health

Rock Health’s 2023 Q1 report tries to put a good face on an implosion. The good: Q1 followed their Retro Time projection; the 2020-first half 2022 bubble was over, but digital health was snapping back to 2019 funding levels. The bad: while things were snapping back, Silicon Valley Bank (SVB), the favored bank of most Silicon Valley VCs and the companies they funded, imploded due to mismanagement.  This Editor would add two corollary nervous-making bank failures on SVB’s heels: Signature Bank (some East Coast healthcare, but too many uninsured deposits and a lot in crypto, taken over by Flagstar Bank/NYCB) and Credit Suisse (pending a Swiss government shotgun marriage with UBS). Add another unnecessary Federal Reserve rate hike to kill growth and the end of the pandemic PHE regulation suspensions that fueled telemental health, plus inflation at about 8-10%…. Like that 1949 Studebaker Starlight coupe, are we coming, or going?

Sidebar: This Editor has heard from other sources (not Rock Health) that ‘dry powder’ (funds) are low for VCs and barely existent on the provider (health system) side. Their own investors, now leery, are cutting back on their exposure. Where there is dry powder, fintech and biopharma are seen as better bets. VCs sense the bottom hasn’t yet been found in digital health valuations. Payers like UHG and CVS are making big deals but not in digital health. If they are, they are small ‘pocket lint’ pickups. Private equity? Largely kicking tires. Family offices and high net worth individuals are generally staying out of the healthcare picture unless there are other compelling (usually personal) reasons to invest. (Theranos still hangs heavy over these last two funders.)

Back to Rock Health, total Q1 funding was $3.4 billion across 132 deals. Yet only six mega deals (over $100 million) accounted for 40% of the funding early in the quarter: Monogram Health (in-home care, $375M), ShiftKey (PRN nurse scheduling, $300M), Paradigm (drug trials, $203M), ShiftMed (another healthcare workforce scheduler, $200M), Gravie (broker benefit solution, $179M) and Vytalize Health (MSO for providers, $100M). To call these ‘mega deals’ is an overstatement. In 2021 or even in 2022 these would have been seen as outstanding Series A and decent Series B-D+ raises. In 2021, the top mega deals crested $500 million.

The remaining 126 sliced up the remainder ($2.043 billion) of the pie, with a median value of only $16 million per deal. Throwing in the six ‘mega deals’, the overall median increased to $25.9 million. That tracks closely with 2019/2022, allowing for some inflation. Comparisons with full year medians: 2019–$19.8 million, 2020–$31.9 million,  2021–$39.9 million, 2022–$26.7 million. 

The IPO window remains closed tight. No easy exits for investors in late-stage companies. Those that went public during the bubble, with few exceptions, have cracked. From the report: “Digital health stocks started 2023 trading almost 50% lower than they did at the start of 2021, pushing some recently-exited players like Pear Therapeutics to explore going private.” (Under $1.00 per share, Pear is currently exploring a sale in toto, in parts, or merger.) According to this chart shown by Arundhati Parmar, MedCity News’ editor-in-chief, during his VC panel at ViVE [TTA 31 Mar], only two of 17 publicly traded digital health companies that went public have share prices in excess of their IPO: Progyny (also profitable) and HealthEquity. Many are near or below the critical $1.00 mark. (This chart does not include Babylon Health which is trading around $5 and reorganizing to become a US company.) He also pointed out that only two of the 17 are profitable.

These deals now also come with strings attached: valuation adjustments and operational revamps which usually mean staff layoffs, but can also be operational in closing/selling off lines of business. Growth is not the key metric anymore–profitability or a road to it is. Recent examples are Komodo Health and Carbon Health, where their substantial fundings ($200 and $100 million respectively) were tied to jettisoning LOB and staff. 

Last but certainly not least in putting a damper on digital health funding and growth is the end of the prolonged pandemic PHE. This relaxed rules for telehealth platforms around HIPAA compliance and also in mental health prescribing without in-person visits of DEA-controlled substances in Schedule 2 and 3-V. This puts a definite halt to telemental health’s expansion, fueled by drug prescriptions and none-too-fussy signups (see: Cerebral) but also too many virtual players in one niche (Mindstrong ceasing business with remaining assets bought out by SonderMind). New telehealth platforms largely complied with HIPAA but penalties for non-compliance are returning and platforms have to secure data. FTC is an added factor with its own privacy microscope.

Even the eternally optimistic Rock Health likens 2023 in digital health to a stormy sea with “turbulent waters’ resulting in “patched up ships and resilient mindsets.” Now that is a stunning mix of metaphors. Your Editor chooses a classic phrase penned by Joseph L. Mankiewicz and uttered with flair by Bette Davis in ‘All About Eve‘: “Fasten your seatbelts; it’s going to be a bumpy night.” And it’s only Q1. Also Mobihealthnews

Interesting pickups from JPM on CVS, Talkspace, Veradigm backs Holmusk, ‘misunderstood’ Babylon Health; six takeaways

Out of a decidedly soggy JPMorgan healthcare conference that concentrated mainly on pharma and biotech, there was some news in the downtrodden health tech and related areas. Selected from FierceHealthcare’s Heather Landi’s take:

CVS Health’s open checkbook for the right companies in primary care, provider enablement, and home health was a throwback to the palmy days of 2020-21. A big announcement at JPM was their investment in in-home kidney care and end-stage renal disease management provider Monogram Health. Their Series C raise of $375 million was lead-funded by CVS Health, Cigna Ventures, Humana, Memorial Hermann Health System, and SCAN.  Release, Mobihealthnews This added up to a busy January for CVS with leading Carbon Health‘s $100 million series D [TTA 11 Jan] and $25 million for Array Behavioral Care [TTA 12 Jan].

Talkspace, the cracked telemental health SPAC most recently rumored to be in buy talks with Amwell, touted their “defined, very significant path to profitability within a short period of time.” New CEO Jon Cohen, MD, a surgeon and veteran healthcare exec, touted the strength of the telemental health model, the effectiveness of their asynchronous messaging therapy for depression and anxiety,  and their market change from consumer to employers and health plans. Talkspace has some distance to go, quickly, with a loss through Q3 2022 of $61 million on revenues of $89 million and a share price today of $0.74, which means eventual delisting from Nasdaq. Is a quick buy in their future?

Veradigm, still settling in on their new corporate name, has its own bet on behavioral health data on the analytics side, with a lead investment in Holmusk‘s $45 million Series B. Holmusk will pull in de-identified patient data from Veradigm to their NeuroBlu Database.  Release

And on to Babylon Health, where Ali Parsa must feel like Eric Burdon of the 1960s blues group The Animals in the depth of being ‘misunderstood’Dr. Parsa promises a path to breakeven by end of 2024.  Babylon’s revenue is on target to hit over $1 billion. They operate in over 15 countries with well over 5 million transactions. But their SPAC cracked too from a high of $272 per share after listing in October 2021 to today’s price just above $11, leaving a lot of investors in the lurch. Even though Q3 revenue increased by $288.9 million versus $74.5 million in 2021, an increase of $214.4 million or 3.9x, and the Q3 loss correspondingly widened to $89.9 million, the loss was significantly lower as a percentage of revenue. They are also converting from a foreign private issuer to a domestic, planning a reverse share split, and selling non-core businesses like the Meritage IPA [TTA 22 Nov 22] It’ll either be more correctly understood by Mr. Market or…be bought?

Arundhati Parmar in MedCityNews had a tart take on the proceedings, leading with the convergence of therapeutics with devices and data, Primary Care-Primary Care-Primary Care, billion-dollar bolt-on acquisitions that may be good for biopharma (but not necessarily so in health tech where integration is leading), and innovative therapies that don’t save but actually cost mo’ money. All of which is no surprise to our Readers. And why is there a JPM every year? Healthcare insanity may be catching.

What’s next for telehealth? Is it time for a correction?

crystal-ballThe boom may be over, between shrinking visit volume and a pileup of providers. Is a correction in the cards? The flood of funding that started in 2020 and has not abated was kicked off by the pandemic and a massive shift to telehealth visits in March/April 2020 from a barely-above-plant-life number in January/February.

Post-pandemic, the shift corrected.

  • The peak of 69% of visits tracked by Epic in April had tailed off to 21% as early as May 2020 [TTA 2 Sept 20].
  • National commercial claims data via FAIR Health was lower. They tracked its peak also in April 2020 at 13%, falling continuously monthly: May to 8.69%, 6.85% in June, 6% in August, and 5.61% in October [TTA 9 Jan].
  • By mid-year 2021, the claims numbers continued to lose altitude: June 4.5%, July 4.2% (FAIR Health monthly report).

Despite the numbers, telehealth companies raised $4.2 billion of a total $15 billion in digital health funding in the first half of 2021, according to Mercom Capital Group, a global communications and research firm. So…what’s the problem with les bon temps rouler?

CB Insights notes the increased specialization of new entrants and, as this Editor has noted previously, the blending and crossing of business lines.

  • Companies like Heal, Dispatch Health, and Amazon Care will send a clinician to your house for a checkup–no running to your urgent care.
  • Kidney disease? Monogram Health. Musculoskeletal pain? Hinge Health. Child with an earache or fever? Tyto Care. Check symptoms first? Babylon Health.
  • Telemental health has gone from cocktail party repellent to the belle of the ball, concentrating on cognitive remote therapies. For the past year, it moved to more than half of all telehealth claims, with currently over 60% of procedure codes–and it’s consolidating. AbleTo was bought by Optum, Ginger bought by Headspace, SilverCloud by Amwell.

So for the Major League–Teladoc, Amwell, Doctor on Demand, Grand Rounds, and MDLive–what does this mean? If this interview with Teladoc’s CIO is an example, they plan to segue to a ‘hybrid’ model of virtual quick response plus integrating providers into a continuing care model with patients, creating a relationship with history and familiarity. A model that’s very much dependent on IT, analytics, and connecting with willing providers. But in this free-floating sea of verbiage, it didn’t come into misty focus till the very end, when he mentions Primary360 [TTA 7 Oct] and a virtual primary care team. (And let’s not forget Babylon360 along similar lines.) He finally sketches a view of all the connections to conditions coming together on a very far horizon. 

One can say it’s a cloudy crystal ball, indeed. FierceHealthcare, HealthcareITNews (Teladoc CIO interview)