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