- As COVID-19 roiled financial markets in the first half of the year, private investors poured $5.4 billion into digital health startups, the largest investment in the sector for the period over the past decade, according to a new midyear report from Rock Health.
- The research firm and venture fund reversed its earlier prediction that the pandemic would dampen access to capital in the digital health space and now expects records to be set this year for overall funding, number of deals and deal size.
- The easing of regulatory and reimbursement barriers to digital health adoption, intended to support healthcare systems during the public health crisis, rekindled investor interest in May and June after a pause at the onset of the virus outbreak, Rock Health said in the report released Monday.
Investment in the digital health sector was off to a strong start in 2020 at a record $3 billion in the first quarter alone, before momentum stalled in March and April. The halt in activity as COVID-19 spread quickly around the globe, however, did not last long. Rock Health notes that of 11 large deals valued at $100 million or more in the first half, five occurred in May and June, when the outbreak and resulting U.S. economic downturn were well underway.
Funding for digital health companies in the second quarter was $2.4 billion, 33% above the $1.8 billion quarterly average for the prior three years. The average size of a deal in the first half of 2020 was $25.1 million, easily topping the previous record of $21.5 million in 2018.
The most popular areas for investment included on-demand healthcare services, disease monitoring and behavioral health.
Among the biggest medical device deals were $125 million in financing for Outset Medical, which makes a connected dialysis system, and $146 million to wearable defibrillator maker Element Science.
Top funding beneficiaries across other sectors were prescription delivery service Alto Pharmacy ($250 million); telehealth services company Amwell ($194 million); AI-driven drug discovery platform Insitro ($143 million); on-demand urgent care company DispatchHealth ($136 million); and evidence-based therapy and psychiatry platform Mindstrong Health ($100 million).
As for the distribution of investment transactions across corporate investor type, the fraction covering medical device companies has declined slightly since 2018, from 6% that year, to 4% last year, to 3% in the first half of 2020, as providers, biopharma companies and traditional tech companies have stepped up their shares since last year.
The report pointed to several policy changes that helped expand the use of virtual care, including CMS' waiving of the video requirement for reimbursement of some telemedicine services; allowing remote billing for outpatient services; and making more providers eligible for remote-care reimbursement. HHS agreed to waive HIPAA penalties for telehealth cases conducted in good faith and reduced the penalty cap for some violations. In addition, many states reduced licensure barriers, enabling clinicians to provide care across state lines.
"While some of these changes may not be permanent, it's tough to close the barn door after the cat is out of the bag. Consumers and providers have experienced the value and convenience of virtual care. We believe these new virtual care habits will create new care paradigms beyond the pandemic," Rock Health said.
A caveat to the rosy 2020 digital health investment outlook: While the pandemic appears to be driving interest in the digital health sector, a second wave of the virus and potential longer-term economic slowdown could quickly derail the uptrend, the report said.