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Rock Health: Digital Health Funding Remains Hot in 2016 Despite Expected Decline

July 19, 2016
by Rajiv Leventhal
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Digital health companies are still lagging behind the broader S&P 500 public market index, however

The first half of 2016 has concluded with slightly over $2 billion in total digital health venture funding–on track with the levels of both 2014 and 2015, according to a midyear report from San Francisco-based Rock Health.

The report says that in a year when everyone expected funding to decline, digital health “has been as steady as ever” and accounted for 8 percent of total venture funding. The first half of 2016 came out on top in one aspect, as a record-breaking 151 companies raised more than $2 million, according to Rock Health. Digital health investment remains within a healthy range proportionate to the rest of the funding landscape and is at its highest level since 2014, according to the report.

A diverse set of companies have made up the largest venture deals of the year so far. Wearable company Jawbone, a familiar name in these rankings, closed the second-largest round of the year, bringing its total amount raised to just under $1 billion. What’s more, Healthline Media (a spinoff from Healthline Networks) and Centauri Health Solutions (founded 2014) took on their first round of outside capital from growth equity investors Summit Partners and Silversmith Capital Partners, respectively.

Roche led Flatiron’s investment, which was the largest deal of the year. This Series C deal (the biggest Series C in the history of digital health), was funded by the Fortune 500 company directly, rather than through their corporate venture fund. Late-stage deals for Health Catalyst (Series E) and Proteus (Series H) rounded out the top six.

What’s more, six categories accounted for more than 50 percent of all digital health funding in 2016: analytics/big data; wearables and biosensing; population health management; personal health tools and tracking; electronic health record (EHR)/clinical workflow; and digital medical devices. Of these categories, only wearables and biosensing and personal health tools were ranked in 2015’s top six.

Breaking it down further, analytics and big data finished the first half with over $300M in funding and over 118 percent year-over-year (YoY) growth. Consumerization also continues to receive consistent investor attention–two of the top three digital health “unicorns” (23andMe, ZocDoc) are consumer-focused companies. Among these top six, the report considers both wearables and biosensing and personal health tools and tracking consumer-focused categories. While healthcare consumer engagement didn’t make the top six for the first time ever, it did experience significant YoY growth (127 percent).

Further, new names jumped to the top of the active investor ranks as digital health continues to be supported by a variety of funds. 2016 saw new (and old) names jump to the top of the list of most active investors, with corporate investors outpacing traditional venture funds in number of deals. New investors UPMC and Heritage Group joined the ranks of top corporate funds in 2016, while stalwarts like GE Ventures and Google Ventures were surprisingly inactive.

In terms of mergers and acquisitions, 87 M&A deals were closed by the 2016 midpoint, slightly below 2015’s midyear mark, with total disclosed dollars eclipsing $10 billion (versus $6 billion in the first half of 2015). Halfway through 2016, Rock Health has already tracked 87 digital health deals, ranking slightly below the midyear mark for 2014 and 2015 (92 and 96 respectively). Other digital health companies continue to be the most acquisitive, acquiring more than half of companies we tracked.

The most notable transactions of 2016 include McKesson’s purchase of Change Healthcare for $3B, IBM’s purchase of Truven Analytics for $2.6B, and Nordic Capital’s purchase of eResearch Technology for $1.8B.

Also noteworthy is that despite improved performance from previous years, publicly traded digital health companies are still underperforming the broader S&P 500 public market index. Bessemer Venture Partners’ digital health public company index is comprised of 33 companies, totaling over $115 billion in aggregate value (McKesson, Cerner, IMS, and Athena hold almost 65 percent of the value). This index is the best gauge of how digital health companies are performing against the broader public markets. With a recent market upswing, the digital health index has improved, but still lags behind the broader S&P index.

A recent survey of digital health investors revealed varying answers to the question: who will be next to IPO? The companies on the list are pursuing a diverse set of sectors (from personalized genomics and healthcare data warehousing, to a cancer analytics platform and ingestible biomedical sensors) with large market opportunities, suggesting a robust IPO pipeline for the rest of 2016 and beyond, according to the report.

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