Memorandum

Rock Health: record 1H17 digital health investment of $3.5B; deals grow in size and number, even amidst healthcare reform uncertainty – July 11, 2017

Executive Highlights

  • According to Rock Health’s midyear review, 1H17 has been the most prolific half-year for digital health investment ever: $3.5 billion was invested in 188 digital health companies (both records) in that time, bolstered by an astounding ~$1.5 billion in May alone! The $3.5 billion in funding rose ~50% over 1H16.
  • The six-month period featured the two largest digital health deals of all time: $500 million for Outcome Health (digital screens and tablets in waiting rooms) and $325 million for Peloton Interactive (connected indoor exercise bikes).
  • There was no mention of any diabetes-related or obesity-related companies, though the half-year did see Livongo raise $52.5 million (March), Omada raise $50 million (June), and Glooko raise $35 million (June). Roche also acquired mySugr in June for a reported~$75-$100 million, a major exit. These were much bigger deals than we’re used to seeing in diabetes and digital health, hopefully a sign of the field’s maturity and path to scale. 

Yesterday, Rock Health released its Midyear Review of Digital Health Funding, a report that has tracked financial investment in the digital health sector going back to 2011. Bottom line, it has been a banner half-year for companies involved in digital health – in just six months, $3.5 billion was invested in 188 digital health companies, both records and the former rose ~50% YOY from 1H16. The trend graph below shows that the majority of this activity occurred in the second quarter, with May alone featuring ~$1.5 billion worth of investments – roughly a third of 2016’s full-year total.

There were a record seven deals worth over $100 million in 1H17, two of which – Outcome Health for $500 million and Peloton Interactive for $325 million – were the largest digital health deals ever. Outcome Health provides point-of-care educational information for patients at HCP offices (e.g., digital screens and tablets in waiting rooms), while Peloton Interactive sells connected indoor exercise bikes. The average deal size for the half year was also the highest ever, totaling $18.7 million. Excluding these two large deals, the average investment for the remaining 186 deals was $14.5 million, still up slightly from 2016’s average of $13.7 million. Notably, none of the top seven investments were in a San Francisco Bay Area-based company.

The report does not mention any diabetes companies, though the half-year did see Livongo raise $52.5 million (March), Omada raise $50 million (June), and Glooko raise $35 million (June), among others. Roche also acquired mySugr in June for a reported~$75-$100 million, a notable exit for the world’s most popular diabetes app. Overall, these were much bigger deals than we’re used to seeing in diabetes and digital health, hopefully a sign of the field’s maturity and path to scale. 

This year to date, the digital health categories that have attracted the most investor interest are: (i) consumer health information – eight deals totaling $757 million (mostly Outcome Health’s $500 million); (ii) digital gym equipment – three deals totaling $341 million (mostly Peloton’s Interactive’s $325 million); (iii) healthcare consumer engagement – 17 deals totaling $321 million; (iv) EHR/clinical Workflow – 11 deals totaling $276 million; (v) analytics/big data – 16 deals totaling $240 million; and (vi) digital therapies – nine deals totaling $235 million. Excluding the top seven deals (each >$100 million), the categorical analysis paints a drastically different picture: Healthcare consumer engagement tops this list, with digital therapies and analytics/big data moving into the second and third. These areas of interest are a notable departure from 2016: when genomics/sequencing, wearables/biosensing, and telemedicine were hot. In both cases, investor focus is well-distributed among consumer- and enterprise-focused products, as noted in the report.

There have been zero digital health IPOs this year to date, and 58 M&As in 1H17 lag behind the 87 in 1H16. mySugr boasts the most notable exit in diabetes this year (acquired by Roche in June), though presumably wouldn’t be counted in Rock Health’s database since it is not US-based (though does have a new office in San Diego).

The report is enormously optimistic about digital health and predicts the momentum will continue into 2H17. We agree with that sentiment, given where we see diabetes going – more connected devices, better use of the data generated from them, novel care delivery models (e.g., coaches), lighter touch care that is more frequent and less face-to-face driven, and a greater focus on prioritizing care for those at the highest risk. We’ll be fascinated to see if diabetes continues to see large deal sizes and whether acquisitions continue. See our ADA 2017 Digital Health Report, as well as our coverage of Musings Under the Moon and Musings After Hours for more thoughts on this field.

  • The two biggest digital health deals of all time now belong to Outcome Health and Peloton Interactive.
    • Goldman Sachs and CapitalG invested a whopping $500 million in provider-facing consumer health information company Outcome Health – this was its FIRST round of funding! According to its website, Outcome Health already has a presence in nearly 20% of doctors’ offices in the US and is “building the world’s largest platform for actionable health intelligence at the moment of care.” Products include a digital waiting room screen, a digital anatomy board, a digital exam room tablet – all interactive devices that aim to inform and engage patients. We see big potential here in diabetes, given the invisibility of the condition – what does a high blood sugar mean for the body?
    • Wellington, KPCB, and True Ventures, invested $325 million in consumer-facing connected fitness equipment company Peloton Interactive. Peloton offers a stationary bike with a built-in tablet for live-streaming cycling classes.
  • Overall, publicly traded digital health companies are up 30% year-to-date (vs. the S&P 500 Index, which is up 8%). At the time of publication, Teladoc (+110%), Care.com (+80.4%), and Evolent (+70%) have had the most successful half years from a stock perspective. Fitbit, which has dubbed this year a “transition year,” has guided for a 27% sales decline in 2017, and has accordingly seen a 33% drop in stock price (now trading at a 52-week low ~$5.23 though still at a market cap of $1.2 billion).
  • On the investor side, 331 distinct investors completed deals in 1H17, 42% of which (138) are new to digital health. In terms of activity, familiar faces KPCB, Flare, and Khosla Ventures led the way on the “Venture” side, while GE Ventures, Mayo Clinic, Google Ventures, and Sanofi-Genzyme Bioventures were the most active “Corporate” investors.
  • Last month, new FDA Commissioner Dr. Scott Gottlieb published a blog post  sharing that FDA is working on a new Digital Health Initiative, allowing the agency to ideally adopt a more efficient regulatory framework for overseeing this field. The initiative is presumably related to the recently announced 13-member digital health unit. Many in the field don’t see FDA as the biggest barrier to commercialization, but this heightened focus should ideally expedite reviews and better clarify the framework for which products are in FDA’s regulatory domain.

 

-- by Brian Levine, Adam Brown, and Kelly Close