2020 breaks record in digital health investment with $9.4B in funding

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The stock market’s sharp recovery and pandemic-initiated policy and regulation changes have enabled large competitive moves and commercialization activities in the digital health space. (SmartPhotoLab/Shutterstock)

With $9.4 billion invested up through the third quarter, 2020 will be the largest funding year for digital health to date.

The sector is on track to hit $12 billion in funding by the end of the year, compared to $7.4 billion invested in 2019 and $8.2 billion invested in 2018, according to investment firm Rock Health's latest digital health funding report.

They cited the stock market’s sharp recovery as well as pandemic-initiated policy and regulation changes that have enabled large competitive moves and commercialization activities in the digital health space.

Since April, the COVID-19 pandemic has accelerated digital health adoption by several years, attracting interest from consumers, entrepreneurs and investors alike.

More mega deals

Large deals are driving the top-line numbers, according to Rock Health. The average deal size in 2020 is $30.2 million, 1.5 times greater than the $19.7 million average in 2019.

Twenty-four digital health companies have raised mega deals of $100 million or more through the third quarter of 2020. Mega deals account for well over one-third (41%) of total digital health funding so far this year, with connected fitness company Zwift raising the largest round so far—$450 million in series C funding.

Other large funding deals include drug delivery startup Alto Pharmacy's $250 million funding round led by SoftBank’s second Vision Fund and telehealth company Ro's $200 million series C funding round led by existing investor General Catalyst.

Personal healthcare assistant company Grand Rounds also scored a $175 million funding round led by The Carlyle Group, and Amwell landed $194 million in a series C funding round before going public.

RELATED: Digital behavioral health startups scored $588M in funding amid COVID-19 pandemic

Investors are making large bets on companies in the on-demand healthcare services space, which includes telemedicine services, prescription delivery and at-home urgent care. It's the top-funded value proposition with $2 billion invested across 48 deals through the third quarter of 2020, Rock Health reported. The average deal size this year for companies in this sector is $42.1 million, 40% larger than the average digital health deal size overall.

Telehealth visits have skyrocketed during the pandemic. By one estimate based on Epic electronic health record data, telehealth visits comprised 69% of total ambulatory visits in the U.S.—office and telehealth—in April. That dropped to 21% of total visits by July.

"We are quite certain that when telemedicine utilization rates do settle, they will be higher than rates in the past," wrote Rock Health CEO and Managing Director Bill Evans in the report. "Investor dollars and consumer adoption signal a shift towards a new normal, with models of virtual care emerging as a central part of care delivery."

Exits and M&A activity

2020 has seen a flurry of digital health exits fueled by the stock market's sharp recovery, which puts more potential money on the table for companies that go public.

Accolade and GoHealth went public in July; Amwell, Outset Medical and GoodRx went public in September; and telehealth platform Hims struck a deal to go public by merging with a blank-check company. MDLive also has signaled plans to go public in 2021.

These filings come on the heels of six digital health IPOs in 2019, according to Rock Health.

RELATED: Amwell lands close to $200M in funding to keep up with demand for telehealth

Overall M&A activity is down in 2020 compared to the prior year with 63 acquisitions of digital health companies through the third quarter. That's on track to fall short of the 113 deals last year.

Potential acquirers may be conserving cash in light of the economic uncertainty created by COVID-19, according to the report.

The $18.5 billion Teladoc-Livongo merger is the exception. The deal was paid almost entirely with shares (plus $11.33 per share in cash). The combined company will be a digital health behemoth and could spur further M&A activity, Rock Health said.

Evans cautions that the economy and the healthcare industry face an uncertain future, and this will likely impact investor interest in digital health.

"Communities and their healthcare infrastructure are bracing for future waves of COVID-19—potentially compounded by flu season. Provider systems and practices with depleted finances face the potential of months of lower utilization and a shifting payer mix with more Medicaid, individually insured, and uninsured patients," Evans wrote in the report.