More Consolidation, IPOs Ahead for Digital Health Companies

Virtual healthcare staked out exciting new ground with the recently announced $18.5 billion merger of telemedicine pioneer Teladoc Health and chronic disease management company Livongo. 

The deal illustrates the growing appetite among public-market investors for innovative healthcare solutions. Analysts at Rock Health likened the deal to a “starter pistol” that signals the beginning of a race—in this case, a race toward consolidation in a red-hot sector that has been maturing rapidly since the pandemic opened up a need for new models of healthcare delivery. At the same time, the initial public offering window is also wide open this year for privately held digital health companies.

Whether you invest in startups or publicly traded digital health companies, one thing is certain: the coming months and years will be active and fast-paced as established leaders team up to dominate markets and startups race toward liquidity events.

Meet ‘Teladongo

For Teladoc, which debuted on the public markets in 2015, the merger with Livongo is the latest in a series of acquisitions, and one that puts the company in a solid position to deliver online care that addresses the needs of providers, payers and consumers. Bringing Livongo under its umbrella means Teladoc can leverage Livongo’s focus in the areas of patient engagement and the management of chronic conditions.

We may soon see other companies joining forces to widen their footprint as well. Telemedicine is a space that’s big enough for multiple winners, and that’s possibly what we’ll see after a period of consolidation.

Behavioral Health Funding Surges in H1 2020

The digital health space has been heating up for years, but telemedicine has become its hottest sector since the spread of COVID-19 significantly curtailed in-person care.

It’s not surprising that the first mega-merger we’ve seen in digital health in recent times is in the telehealth space. It’s also not surprising that the most buzzworthy IPO—that of Boston-based Amwell—is also in telehealth. There have also been plenty of notable telehealth financings, such as PlushCare’s $23 million Series B round, Doctor On Demand’s $75 million Series D round and Thirty Madison’s $47 million Series B round.

But other digital health segments have also been making waves.

In the first half of 2020, digital behavioral health startups raised $588 million, Rock Health reported, which is on par with the annual funding for several previous years. By contrast, total funding for startups in this space reached $539 million in 2019, $658 million in 2018 and $273 million in 2017.

So far, in the second half of this year, on-demand behavioral health startup Ginger has raised a $50 million Series D round, and Lyra Health, one of digital health’s newest unicorns, has raised a $110 million Series D round. Brightline, a technology-enabled pediatric behavioral healthcare company, has raised a $20 million Series A round and Nurx, a digital practice for women’s health, raised a $22.5 million Series C round.

Looking ahead, digital mental health—like women’s health, technology for the aging and other hot areas—could be a sector on the verge of consolidation and other exits for investors.

The IPO Window

Public markets took a historic dive in March in response to the pandemic, prompting comparisons to the Great Depression and the more recent Great Recession. And while the markets have been in recovery mode since then, meaningful recovery during an election year, a global pandemic and a time of widespread job loss remains tricky to define.

And yet, throughout the uncertainty, public-market investors have been diligently welcoming new digital health entrants. Over the past 14 months, nine digital health startups have filed for an IPO, analysts at Rock Health pointed out, with three of those—Amwell, Accolade and GoHealth—announcing their plans over the summer.

The success of digital health companies in the face of economic headwinds caused by the pandemic can be partly attributed to a “flight to quality” among investors and their increasing tendency to back later-stage companies that are already proving out their business models. Additional factors include the easing of certain regulations governing telemedicine and shifting consumer demand.

As venture investors continue their flight to quality with later-stage funding rounds, digital health IPOs may provide public investors with quality they seek. Rock Health’s IPO watch list identifies 35 mature digital health companies that could be preparing for a debut on the public markets.

Exit Markets Warm, But Questions Remain

Digital health companies are acquiring other digital health players in order to expand their reach. We may wonder how soon will we see health systems and payers making their own acquisitions that further consolidate the space, and for how long will telehealth be the hottest area for investments and exits?

How long will the IPO window remain open during such uncertain times, and how will newly public digital health companies perform in the long term?

These are just a few of the many questions that analysts, investors and industry watchers are asking as we push further into the second half of 2020.

But one thing is for certain: The exit markets are quite a bit warmer than expected at the beginning of 2020, and it’s because investors all across the spectrum have an appetite for digital health companies.

As always, leave a comment, drop me a line or reach out on Twitter.

I’m also happy to share that Fenwick is a proud sponsor of the 2020 Rock Health Summit taking place on September 22 and 23, 2020.

Originally published September 18, 2020 on Fenwick's Life Sciences Legal Insights blog.