Wei-Li Shao, President of Omada Health.
U.S. digital health startups raised $6.1 billion in the first half of 2023, according to Rock Health, which sounds impressive until you compare it to the $10.4 billion and $15.1 billion raised in the first six months of 2021 and 2022, respectively. Several well-known companies have consolidated, and we’ve also seen the closure of a number of creative digital health startups. However, I don’t believe this all spells doom.
Many experts believe the current financial environment may be necessary for digital health’s ability to grow sustainably and deliver on its promise to fill gaps in our health system. With digital health experiencing a Darwinian reckoning, which companies will be around for the long haul, which are facing extinction, and why?
Economics Of Digital Health’s New Normal
The financial landscape of digital health is setting the stage for hotly anticipated changes. But another way to look at it is potential course correction.
Capital is a precious resource right now, so I see most companies in cost management mode. Depending on factors such as their most recent fundraising round, companies may have economic holes to climb out of. Many can’t go out and raise money at the valuation they did not too long ago. As a result, companies across industries are making strategic cuts, including major corporations like Amazon, Microsoft and Meta. Digital health isn’t immune to economic uncertainty or downturns.
In this new normal, separating the long-term contenders from the short-term pretenders in digital health comes down to identifying which companies can still generate volume and demonstrate a sustainable business that is, or will be, profitable.
I think this natural evolution of digital health is perhaps inevitable and healthy for our industry, for it spotlights the longevity of companies creating value in the healthcare marketplace and doing it sustainably. In the end, I believe that healthcare doesn’t need a flash in the pan; it needs enduring businesses.
Platforms Win The Day—Not Point Solutions
I see companies with a specific niche in healthcare still having an opportunity to own this and ascend to become category leaders. For example, a sustained focus on diabetes can lead to measurable success in virtual diabetes management. However, digital health is meant to provide what’s missing in traditional healthcare, and part of this is moving to a seamless, multi-condition care approach.
Therefore, I see the leading digital health companies continuing to focus on multi-condition care because there are all too often comorbidities across chronic diseases. Today, 42% of Americans are living with at least two chronic diseases. To build on my aforementioned example, if a company specializes in virtual diabetes management, what about the 58% of individuals living with diabetes who are also dealing with a musculoskeletal disorder? Companies may start by excelling with one condition, but growth and staying power will likely require treating people holistically, not specific conditions.
Don’t Count On Direct-To-Consumer
Direct-to-consumer (DTC) digital health companies face a number of challenges ahead. One hurdle in that business model involves ad spend and other rising costs to acquire customers. Overall, through the first five months of this year, ad spend by DTC brands is down 13% from the same time last year, with DTC brands buying ads also falling by 5%.
Customer acquisition for DTC digital health brands is a significantly tougher environment than it was 12 to 18 months ago. Even if companies are able to get volume, costs to acquire customers that outstrip their lifetime value may not be sustainable. To make matters worse, DTC advertising practices are also facing scrutiny from privacy regulators. Internet-based DTC advertising, especially via social media sites, often employs online tracking technologies that can impermissibly disclose consumers’ sensitive personal health information to third parties.
Another obstacle is that consumers are tightening up their belts as interest rates have been climbing for the past year. Consumer credit debt is also at an all-time high. For Americans, we typically rely on subsidies or insurance for healthcare costs. Direct-to-consumer offerings are often out-of-pocket expenses.
On the flip side, I think business-to-business (B2B) health companies may fare better in the long term. Revenue in the B2B world is often recurring and follows the flow of health benefits the way people are used to acquiring them, which is to say, through health insurance.
Acquisitions Can Be A Lifeline Or A Noose
With digital health startups having a hard time raising capital, this may create ripe conditions for leaders to consider acquisition bids. In the first half of 2023, we saw an average of 12 acquisitions of digital health startups per month. Many companies unable to raise money at their valuation are keen to get acquired, believing in the idea that it’s better to get something rather than nothing.
I believe that allowing the innovations from startups to live on through mergers is part of the healthy course correction digital health is experiencing. Even if a digital health startup can’t survive the current rough economic climate, in some cases, at least their best ideas can live on and help drive forward momentum in our industry.
Recent examples that Fierce Healthcare brings up include Twentyeight Health’s acquiring SimpleHealth customers in the reproductive care and sexual wellness spaces and ThirtyMadison buying the assets of online birth control clinic The Pill Club.
The economic forces leading to lower valuations have also made some previously expensive health tech companies more ripe for acquisition by larger companies. Examples include the recent acquisitions of VillageMD, Signify Health, and One Medical by Walgreens, CVS and Amazon, respectively.
This moment in digital health’s trajectory is nuanced and multi-faceted, but first and foremost, I think leaders in the industry should view it as an opportunity. Digital health is leaning out and paving the way for the most viable business models to lead sustainable sector growth.
In the end, we can all expect digital health to continue refining care delivery and bending the curve in chronic disease care with enduring, proven businesses leading the way.
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