The healthcare industry has experienced significant changes, which have been accelerated by the COVID-19 pandemic. Just some of the wide-ranging shifts include growing disease burden, evolving health needs, increasing consumer expectations, and higher expectations for affordable care. Now a series of macro environment headwinds such as inflation, rising interest rates, and the threat of economic contraction will further test the mettle and business acumen for all players in healthcare—especially those focused on digital health and innovation.
Given this landscape, many organizations are evaluating opportunities to reimagine innovation and access to new capabilities. Within digital health startups, funding dropped to $2.2B in Q3 2022, which is the lowest raised in a quarter within this sector since Q4 2019 when it was $2.1B, according to Rock Health.1 In general, there are smaller deals, declining valuations, fewer unicorns (as defined by $1.0B valuations), and a very unfriendly IPO market.
How can digital health startups rise above these challenging conditions? Frankly, there are already too many digital health startups with narrowly focused solutions competing for the time and attention of employers, integrated delivery networks (IDNs), and payers that are struggling to adopt solutions that only serve a specific need for a patient in their journey. If anything, this will force pharma, medtech, and startups alike to deliver more patient-centric holistic solutions that easily integrate and play well with others in a broader ecosystem. More importantly, it will likely drive more focus on generating clinical evidence with clear improved outcomes.
The Opportunities Within a Challenging Economic Environment
The large pharma and medtech organizations that have found it challenging to build new business and create value on their own due to the high cost and skill set required are now looking for partnerships and M&A opportunities to fuel growth. Digital health startups facing capital shortfalls should welcome this increase in M&A activity in order to bolster point solutions, grow their customer base, improve efficiencies, or generate liquidity to satisfy investors. The companies that stand to benefit the most are the late-stage startups with depressed valuations, a clear product-market-fit, and differentiating clinical evidence.
Another interesting outcome from this impending consolidation is the likelihood for well established, yet unconventional players, to make disruptive moves. Pharma and medtech have been facing a myriad of challenges over the years from ongoing digital transformation, expiring patents, biosimilars, and—now that the pandemic has subsided—the COVID cliff. This creates an ideal opportunity for more non-traditional players to jumpstart their move into healthcare, continuing the trend we are already seeing with CVS’ purchase of Signify Health, Walgreens finalizing their ownership of Shields Health, and of course, Amazon’s purchase of One Medical.
The healthcare landscape is constantly changing and, as the COVID-19 pandemic made clear, strategic imperatives can change quickly. The winners and losers in the next wave will be those that maintain agility and adapt their plans to succeed in the post-pandemic new normal, which will include partnerships, alliances, and acquisitions.
References:
1. https://rockhealth.com/insights/q3-2022-digital-health-funding-the-market-isnt-the-same-as-it-was.
