The Calming Waters of the Digital Health Investment Market - Cover

The Calming Waters of the Digital Health Investment Market

As 2019 closes and 2020 opens, let’s take a moment to examine the past, present, and future of investing in digital health markets. It is apt to compare the recent investing history to rafting Class V rapids as the waters of a raging river begin to calm. Knowing how the waters became so turbulent and what happened to placate these rapids is important for understanding the current field and future opportunities.

The Impact of Overvaluation

Three years ago, the digital health markets were incredibly frothy; many companies in the space were vastly overvalued. This overvaluing came from the public and private markets hunting for companies of enough value to replace the dwindling cash cows of yesteryear. While brick and mortar declined, the digital space struggled to offer superior, or even equivalent, economic value. With immense pressure to seek out and find value, the digital health space was caught up in the increasingly roiling rapids of America’s drive for economic growth. Savvy investors knew to play a reactive game; they needed to respond to the frothy conditions and ride out the chaotic times until more strategic decisions could be made.

Calmer waters started to appear this year. In 2019, the digital health markets saw four IPOs where the previous years saw none. Change Healthcare, Phreesia, Health Catalyst, and Livongo all went public, each opening at modest share prices and maintaining valuations near that original price. Health Catalyst and Livongo, at the time of writing, are the most varied from the original price. With this wave of activity remaining relatively stable, it is unlikely that we will see more IPOs in 2020. The kind of growth that seems more likely is in mergers and acquisitions as a more stable field makes more strategic plays instead of reactionary ones. There even exists the possibility that some public companies may return to private investment in order to capitalize on the stabilizing market and grow stronger in order to reenter the public markets at more sustainable valuations.

Although the waters are calming, they are not completely placid. Private markets are still dealing with overvaluation, and deal volume is down as a result. This is where the macroeconomic pressures of the hunt for high-value companies come into play. Where past years saw a lot of activity with less strategy in order to produce new shooting stars, current debt prices and corporate interest rates are set to draw out large, high-value companies. However, no companies from the digital health markets have appeared. The foreseen downturns are set to relieve this frenetic pressure on the private equity and allow for more strategic plays.

Digital Healthcare’s Hottest Markets for Strategic Investment 

These more strategic plays will be looking at digital healthcare’s hottest market segments, such as population health, specifically around Patient Engagement opportunities.

While the reactive activity of the past placed massive overvaluation on any company that claimed to serve population health, no matter how vaguely or broadly, newer investments will be more smartly placed in more specialized vendors. KLAS’ framework for population health has been very useful in defining the space and giving structure to the previously nebulous term. The six pillars of population health are:

  1. Data aggregation (software and services that pull needed data into one environment where it can be analyzed)
  2. Data analysis (software and services that pull accurate and meaningful insights from patient data for health systems to use for better care)
  3. Care management (using data insights to improve practices and processes of care for patients)
  4. Admin/financial reporting (using data insights to improve revenue cycle and billing)
  5. Patient engagement (using data insights to improve how patients take control of their healthcare)
  6. Clinician engagement (using data insights to improve how clinicians interact with their patients and health systems)

As this space develops, investments will move from investing in new patient portals to investing in companies that offer specialized services in any number of these more specific segments.

Telehealth, which can be considered an execution of the patient engagement portion of population health, is of interest. Telehealth operating at its highest level can be summed up in the phrase, “I have my doctor in my pocket.” As broadband internet becomes more ubiquitous, the ability for patients to interact with their doctors remotely from anywhere in the world is becoming commonplace.

Beyond patient engagement, artificial intelligence is the next hot area in digital health investing. Much like pop-health before it, this area needs more time to develop, create distinctions through operational frameworks, and create specialized companies before it can come into its own and be ready to generate high, growing value. KLAS’ research into the realities of existing AI implementations in health systems today reveals that only basic processes, such as machine learning and natural language processing, are being leveraged. More details on the current landscape of healthcare AI can be found in the Healthcare AI 2019 report.

Moving into 2020

Looking forward into 2020 (and beyond) potentially sees calmer, more stable waters. Investors can make calculated, strategic, and smart plays where the recent past only allowed for reactionary, rushed plays. We can look forward to a season of strategic mergers and acquisitions. The potential of digital health investing in 2020 will be unlocked by those leveraging calmer waters.

     Photo cred: Adobe Stock, janossygergely