As the world continues to shift and adapt to the ongoing COVID-19 pandemic, the digital health sector has experienced tremendous growth and the momentum has only accelerated in 2021.

According to the Digital Health Funding and M&A 2021 First Half Report released by Mercom Capital, the first half of 2021 closed with $14.7 billion invested across 372 US digital health deals with a $39.6 million average deal size.  Fifty-nine percent of that funding came from 48 “mega deals” that involved over $100 million each, including one of the largest single rounds of investment in digital health history: Noom’s $540M Series F round.  Overall, 359 startups were funded.

Telemedicine and Mental Health

After around a year and a half of the COVID-19 pandemic, it may come as no surprise that telemedicine led funding activity, accounting for almost 30% of the funding raised in the first half of 2021 (roughly $4.2 billion).  For context, the next top-funded digital health categories in the first half of 2012 were Wellness with $1.7 billion, Mobile Health Apps with $1.6 billion, Analytics with $1.5 billion, and Clinical Decision Support with $1.1 billion.

At the same time, however, telemedicine utilization has been falling nationally, according to FAIR Health’s Monthly Telehealth Regional Tracker.  The decline in telehealth utilization appears to be driven by the shift back to in-person visits at hospitals and other healthcare settings.

However, this has not stopped investors. According to Fierce Healthcare, telehealth companies raised funds over 105 deals, a 147% increase in year-over-year compared to $1.7 billion raised in 79 deals.

While telehealth use overall has experienced a reduction, virtual visits for mental health conditions, the number one telehealth diagnosis, have continued to rise nationally and in every region.  According to Fierce Healthcare, mental health claims as a percentage of overall telehealth claim lines have continued to rise.  Likewise, psychotherapeutic/psychiatric codes increased nationally as a percentage of telehealth procedure codes, whereas evaluation and management (E&M) codes decreased.

Not surprisingly, for digital health startups receiving funding in the first half of 2021, the top-funded clinical indication was mental health.  Ranked by amount of funding, the next five top-funded clinical indications were cardiovascular disease, diabetes, primary care, substance use disorder and oncology.

In June, the startup Lyra Health, a provider of mental health benefits for employees, raised $200 million in new funding to raise its valuation to a reported $4.6 billion.

Lyra Health provides evidence-based care to support people across many facets of mental health.  Lyra Health’s blended care therapy pairs video counseling sessions, one-to-one messaging, and digital activities prescribed by the provider to support individuals in their everyday lives.  The treatment model, based on cognitive behavioral therapy principles, provides ongoing support between sessions.

Lyra Health also announced an expanded global strategy, to offer care to people in more than 180 countries with support from more than 85,000 mental health providers.  According to Fierce Healthcare, Lyra Health’s new global mental health digital platform would provide members around the world with one place to access all of Lyra Health’s care options and services, such as preventive care, mental health coaching, therapy and medication.  Lyra Health plans to make the unified platform available in 2022.

“One in five people struggle with mental health challenges such as anxiety, depression, or substance use disorder,” said David Ebersman, Lyra Health CEO and co-founder in a statement. “Delivering mental health care for diverse employee populations around the world is one of the most pressing and complex issues for employers today, and this new funding will help Lyra accelerate our plans to deliver comprehensive global solutions.”

Direct to Consumer Models

The venture fund Rock Health credits the COVID-19 pandemic with changing consumer health behavior, as people have grown more comfortable using different virtual care and wellness products in their own homes.  Some of the largest direct-to-consumer digital health deals from the first half of 2021, including Noom ($540M), Ro ($500M), and Capsule ($300M), signal strong investor confidence in this business model.

Noom, which experienced one of the largest single rounds of investment in digital health history, is a weight-loss app.   “Most people want to eat healthier, exercise more, be less stressed, and get better sleep, but it’s not easy to change these behaviors,” said Saeju Jeong, co-founder and CEO of Noom in a Press Release dated May 25, 2001, announcing Noom’s $540 million Series F funding.   “This strategic round of funding reflects our investors’ confidence in the immense opportunity we have in building a business around helping as many people as possible live healthier lives through behavior change.”

Capsule’s aim is to build a “one-stop-shop” for digital healthcare where consumers can access Capsule’s digital pharmacy along with a curated set of products and services—such as telemedicine or mental health support—all from within a single app, according to company executives speaking to Fierce Healthcare.

Rock Health posits that the main benefits of the direct to consumer approach is that “it allows companies to move upstream in consumer acquisition (marketing to individuals before they enter the healthcare system), meet consumers where they are (outside of a clinical setting), identify people’s most pressing needs … and personalize service for specific use cases, rather than to enterprise clients’ aggregate needs.”  However, with a limited total addressable market (when comparing consumer healthcare spend to enterprise healthcare spend) and high customer acquisition costs, Rock Health notes that such business models are not always conducive to achieving the scale and widespread impact that healthcare innovation can offer.  Additionally, such models often put the full burden of payment for healthcare onto consumers.

IPOs; Mergers and Acquisitions

Aside from funding, the digital health sector also saw 12 initial public offerings in the first half of 2021.  This is the highest number of IPOs in any first half of any year since 2010, and there were no IPOs in the first half of 2020.

This year also has seen a record number of M&A deals with 136 digital health transactions compared to 83 during the same time last year.  In Q2 2021, there were 73 M&A transactions compared to 63 (14 disclosed) in Q1 2021.  As a comparison, there were 42 M&A transactions in Q2 2020.  Practice-focused companies dominated M&A activity in Q2 2021, with 43 of the 73 M&A transactions. Consumer-centric companies recorded 30 of the 73 M&A deals in Q2 2021.

Notable M&A transactions in 2021 so far include: Microsoft’s acquisition of Nuance for $19.7 billion, Datavant’s acquisition of Ciox Health for $7 billion, and Boston Scientific’s acquisition of Preventice Solutions for $925 million.

Future Opportunities and Challenges

As investors pick up the pace and volume of funding, Rock Health suspects that digital health founders are more likely to find themselves navigating an overwhelmingly rich investment landscape. Fifty companies raised multiple rounds in the past 12 months (end of the first half of 2020 to the end of the first half of 2021), double the 25 companies that did so in the 12 months prior (end of the first half of 2010 to the end of the first half of 2020).  Rock Health also advises that founders maintain a healthy sense of valuation and investment cycles, and build a circle of trusted operating and funding partners to inform decisions.

Further, Rock Health noticed that over one quarter of all digital health companies funded in the first half of 2021 were direct-to-consumer-only startups.  This was the largest percentage in Rock Health’s ten-year tracking history, almost two-fold higher than the mid-decade baseline, and five percentage points higher than in 2020.

The immense momentum of 2021 also introduces new risks for investors and entrepreneurs.  Rock Health notes that the “speed and amount of investment will test the marketplace’s current and future capacity to design and deliver digital health solutions, and then scale them into sustainable companies.”

Finally, the immense digital health activity over the past few years may also lead to further consolidation through M&A transactions.  According to Rock Health, digital health companies remain the largest acquirers of other digital health companies, another indication that market consolidation is a driver of at least some of the recent fundraising activity.