Rock Health Head of Consulting Sari Kaganoff appeared on the MM+M (Medical, Marketing + Media) podcast to unpack the numbers and interpret the directional signs behind last year’s frenzied funding environment for digital health. She said 2021 was a big year for digital health, noting that $29.1 billion was raised by venture-backed startups, according to Rock Health data. This is almost twice the prior year and much higher than years before that.
The average deal size increased very notably for series D and above, Kaganoff said. “You’re seeing a lot of money pouring into the later stage companies as they really move and scale,” she explained. As companies raise money, they generally move to acquire other companies and improve their services and gain employees.
The year 2021 saw a shift towards a consumer focus, with mental health maintaining an important role. Kaganoff credits this to unmet need in the mental health space, allowing not only for larger companies to scale but also giving an opportunity for new companies to form and operate addressing diverse populations or issues. There were a fair number of acquisitions of mental health companies in the past year as well. Kaganoff noted a normalization of mental health services, especially during the pandemic: “More recently there’s been an awareness that we do need to take care of our mental health and that’s not something people should be shy of,” she said.
Rock Health recorded an increase in digital health exits in the past year, which is a sign pointing to a maturing of the industry. Kaganoff said she finds it interesting that mergers and acquisitions have begun to take place across company sizes, as large companies acquire smaller ones to bolster their offerings. “Historically, digital health has been an area that has not had a lot of publicly traded companies,” she said. “I think part of this is just timing. It’s time for some of these companies to grow up… Part of it is that the world has awoken in the last two years to this recognition that digital health is a real thing and it’s here to stay.”
Turning towards 2022, Kaganoff said she is expecting that there will continue to be a lot of funding activity in the coming year. She thinks valuations for some companies are a little high currently, which is something she is cautious about. She said she expects to see continued high rates of mergers and acquisitions and a lot of SPAC matchmaking. She expects medium-sized consumer companies with strong brands to move into the digital health space.
“When something is new, finding the right approach and the right partnership model can take time,” she said when discussing the future of M&A in digital health. She pointed out a lot of companies going for a portfolio approach, in which a larger company makes a lot of different partnerships and deals. “I think we’ve gotten to a point where the biopharma industry realizes this is an integral part of how they have to do things going forward,” she stated, noting the relationship between incumbent digital health companies and newcomers. She explained that while there have been a few failures in acquisitions, she doesn’t think that this should be seen as a sign of issues in the digital health market, as companies are still getting their footing when it comes to M&A.
Listen to the full podcast here.