In a Maturing Digital Health Market, Players Must Adapt Their Game Plan

HOW DID WE GET HERE?

Following the meteoric rise in demand for digital healthcare offerings, developers and vendors found themselves in a market full of opportunities to launch and grow their ideas.  

"Startups were able to raise at very high valuations, and it was a founder-friendly market," said Adriana Krasniansky, Rock Health's head of research, in an interview. "Meaning that founders did not have a difficult time finding investors for their businesses, and investors from all different types of industries, including those that weren't particularly experts in digital health or healthcare, made investments. So, it was a very crowded, generalist, exciting moment in digital health."

But much has changed since that heyday of digital health deals. According to Krasniansky, in 2023, the digital health landscape is being driven by a smaller subset of active investors, many of whom are repeat investors knowledgeable in the market,

"And why this is important is [because] it takes away some of that non-discretion in terms of investments. Now, you have investors who have a very smart thesis or perspective on the space, and they have a very clear ability to separate what they consider as signal from noise," she said.

Larry Cohen, CEO of Health2047, an innovation firm backed by the American Medical Association, also emphasized that investors appear to be looking for demonstrated value as the market matures.

"Let's say you were trained in computer science, AI [artificial intelligence], machine learning, whatever it is, and you come up with an idea that you think is going to have an impact on healthcare," he said. "You need to demonstrate that, right? You need to put the simplest embodiment of your invention [out] into the market to really demonstrate what we call customer-product fit. Is it something that really solves the problem that the customer is facing? Are they willing to pay for [it], and does it have the right components?"

In other words, investors are now looking more closely at the overarching value of technologies launched during the pandemic. In doing so, they are examining where these technologies fit in as patients signal an enduring preference for in-person care.

According to Erin Ney, MD, an expert partner at Bain & Company's healthcare practice, the market remains crowded even as patient preferences evolve, further putting the burden on digital health companies to show the impact of their offerings on outcomes and cost.

"All of the buyers want to see demonstrated results and a return on investment," she said. "And many companies just didn't have that yet."  

WHAT DOES IT MEAN FOR DIGITAL HEALTH STAKEHOLDERS?

The evolving digital healthcare market has put the onus on companies to adjust their strategic plan accordingly.

As digital health players determine the adjustments needed to scale, they need to consider the unique patient needs that drive sustained engagement with technology. Bain's Ney noted that patient engagement is tricky, making it essential for companies to assess the target population and develop focused engagement strategies.

She also cautioned that a one-size-fits-all approach may not work in healthcare.

"Those companies that tend to go too big too fast are often missing the point that healthcare is local," Ney said. "And so there are going to be local market dynamics and variations in the payer, provider, and employer dynamics, and you really have to understand those and take a really thoughtful approach to scaling."

According to Health2047's Cohen, the tendency to scale too quickly has led to recent struggles in the digital healthcare landscape. For instance, he believes Pear Therapeutics, a once-lauded digital therapeutics provider that went belly-up earlier this year, tried to grow too fast.

"They didn't realize, even with [Food and Drug Administration] approval, how difficult it was to convince the payers, the providers, the physicians, and the patients that this was a viable approach," Cohen said. "They underestimated how difficult it was to turn the big battleship of healthcare around. And rather than focus on really understanding the forces that would drive adoption for a completely novel therapeutic approach like that, they branched out into other indications."

Founded in 2013, Pear Therapeutics provided prescription software-based therapeutics for substance use disorder, opioid use disorder, and chronic insomnia. The company, which went public through a special purpose acquisition company deal in 2021, had received Food and Drug Administration approval for all its products.

But, on April 7, Pear Therapeutics voluntarily filed for protection under Chapter 11 of the US Bankruptcy Code, planning to pursue a sale of the business or its assets. Its CEO claimed insurance denials and market conditions drove the company to bankruptcy. A court filing in May showed that Click Therapeutics, Inc., Harvest Bio LLC, Nox Health Group, Inc., and WELT Corp. Ltd. bought the company's assets.

Similarly, Babylon Health, a digital health start-up offering an AI-driven, virtual-first primary care service, recently filed for bankruptcy and sold a large portion of its assets to eMed Healthcare UK. Headquartered in the United Kingdom, the company had contracted with the National Health Service. It had also entered the United States market and was working with the government of Rwanda. It went public in 2021 through a combination with a SPAC.

Babylon, like Pear, was too aggressive in the market, and "in both of those cases, it's likely they got ahead of themselves," Cohen said.

In moving too fast, some digital health companies may not have fully understood the complexity of the healthcare system and, thus, not accounted for the shortcomings of their point solutions in the vast healthcare landscape.

"They oversimplify or perhaps try to duplicate technology advances in other areas that are perhaps much simpler or much more monolithic or have fewer stakeholders, or [where] the data is linear, which healthcare data is not," he said.

As they scale, Cohen added, digital health companies must ensure that user concerns among all participants in the market — patients, providers, and other stakeholders — are supported.

In light of the potential for missteps and the not-so-founder-friendly market, Rock Health's Krasniansky stated that some companies may have to rethink their sky-high valuations.  

The spike in funding and large IPOs of the early pandemic years resulted in outsized expectations for the trajectory of various publicly traded digital health players. For privately held companies, too, there are high expectations of their trajectory based on the valuation at which they raised funding.

"Some of the companies that raised funding in 2021 now have valuations that feel unsustainable in this more conservative market," she said. "And so, they're not able to raise subsequent rounds as easily or quickly without having hard conversations about valuation adjustments."

Another hurdle facing digital health companies in this market is gaining commercial traction. While product innovation in digital health is ongoing, there is still no well-established reimbursement pathway.

"This is particularly relevant to companies like Pear Therapeutics that develop new IT, have a team of really incredible and smart thinkers, but just have challenges finding the right commercial pathways to hit their revenue and margin targets for their investors, even with really interesting products," Krasniansky said.

But this is where the increasingly investor-led market may prove to be a boon. With more digital health-savvy investors, companies may be able to connect with seasoned investors who have relationships within and outside of the market, according to Krasniansky.

These investors can "open doors for their portfolio companies…that's not necessarily a bad thing for the general sector or for founders," she said.

Regardless of the strategic pivots digital health players consider as they plan their next move, the overarching focus must remain on those seeking healthcare.

Bain's Ney emphasized that even in the era of 'digital-first,' healthcare requires a human touch, so ridding the patient care journey of human connection could be detrimental to digital health efforts. 

"In healthcare, there are lots of complex, emotional moments when actually human-first but digital-supported is the approach," she said. "And as a former practicing physician, I think that piece is really, really important, and it's easy to lose sight of in the hype about the promise of digital."