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DIGITAL HEALTH FUNDING 2023: AN ECOSYSTEM AT A CRUCIAL TURNING POINT
Galen Growth on January 8, 2024
DIGITAL HEALTH TRENDS UNVEILED IN 2023
At the midpoint of the year, Galen Growth anticipated a continued upheaval and
challenges in Digital Health, foreseeing a continued contraction in venture
capital funding that would reshape the industry landscape. This ongoing
transformation of the Digital Health ecosystem is characterized by
consolidation, heightened scrutiny, and a notable shift in investment dynamics.
In our anticipated year-end briefing, Galen Growth offers an exclusive preview
of the highly awaited 2023 Year End Digital Health Global Key Trends report—a
fundamental resource eagerly anticipated by industry leaders, investors, and
innovators. This comprehensive annual edition, scheduled for release on January
16, 2024, stands as the definitive guide to the evolving Digital Health
landscape. Renowned for its in-depth analysis, this report leverages the
unparalleled capabilities of HealthTech Alpha, the world’s leading Digital
Health data, intelligence, and insights platform, ensuring comprehensive
coverage curated by Galen Growth’s specialized Digital Health team.
EVOLUTION OF DIGITAL HEALTH INVESTMENT
As the landscape of Digital Health rapidly evolves, a significant shift is
evident, moving the sector from an era of inflated expectations to a more
realistic perspective post the exuberance of 2021. Having over a decade to
mature, the Digital Health sector has expanded, housing more than 10,000 private
entities, each showcasing varying degrees of innovation and potential.
Healthcare value chain challenges play a pivotal role in reshaping Digital
Health priorities. This transformation fuels increased commitments from
pharmaceutical companies, directing greater investment towards Digital Health
innovation in their research efforts. Concurrently, health systems intensify
their focus on harnessing Digital Health innovation to enhance healthcare
delivery, effectively tackling mounting capacity and productivity challenges.
CHALLENGES IN SECURING FUNDING FOR DIGITAL HEALTH VENTURES
Despite the thriving ecosystem, the Digital Health sector grapples with
formidable funding challenges. Recent data paints a stark picture: less than 35%
of Digital Health ventures secured funding in the past 18 months, indicating a
substantial decline in investor largesse.
The pace of mergers and acquisitions (M&A) has notably decelerated, while
initial public offerings (IPOs) and Special Purpose Acquisition Companies
(SPACs) activities remain scarce. Particularly in Europe, the absence of
recorded IPOs underscores the subdued state of the industry.
The sector’s narrative is punctuated by high-profile closures, exemplified by
Pear Therapeutics (United States), Olive.ai (United States), and Babylon (United
Kingdom). Despite substantial funding and lofty valuations, these entities
faltered due to unrealistic growth assumptions, signalling the potential for
similar shutdowns during 2024.
GenAI or Generative AI, has emerged as a central focus for Digital Health
innovators in 2023. Its prominence in biopharma and health systems partnerships
with Digital Health ventures underlines its status as the most captivating topic
in Digital Health innovation, garnering attention from industry stakeholders,
investors, innovators, and media.
ADAPTING TO FUNDING DECREASES IN DIGITAL HEALTH
The Digital Health sector has undergone a substantial shift in funding dynamics,
departing from previous years’ inflated expectations towards a phase emphasizing
practical solutions. This transition from hype to reality over the past two
years has resulted in a significant plunge in venture funding, dropping to over
$22 billion – a staggering 37% decline year-on-year from 2022. This decline
reflects a global trend reduced investor interest across all regions.
Navigating the current landscape proves increasingly challenging for Digital
Health ventures with a significant portion facing critical funding shortages.
Alarmingly, only 31% of Early-Stage ventures, 34% of Growth-Stage ventures, and
53% of Late-Stage ventures secured funding within the past 18-month or standard
runway period. This funding gap has led many ecosystem players to grapple with
implementing cost-cutting measures or reassessing their business models.
Funding Strength in Digital Health 2023
INVESTOR ENGAGEMENT AND REGULATORY TRENDS IN DIGITAL HEALTH
EXIT TRANSACTIONS IN 2023
Compared to the peak year of 2021, exit transactions in the Digital Health
sector—encompassing Mergers and Acquisitions (M&A), Initial Public Offerings
(IPOs), and Special Purpose Acquisition Company (SPAC) activities— experienced a
14% decrease in volume throughout 2023. Notably, venture-to-venture acquisitions
dominated M&A activities in the sector during this period.
DECLINE IN INVESTOR ENGAGEMENT
Investor engagement within the Digital Health domain also declined, witnessing a
28% reduction in unique investor participation in 2023 compared to the previous
year. Despite the cumulative count of over 9,000 unique investors between 2019
and 2023, a mere 4% consistently participated in funding rounds across all
periods surveyed.
GLOBAL REGULATORY FILINGS
Global regulatory filings for Digital Health ventures sustained a downward
trajectory for the second consecutive year, plummeting by 48% year-on-year.
While North American ventures accounted for the largest share of these filings
at 43%, this decline indicates a global trend in regulatory engagement within
the sector.
RISING PARTNERSHIPS WITH HEALTH SYSTEMS
Despite these challenges, health systems, including private clinics and
hospitals, emerged as pivotal partners for Digital Health ventures.
Announcements of new partnerships in 2023 surged by 1.2 times compared to the
previous year. Globally, the total number of partnerships disclosed by Digital
Health ventures globally witnessed a 3% year-on-year increase, signalling
incumbants’ confidence despite challenges stemming from the geopolitical and
economic environment.
TECHNOLOGY INTEGRATION DRIVING DIGITAL HEALTH PARTNERSHIPS
Technological integration remains a cornerstone, with 39% of private Digital
Health ventures leveraging Artificial Intelligence (AI) or Generative AI
technologies. Among these ventures, 43% focus primarily on Medical Diagnostics
or Patient Solutions. Remarkably, within the Medical Diagnostics Cluster, only
3% currently incorporate GenAI technology.
Regarding funding distribution, the Research Solutions cluster claimed 20% of
the total funding by value deployed in 2023, despite a 28% year-on-year decline.
Mega Deals (>$100M) propelled this cluster’s prominence, with the top 5 funded
clusters representing 62% of the total investment in 2023.
Moreover, the announcement of Galen Growth’s annual HealthTech 250 highlighted
the most promising Early-Stage Digital Health Ventures in 2023, spanning across
various regions globally, including North and South America, Asia Pacific,
Europe, the Middle East, and Africa. These ventures represent a diverse spectrum
driving innovation in Digital Health on a global scale.
As the Digital Health sector confronts these challenges, its resilience and
adaptability will be tested in fostering sustainable growth amidst fluctuating
funding trends and evolving regulatory landscapes.
OUTLOOK FOR 2024: CHALLENGES AND OPPORTUNITIES
The forecast for the Digital Health landscape in the initial half of 2024 echoes
the trends observed in the previous year, navigating geopolitical uncertainties.
The imminent US presidential election adds another layer of complexity to the
industry’s narrative, indicating a year of continued volatility. Nevertheless,
optimism emerges for the latter half of 2024, potentially marking a pivotal
turning point for the sector.
Amidst persistent unpredictability, the industry is steadfastly moving towards
heightened resilience and innovation. Gradually, regulatory frameworks and
reimbursement structures are evolving due to a health system crisis exacerbated
by the slow adoption of Digital Health innovations among Healthcare Providers.
The resulting pressure from payors to establish Digital Health reimbursement
frameworks, exemplified by initiatives like DiGA in Germany and PECAN in France,
signifies the industry’s evolving landscape.
DIGITAL HEALTH VENTURE SUSTAINABILITY
Digital Health ventures face imminent funding challenges, leading to lower
valuations. Emphasis shifts toward profitability pathways, highlighting the need
for robust proof points like clinical evidence. This setting sets the stage for
continued consolidation, marked by M&A activities and business closures.
The focus must now also turn towards constructing Digital Health platforms
offering comprehensive solutions, seamless interoperability, and enhanced value
compared to fragmented solutions. Biopharma is anticipated to intensify its
Digital Health innovation efforts in drug Research and Development, driven by
significant patent cliff and pipeline shortages.
GLOBAL HEALTHCARE CHALLENGES AND INNOVATION
The challenging scenario in the United Kingdom, where the NHS waitlist surpasses
8 million people, representing over 12% of the population, forcing more than 40%
of UK citizens to self-diagnosis driven by their limited healthcare access. This
situation mirrors challenges seen in health systems globally, emphasizing the
pressing need for transformative healthcare solutions. Health systems must
prioritize Digital Health innovation to enhance capacity, productivity, and
address rising demand, labour shortages, and escalating costs.
Investors grapple with a constrained investment value chain, experiencing
reduced exits and scare IPO opportunities and navigating these stormy seas for
improved returns in an extended higher cost of capital environment. Current
valuations, not yet at their lowest, significantly influence follow-on rounds
and multiples on invested capital (MOIC). The venture capital landscape, which
was flooded with new entrants due to easy access to capital, now foresees an
inevitable consolidation. However, this reshaping presents an opportunity to
transition from short-term, exit-oriented strategies toward sustainable
venture-building approaches.
CONCLUSION: NAVIGATING DIGITAL HEALTH CHALLENGES
Despite multifaceted challenges, 2024 offers promise for perceptive investor
organizations and forward-thinking entities within the Digital Health sector.
In essence, the Digital Health ecosystem faces a critical phase entering 2024.
It will need to recalibrate amidst funding obstacles and significant setbacks
while focusing on addressing fundamental healthcare challenges. The industry’s
resilience and adaptability will undergo scrutiny as it transitions from
hype-driven trends to practical innovation, laying the groundwork for a dynamic
and potentially transformative future.
_____________________
This article provides a quick preview of our comprehensive analysis, timely for
the many busy professionals gearing up for JPM 2024. Our complete report, a
staple of our unbiased approach, spanning over 70 pages, meticulously curated
with data, tables, charts, and expert narratives.
Subscribe to Galen Growth for access to the ultimate analysis covering Digital
Health activities and advancements over the past 12 months.
Explore our broad collection of unrivalled thematic reports, all powered by
HealthTech Alpha, the foremost global platform for Digital Health data,
intelligence, and insights. Anticipate our upcoming comprehensive report,
delving deeper into the trends shaping the Digital Health landscape and offering
invaluable insights into the industry’s evolution.
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POPULAR POSTS
* DIGITAL HEALTH FUNDING 2023: AN ECOSYSTEM AT A CRUCIAL TURNING POINT
January 8, 2024
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December 7, 2023
* DIGITAL HEALTH INNOVATION FOR CARDIOVASCULAR DISEASES: A ROUNDTABLE
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* DIGITAL HEALTH INNOVATION IN CARDIOVASCULAR DISEASES: INSIGHTS FROM EUROPE
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