It has been a rough year so far for digital health. After an astonishing $45 billion poured into new digital health companies in 2020 and 2021, and an early 2021 peak in market valuations of publicly-traded digital health providers, valuations and multiples have collapsed. Once high-flying Teladoc, which traded at an eye-watering 42x revenues and commanded a $45 billion market capitalization, is now trading around 2.7X at about $5.7 billion. AmWell, the next largest telehealth player, has seen its stock drop more 90% from its high.
Nor is the evaporation in market value is confined to just a few highly visible incumbents. The 29 healthtech companies to go public (either via IPO or SPAC) in 2021 were collectively trading 45% lower than their opening day price by the end of the year, according to STAT. Among the privately held firms, re-valuation of digital health is getting underway. Bearish market signals portend a sharp correction in digital health, characterized by brutal price competition, widening (and less tolerated) operating losses, layoffs, and ultimately, widespread consolidation.
However, there is also major pushback from the ‘demand side’ of the digital health equation. With the explosion of digital health players, potential customers are confused and frustrated. There is a fundamental disconnect between the exuberant (and as yet largely unsubstantiated) promises of digital health startups and the needs of the four ‘phenotypes’ of health care customers. How digital health firms respond to those customers’ needs will ultimately determine the shape and size of the digital health market.
Why is the Digital Health Market Correcting?
Let’s start with the supply side. It is not difficult to identify the source of the digital health boom: hyper liquidity in the market fueled by expansive COVID-related fiscal and monetary policy. In the heat of COVID, Congress enacted three enormous stimulus/relief packages in eighteen months. The Federal Reserve also turned deeply dovish, keeping interest rates near zero and embracing epic quantitative easing – pumping $120 billion a month into the economy and expanding its balance sheet by more than $6 trillion. Much of this newly printed cash found its way into the coffers of private investors. Private equity, growth equity, and venture capital collectively raised $733 billion in new capital across 2021. Globally, private equity firms alone invested $151 billion in healthcare in 2021.