National Cancer Institute and Unsplash image representing digital health
[Image from National Cancer Institute/Unsplash]

Rock Health analysts say the third quarter of 2022 brought low funding numbers that raise questions about the condition of the digital health market.

The report tallies digital health funding at $2.2 billion across 125 deals in the third quarter. This represents the smallest funding quarter in the sector for all of 2022.

On top of that, it’s the lowest quarter by dollars raised in digital health since the fourth quarter of 2019 ($2.1 billion).  Overall funding took a freefall, dropping 48% between the second and third quarters.

Researcher Mihir Somaiya led the report with help from Adriana Krasniansky, Megan Zweig and Bill Evans. According to the researchers, 2022 year-to-date funding totals $12.6 billion across 458 deals. They now have doubts that the 2022 total can reach half of last year’s spoils of $29.2 billion.

There have been some big digital health deal announcements, though. Amazon made a $4 billion acquisition of One Medical, then CVS agreed to buy Signify Health for $8 billion. Despite the expensive activity, analysts say investors are wary of the market and waiting for stabilization.

The Rock Health report noted four key themes ahead of the final three months of 2022. Those are: smaller investments, focus on early-stage funding, reprioritization of technology investments and a thawing exit market. They say digital health funding enthusiasm took a hit on the back of macroeconomic struggles. We’ve seen those over the course of the last year, with inflation, interest rates, supply chains and more affecting medtech.

Rock Health said only six funding raises of Series C or higher came in during the third quarter. This accounted for less than 5% of the quarter’s total volume, they noted. The second quarter saw 19 Series C or higher raises, while 32 took place in the first quarter. Just two digital health raises totaled $100 million or more.

The report claims a portion of “missing deals” already happened, having been pulled into 2021 to take advantage of last year’s “funding-friendly climate.” Another set of deals still take place, they say, but behind closed doors through round extensions and venture debt. The analysts say a final portion of deals simply aren’t taking place.

“Revenue penalty” could represent one potential reason for the performance issues, namely with digital therapeutics companies. Despite the industry seemingly heating up over the last year or two, some investors remained concerned with the ability to drive recurring revenue, Rock Health says.

They pointed to some players in digital therapeutics “feeling stretched thin.” One instance of this came in July when Pear Therapeutics announced layoffs. However, the analysts say market signals “may indicate better days ahead” yet.

Rock Health says rational prices remain, promoting market health in the long term. Because of this, despite apparent struggles in digital health, near-term worries won’t cause problems yet.

“While Q1 and Q2 2022 may have read as adjustment periods coming off of 2021, Q3 represented a clear departure from the COVID-driven digital health financial market, including changed market dynamics, shifts in investor focus to prioritize workflow support and complex diseases, and growing excitement for new technologies and immersive solutions,” the analysts wrote. “We’ll be watching Q4 closely to see which of these trends take hold to shape the market going into 2023. Small ripples can lead to big waves — and we’re curious to see where these directional turns lead.”