With three quarters of 2022 closed, digital mental health and telehealth’s grip on venture capital investment may be beginning to slip.
That’s indicated by new data and a report released by Rock Health and Flare Capital Partners. The latter shows that overall investment in digital health has chilled out following a red-hot 2021.
“With $2.2 billion raised across 125 deals, Q3 takes the title of the smallest funding quarter in the sector for all of 2022 — in fact, it’s the lowest quarter by dollars raised in digital health since Q4 2019 ($2.1 billion),” the report states. “With Q3 included, 2022 year-to-date funding totals $12.6 billion across 458 deals, raising doubts that this year’s digital health pot will reach even half of last year’s $29.2 billion haul.”
Mental health continues to be the most well-funded clinical indication.
In Q3, digital mental health companies raised about $400 million. That brings the total mental health funding amount to $1.7 billion through nine months of 2022. That is about 82% less than the $3.1 billion garnered in the first three quarters of 2021, according to a previous Rock Health report.
Top funded clinical indications, YTD 2022
| Mental health | $1.7B |
| Oncology | $1.08B |
| Cardiovascular | $900M |
| Diabetes | $900M |
| Reproductive/Maternal Health | $700M |
| Primary Care | $600M |
The latest report finds that investment in complex disease states is growing. The second place indication, digital health companies addressing oncology, raised $946 million through the first three quarters of the year.
Startups harnessing telemedicine, as the report calls it, retained a second-place spot in terms of tech usage ranked by total investment ($1.7 billion), where it has remained since 2015. It is behind nonclinical workflows in the No. 1 spot. Artificial intelligence is especially prominent in workflow investments, the report states.
“[An] oversupplied market, declining yields on direct-to-consumer advertising, virtual prescribing scrutiny, and difficult trajectories of public telemedicine leaders like Teladoc have increased investor skepticism toward telemedicine’s cash crop of virtual care providers, raising only $2B so far this years,” the report states.
The report refers to the Drug Enforcement Administration’s investigation of digital mental health Cerebral Inc. and Done Global Inc. Both companies have faced scrutiny over their handling of prescribing controlled substances for the treatment of ADHD.
The report estimates that telemedicine investment will close the year near $2.7 billion which is just over one-third of the funding raised in 2021. Waning attention to telemedicine is being replaced by “immersive and decentralized health-tech enablers.”
Top funded value propositions, YTD 2022
| Nonclinical workflows | $1.8B |
| On-demand healthcare | $1.7B |
| Research and development | $1.7B |
| Treatment of disease | $1.6B |
| Healthcare marketplace | $1.4B |
| Monitoring of disease | $1.4B |
The digital mental health investment macro-environment
The quarter also saw a slowdown in later-stage investments. The third quarter only saw six funding rounds at Series C or later including digital behavioral health startup Alma’s $130 million Series D, announced in August.
The Alma deal is also notable because of a relative absence of “mega raises.” Rock Health only tracked two digital health deals that totaled $100 million or more. The other was for the cardiovascular health app Cleerly, which raised $223 million at Series C in July.
“By comparison, the quarterly average number of megadeals across 2021 was 22 deals, totaling 88 megadeals through the year,” the report states. “While 2021’s trend of $100M+ raises held somewhat steady throughout Q1 of 2022 (18 megadeals), the pace of megadeal funding started to fall in Q2 (11 megadeals) before nose-diving in Q3.”
The report also notes yet another rocky stock market appearance of a digital mental health company: Akili Interactive (Nasdaq: AKLI), a digital therapeutic focused on cognitive impairment, hit the Nasdaq in August through a special purpose acquisition company (SPAC) merger with Social Capital Suvretta Holdings Corp. I.
The stock hit a high of $37.58 on its public debut on the stock market but closed at $7.15, according to historic share price data from Yahoo Finance. As of Tuesday afternoon, Akili Interactive shares trade at $2.45.
“While Akili might just be suffering the growing pains of entering onto the public market, it’s also worth noting that since the start of 2022, the three publicly traded [digital therapeutics] manufacturers — Better Therapeutics, Pear Therapeutics and Akili — significantly underperformed the Rock Health Digital Health Index (RHDHI),” the report states.
At the beginning of the third quarter, Better Therapeutics’ and Pear Therapeutics’ stock prices averaged $1.52, averaging a 74% drop from their 2022 open prices. This underperformed the RHDHI by 40 percentage points. Including Akili Interactive’s listing raised the average stock price up to $2.02, 28 percentage points below the RHDHI at the end of the third quarter.
The report postulates that the poor stock performance may be tied to a so-called “revenue penalty” which the report defines as a hit that share prices take when there are investors’ concerns over a company’s ability to generate recurring revenue.
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