Digital health investment, which has historically included a large percentage of behavioral health funding, has plummeted to pre-pandemic levels during the first quarter of 2023.
This comes as the public health emergency’s end also nears, potentially disrupting telehealth allowances and ending flexible controlled substances regulations.
Investors poured roughly $3.4 billion into digital health companies in Q1, according to a new report by San Francisco-based digital health venture capital and advisory firm Rock Health. Comparatively, 2022 ended with $15.3 billion in digital health funding, and 2021 funding totaled $29.3 billion.
Although Rock Health did not specify what percentage of that funding was invested in behavioral health companies, it’s unlikely that the behavioral health funding will catch up with 2022’s grand total of $2.1 billion in funding. It’s even less likely to reach the $4.8 billion raised in 2021.
The average deal size across digital health was also down. Rock Health reports that the average deal size in Q1 was $25.9 million. That’s down from 2022’s average of $26.6 million and 2021’s average of $39.7 million.
Besides reports of Headway closing a $100 million investment, mega deals were almost nonexistent in the digital behavioral health space during Q1.
Still, Rock Health reported that mega deals from Monogram Health ($375 million), ShiftKey ($300 million), Paradigm ($203 million), ShiftMed ($200 million), Gravie ($179 million) and Vytalize Health ($100 million) accounted for 40% of all funding last quarter.
It was more common to see small and mid-range deals in the behavioral health space in Q1. For example, pediatric behavioral health provider Bend Health closed a $32 million round in March. Another notable behavioral health investment last quarter was serious mental illness provider firsthand’s $28 million funding round led by GV, previously Google Ventures.
Rock Health said that regulatory factors could be one of the forces impacting digital health investment. For example, the end of the public health emergency on May 11 means that Ryan Haight Act measures could be reinstated, barring telehealth companies from prescribing schedule II substances remotely.
This could be particularly impactful for digital behavioral health companies with a business model that relies on prescribing medication-assisted treatment (MAT) for opioid use disorder (OUD), and others that prescribe behavioral health medications, such as Adderall and ketamine.
“As we approach the horizon of post-pandemic healthcare regulation, certain digital health startups that relied on COVID-era measures as business catalysts will be forced to adjust their modi operandi,” authors of the Rock Health report wrote. “In response to the DEA’s proposed reinstatements, Cerebral closed its medication-assisted treatment program for opioid use disorder and laid off 15% of its staff, while virtual clinics prescribing ketamine found their operational pathways in limbo.”
In addition to Cerebral, several companies in the controlled substance space have already started to falter. In Q1, Field Trip Health & Wellness, a virtual ketamine and psychedelics provider, announced it is on the market after revealing that it was not solvent. This comes after the company raised two private funding rounds and an IPO that totaled about $96 million.
While there is still a lot of uncertainty around what will happen after the PHE, the DEA has proposed a new rule that would effectively undue controlled substance prescribing via telehealth. This proposal has been met with a substantial amount of pushback. The organization received more than 21,000 submissions during its public comment period, the vast majority opposing the new proposals.
Over the last few years investors have placed bets on digital health companies that prescribe controlled substances including Bicycle Health, Boulder Health and Ophelia.
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