Caveat Digemptor: Where would you invest in digital health?

Digital health technologies, those that apply information and communications technologies to improve care outcomes, reduce per capita costs and improve the patient and doctor experience, continue to hit the market with breakneck speed.

In 2018 alone, ten companies have inked mega-deals of more than $100 million including chronic disease management company Livongo , workforce healthcare management company Collective Health , Chicago-based data company Tempus and mobile ultrasound company Butterfly Network .

Far and away the largest deal was the $550 million capital infusion into exercise equipment and workout class company Peloton, which was led by TCV.

Part of the escalation in funding can also be attributed to the increasing prominence of corporate venture capital arms in digital health, especially in later stage rounds.

Fast forward to now , coming off of 2021’s breakthrough year in digital health funding, it’s already clear 2022 has its own story to tell. Supply chain and energy disruptions, market corrections , and the Russian invasion of Ukraine are new variables entering public and venture funding equations—changing the calculus for startups and investors who extrapolated a path based on sector activity in 2021.

After a wild ride in the past two years, digital health startups are adjusting to a new reality faced with difficult economic changes and investor pullback.

Digital health startups pulled in $15.3 billion in funding dollars across 572 deals last year. While still a hefty number, that $15.3 billion is?just over half of 2021's blockbuster $29.3 billion. And, digital health funding in 2022 barely sneaked past 2020's total of $14.7 billion,?according to a 2022 funding report from Rock Health, a venture fund dedicated to digital health.

However, we are reaching a point where investors are wringing out the hype and looking for sustainable models based on valid technical, commercial, and clinical validity.

Here are some lessons learned by sick care investors. One is that, in the end, the only thing that really matters is creating patient defined value.

Major categories include wearables and biosensing, analytics and big data, patient engagement, telemedicine, employee wellness, EHR and workflow.

It can be hard to keep up with all the latest digital health technologies nowadays, but a new report breaks them down into eight categories.

Here are those classifications, according to the Digital Therapeutics Alliance trade group and consulting firm Health Advances:

Healthcare provider-facing

1. Health system clinical software

Industry and admin-facing

2. Health system operational software

3. Non-health system software/digital health solutions

Patient-facing

4. Care support

5. Digital diagnostics

6. Digital therapeutics

7. Health and wellness

8. Patient monitoring

Digital health products are a broad category of technologies that use health and technology to improve health outcomes. They can be categorized into several types, including:

• Digital medicine: Tools that support medical practices, such as measurement, treatment, prevention, and health promotion.
• Digital therapeutics (DTx): Software applications that help patients treat, prevent, or manage diseases.
• Mobile health (mHealth): Mobile medical apps and software that support clinical decisions.
• Wearable devices: Patient-facing devices that can be used for remote sensing.
• Telehealth and telemedicine: Tools that allow for remote healthcare.
• Health information technology (IT): Software that can analyze patient records to identify inconsistencies and potential medication errors.
• Predictive modeling: Tools that can help hospitals and clinics predict admission rates and improve staff scheduling.
• General wellness products: Products that are not intended for a medical purpose.
• Software as a Medical Device::Software as a medical device or SaMD is “software intended for one or more medical purposes that perform those purposes without being part of a hardware medical device,” as defined by the International Medical Device Regulators Forum (IMDRF).
• FDA defines SaMD as “Software that meets the definition of a device in 181 section 201(h) of the FD&C Act and is intended to be used for one or more medical purposes without being part of a hardware device.

Here's how I slice and dice the industry:

1. Remote sensing and wearables

2. Telemedicine

3. Data analytics and intelligence, predictive modeling

4. Health and wellness behavior modification tools

5. Bioinformatics tools (-omics)

6. Medical social media

7. Digitized health record platforms

8. Patient -physician patient portals and consumer experience

9. DIY diagnostics, compliance and treatments

10. Decision support systems

11. Population health

12. Workflow improvement

If you are thinking about investing in the digital health industry, keep a few?things in mind:

1. There is a difference between an industry and a market. Those companies that provide products and services comprise the industry. The customers who use those products and are looking for ways to get a particular job done are the market.

2. Like all investors, digital health investors are looking for the highest rate of return with the least amount of risk. Given the foggy legal, regulatory and reimbursement atmosphere, it's too early to tell which dogs will eat the food.

3. Most digital health technologies have not been clinically validated.

4. The FDA continues to offer periodic guidance documents and regulations that contributes to a level of uncertainty that makes the hair stand up on the back of investor's necks. Plus, other regulatory agencies, like the FTC and the Consumer Product Safety Commission, have started poking their noses under the tent.

5. Given the multiple stakeholders in healthcare, like payers, providers, patients, partners and others, it's hard to target any one customer. Several need to see the value for any given product or service.

6. The industry is too new and there is too little research to know which customers/[patients/stakeholders will adopt a product and why.

7. Scale trumps innovation. The single most important characteristic of those companies that have received substantial follow-on investments are those that have scaled their customer rate rapidly by at least 70% a year.

8. Doctors don't have the information they need to know whether to prescribe or use a given digital health technology. In many instances, they have too much data and not enough actionable information.

9. Most doctors don't get paid to use digital health technologies, they disrupt workflow and there are nagging behavioral and emotional barriers to adoption by both patients and their families and their doctors.

10. There are significant confidentiality, security and data privacy issues still lurking.

Fitbit went public and was valued at $4.1B . But, they face competition from Apple and other mobile platforms.

Here is a due diligence check list for digital health products and services

We are moving down the digital health hype cycle curve.

Some investors think they have the secret sauce. Others just rely on AI to tell them where to invest. Some use a Vanguard index-fund like strategy figuring, like stock pickers, they can't consistently beat the market.

Investors are now red-flagging AI, virtual reality and direct to patient apps for good reason. It seems they are on the down side of the hype cycle.

Here's how to evaluate an app.

Here is what companies need to know before investing in AI.

Digital health is the new new thing. Like all new things, it is surrounded by hype and hope. Whether digital health can achieve its goals or is just another tech bubble remains to be seen. Digital health investors need to do their due diligence with both eyes open and their wallets closed until their risk hurdles are met. Caveat Digemptor.

Arlen Meyers, MD, MBA is The President and CEO of the Society of Physician Entrepreneurs on Substack