What's Going on with Digital Health Stocks?
Digital health has been the subject of much attention from founders and venture investors alike. But how do public market investors feel? The stock performance of publicly traded digital health companies tells a somewhat disappointing tale.
My friends at Bessemer Venture Partners recently released a State of Health Tech 2023 report (I did a Heart of Healthcare podcast episode recap with the authors here). The fact is — publicly traded digital health companies have seen an average share price decline of 28% since 2018, while other indices and legacy healthcare companies have enjoyed growth in share price over the same period. Let’s dive into the report.
The hype cycle
The Bessemer report discusses how the digital health sector has navigated through a predictable "hype cycle" between 2018 and 2023, encompassing three distinct phases: technology and regulation triggers, peak of inflated expectations, and the trough of disillusionment.
The push from technology and regulation
They looked at the trajectory of digital health companies formed primarily in the 2010s, catalyzed by regulatory shifts and the widespread adoption of cloud technology. Their maturity coincided with the last bull market, and the pandemic served as a crucible, both identifying weaknesses in healthcare infrastructure and driving up share prices of these companies. This cohort reached its peak valuation in February 2021. The same year when we saw a record number of digital health IPOs and SPACs.
The fall from grace
After this peak, the digital health sector suffered a dramatic decline, losing an average of 60% in stock value from February 2021 to May 2022. While it might be tempting to single out digital health for this decline, high-growth companies more broadly experienced a comparable drop, indicated by a similar decline in the emerging cloud software index.
Searching for stability
The summer of 2022 and the opening weeks of 2023 have marked a phase of relative stability (although notably, not growth) in digital health stocks. Key drivers include major acquisitions such as Amazon’s $3.9 billion purchase of One Medical and CVS Health’s multi-billion-dollar acquisitions of Signify Health and Oak Street Health. The sector now appears to be in a trough and mirroring the rebound trends observed in other major market indices.
Dissecting sub-sector performance
The BVP report also broke down stock performance over this period by sub-sectors:
Biopharma software-as-a-service (SaaS): -1%
Value-based care (VBC): -34%
B2B2C: -27%
Payer and provider software: -57%
D2C: -68%
When scrutinized through the lens of revenue multiples, Biopharma enjoys the highest valuation multiples, while VBC and D2C are at the bottom.
Venture investors are still optimistic
I think there's two types of bubbles, right?
There's a bad bubble and an okay bubble. The bad bubble is when the valuation of companies is wrong. But also on top of that, the companies fundamentally aren't great. I think of a bad, really bad bubble being the dot com era, right? The version 1.0 over those models, they fundamentally didn't work. They were based on eyeballs. There wasn't really a P&L that would support it. And they were also overvalued.
I think this time in digital health it was just an okay bubble. It was a natural innovation cycle bubble, which is market valuations just got too high. It's not that the businesses fundamentally are bad.
So I actually think there's reason to be hopeful. And then the question is what gets us out of this trough… But I want to state that this is like a bubble, but it's not a horrible bubble.
- Steve Kraus on Heart of Healthcare episode 094
Despite the past turbulence in digital health stocks, there are glimmers of optimism. The digital health sector has generated a public market cap of over $90 billion in the last five years. And companies like Veeva, R1, Nuance, Model N, and Simulations Plus have exhibited significant market cap growth since October 2018.
The overarching narrative is one of a sector still in flux, negotiating the gap between hype and substance, yet offering clear opportunities for patient investors. A reckoning has occurred, but it is not singular to the digital health space; similar recalibrations are being felt in other sectors as well. The pressing questions are less about whether this sector will survive its current phase, but rather which business models will prove most resilient and how the industry can transition into a new phase of "enlightenment."
The challenges faced by publicly traded digital health companies reflect more than just an individual sector’s growing pains—they echo broader market dynamics and evolving investor sentiment. So while it may be tempting to view the sector through a lens of disillusionment, this might be the opportune moment for re-evaluation and strategic investment.
Read the full Bessemer Venture Partner report here.