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Public digital health companies have undergone a considerable decline since reaching all-time highs in early 2021. The sector is currently trading off nearly 70%, which has led to an erosion of approximately $100bn in market value. Valuations across digital health have compressed from a 15x forward revenue multiple at the peak to ~3x today. The shape of the decline nearly mirrors the contraction experienced by the tech industry as measured by the NASDAQ after the dot com bubble burst of the early 2000s. There are several similarities:
The digital health industry’s recent downturn has closely mirrored the post-dot com tech industry performance with digital health stocks dropping nearly 70% from all-time highs in February 2021, while valuations have compressed to ~3x forward revenue (from ~15x at the peak).
Teladoc, the bellwether of the sector, experienced a stock price decline of over 90% from a peak over $300 in Feb ’21 to under $30 in May. Just when investors were deeming it safe to ease back into the stock, Q2 earnings announcement resulted in a ~20% decline.
When comparing to the post-dot com era, the sixteen months of time that has elapsed following the digital health market peak suggests that the public market malaise could persist for the next several months, extending well into 2023.
Companies today are pursuing other financing alternatives, including venture debt and insider rounds such as Ro’s $150 million financing in February and Everside’s $164 million financing in July.
And yet, despite the headwinds, many prominent financings have occurred in recent months, including:
The expanding base of investors and companies participating in the sector in recent years has created a growing backlog of stakeholders that will be seeking both incremental capital and liquidity in the months and years ahead. This increased competition will likely result in a concentration of deals with the top tier issuers. However, all issuers will experience a more tempered valuation environment in the near-term.
We expect an increase in structured transactions and rare all-equity mergers of private companies. Notable examples of the latter include:
As boards consider more tempered valuation expectations for the sector and the availability of public capital remains moderated in the near- to medium-term period, companies could be forced to consider take-private and sale transactions as they seek the additional funding and the reduced scrutiny of the private markets.
In conclusion, despite the current challenging public market environment, the digital health sector remains highly linked to some of the most powerful megatrends of any industry:
As a result, the sector continues to be ultimately well-positioned for outsized growth and expansion in the years ahead. An important fact to remember about the dot com bubble – the internet did not go away. The period of exuberance in the late ‘90s set the stage for innovation that defined the first two decades of this millennium. Notably for the brave, investment vintages of 2003 and 2004 in the two years following the trough are the highest on record for private internet investment returns. Further, prominent names like Google, Facebook, Salesforce and Netflix all debuted in the public markets after 2000.
It is no wonder then that digital health investors have been able to raise record amounts in 2022 even during this downturn including Oak HC/FT’s nearly $2 billion fund, NEA’s reported $7 billion in new funds, and Andreesen Horowitz’s $9 billion in new funds. The future for innovation in healthcare remains bright.
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This information (including, but not limited to, prices, quotes, and statistics) has been obtained from sources that we believe reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All information is subject to change without notice, and the information and any opinions contained herein are as of the date of this material and the Firm does not undertake any obligation to update them. The information is not an offer to sell or a solicitation to buy any product to which this information relates. Leerink Partners LLC (“Firm”), its officers, directors, employees, proprietary accounts, and affiliates may have a position, long or short, in the securities referred to in this report, and/or other related securities, and from time to time may increase or decrease the position or express a view that is contrary to that contained in this piece. The Firm’s research analysts, bankers, salespeople, and traders may provide oral or written market commentary or trading strategies that are contrary to opinions expressed, and the Firm’s market making desk may make investment decisions that are inconsistent with the opinions expressed in this document. The past performance of securities does not guarantee or predict future performance. This material does not take into account individual circumstances, objectives, or needs and is not intended as a recommendation to any particular person(s). As such, the financial instruments discussed herein may not be suitable for all investors, and investors must make their own investment decisions based upon their specific investment objectives and financial situation. This material is a marketing communication and is not and should not be construed as investment research or a research report prepared by a research analyst. Any views portrayed in this material may differ from those of the research department of Leerink Partners LLC. All information contained herein is intended solely for your own personal, informational use, and you are not permitted to reproduce, retransmit, disseminate, sell, license, distribute, republish, broadcast, post, circulate or commercially exploit the information in any manner or media without the express written consent of Leerink Partners LLC, or to use the information for any unlawful purpose. Additional information is available upon request by contacting the Editorial Department, Leerink Partners LLC, 53 State Street, 40th Floor, Boston, MA 02109. MEDACorp LLC (MEDACorp), an affiliate of Leerink Partners LLC, is a global network of independent healthcare professionals (Key Opinion Leaders and consultants) providing industry and market insights to Leerink Partners and its clients. © 2024 Leerink Partners LLC. All Rights Reserved. Member FINRA/SIPC.
This information (including, but not limited to, prices, quotes, and statistics) has been obtained from sources that we believe reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All information is subject to change without notice, and the information and any opinions contained herein are as of the date of this material and the Firm does not undertake any obligation to update them. The information is not an offer to sell or a solicitation to buy any product to which this information relates. Leerink Partners LLC (“Firm”), its officers, directors, employees, proprietary accounts, and affiliates may have a position, long or short, in the securities referred to in this report, and/or other related securities, and from time to time may increase or decrease the position or express a view that is contrary to that contained in this piece. The Firm’s research analysts, bankers, salespeople, and traders may provide oral or written market commentary or trading strategies that are contrary to opinions expressed, and the Firm’s market making desk may make investment decisions that are inconsistent with the opinions expressed in this document. The past performance of securities does not guarantee or predict future performance. This material does not take into account individual circumstances, objectives, or needs and is not intended as a recommendation to any particular person(s). As such, the financial instruments discussed herein may not be suitable for all investors, and investors must make their own investment decisions based upon their specific investment objectives and financial situation. This material is a marketing communication and is not and should not be construed as investment research or a research report prepared by a research analyst. Any views portrayed in this material may differ from those of the research department of Leerink Partners LLC. All information contained herein is intended solely for your own personal, informational use, and you are not permitted to reproduce, retransmit, disseminate, sell, license, distribute, republish, broadcast, post, circulate or commercially exploit the information in any manner or media without the express written consent of Leerink Partners LLC, or to use the information for any unlawful purpose. Additional information is available upon request by contacting the Editorial Department, Leerink Partners LLC, 53 State Street, 40th Floor, Boston, MA 02109. MEDACorp LLC (MEDACorp), an affiliate of Leerink Partners LLC, is a global network of independent healthcare professionals (Key Opinion Leaders and consultants) providing industry and market insights to Leerink Partners and its clients. © 2024 Leerink Partners LLC. All Rights Reserved. Member FINRA/SIPC.