In spite of predictions that digital health funding would slow in 2019, the industry is on track for yet another record-shattering year of funding, according to the latest Rock Health report. Now at the midway point, 2019 has seen a total of $4.2 billion dollars of digital health investment dollars by the agency's count. 

“If this pace holds steady, the sector is on track for an $8.4 billion year in 2019 — and may even top 2018’s record-breaking annual funding total,” Sean Day, a researcher at Rock Health, wrote in the report. “As in 2018, a handful of $100M+ mega deals are driving the overall trend.”

While the industry continues to balloon, over the last eight years few companies have paid out their investors. Rock Health researchers conducted a deep dive into digital health investments from 2011 until July 1 of 2019. Rock Health measured a new concept, it has dubbed net liquidity overhang, which looks at what money is left over after the investment capital has been returned to investors in an exit. Here, they found that 81% of investments since 2011 are still awaiting liquidity. 

The M&A route continues to be the most popular exit for digital health companies in recent years. The industry has seen 43 M&As so far this year, which is less than typical according to the report. If this trend continues this year will be on track to have 25% fewer acquisitions than last year.

However, Rock Health predicts that more non-healthcare companies will be buying digital health startups in the future. 

“We expect other categories of acquirers to become more active in the coming years," the researchers wrote. "As more non-healthcare organizations enter the healthcare industry, their strategies include buying external innovation in addition to building it internally. Technology companies and other non-healthcare companies are consistently the second and third most active acquirers, respectively, in our Digital Health M&A Database."

IPOs continue to be a rather rare occurrence in the digital health space. To date, slightly more has been invested in digital health companies that shut down than invested in companies that went public, according to Day. 

However, this year is set to see a slew of new IPO exits. So far Livongo, Health Catalyst, Change Healthcare, Phreesia and Peloton have all been on deck to go public, which would break the three-year period without an IPO, according to the report. 

WHY IT MATTERS

Over the last decade the digital health industry has continued to grow both in reputation and in funding. While the report's accounting of continued growth sticks to the pattern, it also adds more nuance into the ongoing debate over whether digital health at large is caught in a bubble.

THE LARGER TREND

2018 also set a record in digital health funding, with $8.1 billion. However, at the end of last year Rock Health released a report predicting that 2019 would lessen its pace.

“With the surge in funding, and absence of an equally robust exit market, there is more scrutiny on digital health than ever before, begging the question: will value creation track with recent investment trends?” the authors of the January report wrote. “Given that over $30 billion in venture dollars have been invested in digital health since 2011, and assuming investors expect an approximate 4X return over 10 years, the market should grow to $120 billion in the next 4 to 6 years. That is a pretty large number, but with a $3.5 trillion healthcare market, this magnitude of return is conceivable. However, with today’s high but as-yet-unrealized expectations, we aren’t surprised to see the b-word increasingly pop up in conversations.”

Correction: This article has been updating to accurately reflect the term net liquidity overhang.