Digital health IPOs signal thaw, but new success metrics apply

PROVING PROFITABILITY & SUSTAINABILITY

The digital health industry has no shortage of ideas for solving age-old healthcare problems. But today's public market is increasingly interested in sustainability.

We've certainly been really excited to see a bit of the thawing of what I'll call the digital health IPO winter.

"IPO-ing is a milestone, but it's certainly not the finish line," Zweig said. "And so, investors are going to be looking at: what are the growth prospects and profitability prospects longer term?"

She added that Omada Health and Hinge Health were able to demonstrate those prospects, exiting with strong signals for sustainability.

For instance, Hinge Health, which raised $437.3 million alongside its selling shareholders in its IPO in May, achieved profitability before going public and launched a provider network for musculoskeletal (MSK) care. 

Meanwhile, despite not having achieved profitability yet, Omada Health raised $150 million in its IPO. The company also recently launched an AI agent to offer nutrition education, helping members identify challenges like emotional eating and make decisions about nutrition, including GLP-1 use, which, according to Zweig, is gaining traction amid the anti-obesity medication boom.

"It's not just about the profitability metric when you go public, but how are you continuously leveraging things like technology to improve upon margins, and then of course, thinking about new and different types of products and services to keep scaling, keep growing," Zweig noted.

Sunny Kumar, MD, partner at Informed Ventures, echoed Zwieg, noting that achieving profitability is not a hard and fast requirement. However, having a pathway to profitability is.

"You can go public while burning cash, but if you don't have a path to profitability, it becomes much, much harder," he said in an interview. "Now, if you're growing very quickly, that can offset that cash burn. But the best companies are the ones that are growing and profitable. Not every company can manage that, of course, but the ones that do are viewed very, very well in this market."

For some digital health companies, consolidation via mergers and acquisitions will be key to strengthening their profitability prospects, said Adam Besvinick, founder and managing partner of Looking Glass Capital. Digital health companies that consolidate assets can diversify their revenue streams and offer a more compelling growth trajectory.

In addition to diversity in revenue streams, Besvinick emphasized the importance of diversity in purchasing channels. For instance, he singled out employers as a challenging purchasing channel for digital health companies as they are beholden to macroeconomic conditions, which means they may be quick to cut digital health benefits if they don't see a return on investment (ROI) fast enough.

The digital health companies that are having the most success and reaching the greatest degree of scale are not primarily relying on employers. Instead, they are pursuing numerous purchasing channels, including direct-to-consumer or selling through providers, Besvinick said.

The current digital health landscape is also forcing companies to temper their expectations regarding the size of their IPO fundraising and valuations. Kumar pointed out that digital health companies that raised their last venture rounds at the peak of the market in 2021-22 achieved high valuation multiples; however, the multiples that the public market investors were providing were not at that same level.

"Many of the companies in that batch hoped to grow into those multiples, hoped that the public markets would adjust," he said. "But the reality is that that didn't quite happen to that extent. And what you saw was that in order to come into the public markets, in order to IPO successfully, companies like Tempus [AI] and Hinge actually priced well below their last private round valuations. They still had very successful IPOs, but they had to take that bitter pill and accept that adjustment down in valuation."

ADDING THE ALL-IMPORTANT AI ELEMENT

Not only must digital health companies ensure they have a compelling growth story, but that story needs to include AI. With AI becoming a staple in healthcare delivery, digital health companies without an AI-based feature, tool or platform may be at a disadvantage when seeking a public exit.

You can go public while burning cash, but if you don't have a path to profitability, it becomes much, much harder.

"Every one of these companies that I just mentioned -- Tempus, Hinge, Omada -- has an AI element to their story, whether that be on the therapy side or how they're selling their product to their customers," Kumar said.

While AI isn't the core of what they're selling, building a growth narrative that includes AI has provided additional momentum that's allowed them to access the public markets, he continued. The momentum can be attributed, in part, to the high AI adoption rate across the healthcare system, spurred by the drop in AI development costs, especially for AI scribe technology.

Besvinick agreed, adding that investors are less interested in companies that offer features that have been on the market for a few years.

"If an investor feels like they could have backed your company three, four, five-plus years ago – what I'll just call a generic digital health business -- there's not a lot of demand for those companies," he said.

Digital health companies eyeing a public exit in the current landscape need to show that they are aligned with the times and keeping up with innovation.

"If you launched a digital health company pre-ChatGPT, and now you're out raising, you better have a significant amount of revenue to validate why you're raising at some number, or you better have a very compelling 'why now,' as in, what is your AI story?" Besvinick continued.

ALIGNING WITH VALUE

One of the most consequential changes to the digital health landscape in recent years has been the shift from volume to value.

The old adage is that the IPO window is never closed. If you're an amazing business, if you're building a phenomenal company with amazing unit economics and you're profitable or you have a very clear path to profitability, the IPO window is always open.

Kumar highlighted this shift, noting that digital health purchasers, including employers, payers and health systems, are increasingly focused on gaining a return on investment from their digital health programs and tools faster.

"I can't give you two years -- I can't even really give you a year," Kumar said. "I want to see that value within six months or three months. If you can do that, then I'll pay attention. And we're increasingly seeing that pressure."

This pressure is one reason provider-facing tools are popular. According to Zweig, there has been greater acceptance and adoption of provider-facing tools in the past year, primarily driven by healthcare worker burnout.

Burnout is a trenchant challenge in healthcare, with data showing that 46% of health workers reported often feeling burned out in 2022, up from 32% in 2018. However, digital health tools, especially ambient AI scribe technology, are proving effective in reducing burnout and improving clinician and patient experience.

"It's not just enabling top-of-license work, it's enabling top-of-purpose work where [providers] feel like they can deliver high-value care to patients at scale with AI as almost like a member of the team," Zweig said.

In addition, the pressure to prove value means that digital health companies cannot hope to succeed in the public market with tools that simply replicate in-person healthcare interactions through screens. Instead, their solutions must reimagine the care delivery system.

Zweig explained that reimagining care delivery involves developing longitudinal care models that leverage various tools, like synchronous telehealth, remote patient monitoring and connected devices, to create a more proactive healthcare system.

While the above factors can bolster digital health companies' public exit plans, experts agree that the ultimate key to success in the public market is building a scalable, resilient business based on a solution that works. Rather than exclusively planning for an exit, companies must ensure that they have a solid foundation.

"The old adage is that the IPO window is never closed," Besvinick said. "If you're an amazing business, if you're building a phenomenal company with amazing unit economics and you're profitable or you have a very clear path to profitability, the IPO window is always open."

Anuja Vaidya has covered the healthcare industry since 2012. She currently covers the virtual healthcare landscape, including telehealth, remote patient monitoring and digital therapeutics.