Why digital health IPOs disappeared in 2022

There were 20 digital health companies that went public in 2021. In 2022, there were two, only of one of which listed on an American-based stock exchange.

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The one company that went public in the U.S. exemplifies why other digital health firms are shying away from going down this same path.

Boston-based prescription video game company Akili Interactive launched an initial public offering August 23 through a special purpose acquisition company, Social Capital Suvretta Holdings. The stock opened at $36.06 per share and closed at $7.15 per share on its first trading day. Monday, it closed at $1.05. 

Other digital health companies that went public in the last few years have suffered similar fates. Only two out of 20 digital health companies that had an IPO in 2021 have not lost significant market share, according to Digital Health Business & Technology’s database.

Industry watchers blame a challenging macroeconomic environment along with investor uncertainty on digital health business models and said late-stage private companies should use the pause to strengthen their business.

“Companies that thought they’d go public this year have had to extend their timeline in the private market,” said Jacob Effron, principal at venture capital firm Redpoint Ventures. “There has certainly been a valuation reset in the public markets that I think has big implications for some of these growth-stage private companies.”

Komodo Health exemplifies the challenge faced by many. Early in 2022, the healthcare data analytics company made plans to go public in the summer. Instead, it secured $200 million in funding on December 13 from venture firms Coatue Management and Dragoneer Investment Group, while laying off 9% of its staff.

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SPACs, a big part of the IPO wave, have disappeared. Pear Therapeutics, Owlet, Sema4, 23andMe, Babylon Health and Hims & Hers went public via SPAC in 2021, compared with just Akili in 2022. Experts say SPAC IPOs are popular for companies with unproven business models, which made it appealing in the emerging digital health industry. Those days are over.

“In the near term, investors are going to do a lot more diligence around certain business models,” said Cheri Mowrey, head of U.S. investment banking at Morgan Stanley. “Over the last two years, there was so much coming to the market that nobody was doing due diligence on these companies.”

Chamath Palihapitiya, managing partner of Akili’s SPAC partner, Social Capital Suvretta Holdings, has been called the SPAC king for taking several companies public. But in September, he said he was winding down two SPAC holding companies due to high interest rates. Palihapitiya also led a SPAC IPO for Oscar Health, the New York-based insurtech that has recently faced financial challenges.

Investors are not expecting a comeback for public market financing in digital health in the coming year, and the lack of outside funding means companies are going to have to conserve cash, Effron said.

“It’s possible 2023 is worse than 2022 and in that case, you want to make sure you have money for a long time so you don’t need to raise any time soon,” Effron said. “If the market changes in the first half of 2023 and things are going super well, you can always adjust, raise more funds and go public.”

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Lorin Gu, founder of venture capital firm Recharge Capital, said digital health companies that offer tech-enabled services have seen challenges in the public markets with approximately 80-90% decreases in stock prices. He expects that to continue into 2023.

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“We’re not going to know until the second quarter of 2023 how the market is recovering, but in the meantime, I expect recessionary tailwinds to rotate among the hot new sectors, such as [software-as-a-service] digital health,” Gu said.

Digital health companies that have already undergone late-stage funding rounds should use this time to focus on financial sustainability, said Scott Barclay, managing director of healthcare at venture capital firm Insight Partners.

“We are under the assumption that the IPO market is closed,” Barclay said. “And so long as it’s closed, we’re telling our companies to focus on building a great business. We’re asking them if they’re building a long-term company that can sustain…This market will establish winners.”

A delay can have upside for an executive team that’s never gone through the process, said Carl Stegman, senior vice president at Fidelity Investments’ stock plan services division that helps soon-to-be public companies determine equity compensation.

“We’ve seen situation where companies, especially in SPACs, didn’t understand the implications of registered and restricted securities,” Stegman said. “A delay can be an opportunity to better educate yourself based on the IPO you’re preparing and working with your employees so that they understand what’s going to be tradeable and what’s not. There should be no surprises.”

This story first appeared in Digital Health Business & Technology.


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