Key takeaways

• Funding
  • Clinical progress and GenAI propelled funding into AI Drug Discovery: In Q3, the US Digital Health sector raised USD 4.0 billion across 257 rounds, up 10% QoQ from the USD 3.6 billion raised in Q2. The average deal size was USD 15.7 million during Q3, also up ~24% QoQ. With the first AI-discovered drug going into Phase II clinical trials in Q2 and the hype surrounding GenAI, it seems AI Drug Discovery startups have started to attract funding on a big scale. They raised USD 763 million in Q3, more than 10x of Q1–Q2 volume, led by protein therapeutics developer Generate Biomedicines. Preventive Healthcare startups continued to attract funds (USD 538.4 million in Q3 on top of USD 535.2 million in Q2).
  • Brain-computer interface company Neuralink, which received FDA approval to conduct human clinical trials in May 2023 and commenced making patient recruitments in September, raised the most funding with a USD 280 million Series D led by Founders Fund.

• Product updates 
  • New products continued to focus on primary care: The quarter witnessed 18 new product launches and updates, the majority from Telehealth and Connected Fitness. These also included AI-powered solutions aimed at accelerating drug discovery and development, along with GenAI-powered solutions launched by incumbents such as Oracle and Amazon to digitalize clinical documentation workflows.

• Partnerships
  • Incumbent presence in Digital Health grows as GenAI adoption becomes a focus: Incumbents accounted for ~62% of partnerships in Q3, which included Big Tech companies like Alphabet and Microsoft and retail giants such as CVS Health and Walmart. Notable collaborations included areas such as AI Drug Discovery (~20% of the total), Telehealth (~16%), and Preventive Healthcare (~12%). Among Big Tech incumbents, Microsoft and Alphabet recorded the majority of the partnerships, focusing on leveraging GenAI capabilities in the Hospital Management space.

• M&A
  • Product portfolio and geographic expansion continued to drive M&A activity: Q3 saw eight acquisitions, with five involving incumbents. This included Novartis’s USD 3.5 billion acquisition of Chinook Therapeutics to expand its renal portfolio. By industry, Telehealth saw three acquisitions, focused mainly on combining the capabilities and technology of companies like ResMed’s acquisition of Somnoware and geographically expanding businesses like Doccla through the acquisition of OpenTeleHealth.

• Regulation
  • Q3 has had a quiet regulatory scene following the expiry of the Covid-19 Public Health Emergency in May 2023 and various new initiatives imposed in Q2. However, subsequent to the quarter's end, in October 2023, the FDA launched a Digital Health Advisory Committee, which would bring together a diverse group of experts to advise on the most effective way to regulate digital health technologies. The committee is slated to be fully functional in 2024.