Key takeaways

• Funding

  • AI Drug Discovery drove a surge in funding: In Q2 2024, the US Digital Health sector raised USD 5.4 billion across 231 rounds, up by ~39% QoQ from the USD 3.9 billion raised in Q1. The overall funds raised this quarter marked the largest recorded in the last four, surpassing Q3 2023 levels of USD 4.1 billion. 
  • AI Drug Discovery startups led the pack this quarter with an aggregate of nearly USD 1.4 billion across 17 rounds and an average deal size of USD 82 million. This was driven by Xaira Therapeutics, which raised USD 1 billion, and EvolutionaryScale, which raised USD 142 million. The theme of these rounds was “GenAI-powered protein design,” indicating the technology’s potential in developing novel treatments.

• Product updates

  • Drug discovery and clinical development took center stage, powered by GenAI/AI technologies: In Q2, Digital Health witnessed 47 new product launches and updates focused predominantly (~43%) on accelerating the drug development process, including drug discovery, preclinical testing, and clinical trial operations.

• Interest in this sector was particularly high this quarter, with DeepMind’s newest AlphaFold 3 model pushing the boundaries of AI in drug discovery. In previous quarters, primary care for dependents—elders and pets—stole focus, while this quarter saw only five updates from these industries. Nevertheless, other major primary care industries, such as Mental Health Tech, Telehealth, and Preventive Healthcare, continued to launch new products, contributing to 34% of all product updates. 

• Partnerships

  • AI Drug Discovery deals from startups dominated overall activity; GenAI/AI played a key role: Around 73% of all activity came from partnerships among startups to develop new products or expand their market reach. Notably, most of these deals involved the use of GenAI/AI technologies to develop new solutions and enhance scientific research. 
  • Overall activity for incumbents dropped to ~28% from ~51% in Q1. These deals were focused on AI drug discovery, precision medicine, and clinical trial technology, indicating a shift from primary care and hospital management toward clinical development in healthcare. Alphabet recorded the most number of partnerships (8) for the quarter, driven by Google Cloud’s AI/GenAI capabilities.

• M&As

  • Walmart exited from telehealth; primary care took the lead on M&A activity: We recorded 22 acquisitions this quarter, most of which came from Preventive Healthcare, Mental Health Tech, and Telehealth startups. The most notable transaction during the quarter was the divestment of Walmart’s telehealth business, MeMD, to health tech company Fabric for an undisclosed sum. In addition, UnitedHealth Group also announced shutting down its virtual healthcare arm, Optum, early this quarter. The numerous acquisitions across the primary care sector indicate a shift toward a consolidation phase, promoting better patient care.

• Outlook

  • GenAI continues to make significant strides in healthcare industry: While the focus of technology shifts every quarter, GenAI continues to be consistently applied across various areas of the healthcare value chain, and this trajectory is expected to persist in the medium term. According to the 2024 Generative AI in Healthcare survey by John Snow Labs, healthcare organizations have implemented significant increases in GenAI budgets. In addition, more GenAI adoption is expected in the next two to three years in primary care areas like patient-doctor conversation transcribing, medical chatbots, and support for patients in query responses. This is consistent with our earlier study, where we saw the highest incidence of GenAI activity in healthcare and pharmaceuticals.
  • Telehealth is expected to transition from basic standalone offerings to an integrated product: In Q1, we saw Telehealth receiving renewed investor interest (~USD 800 million raised) likely from growing efforts by the US Government to expand healthcare access across the US, especially in rural America. However, funding levels seemed to have halved in Q2 (only USD 368 million raised) amid Walmart’s divestment of MeMed. This could potentially be due to the uncertainty of telehealth regulations becoming permanent, as the extended period for telehealth flexibilities ends in December 2024. Nevertheless, we noticed startups upgrading their business models to offer integrated products that combine multiple services. For instance, Ro, a direct-to-consumer telehealth provider, introduced a vertically integrated solution that combines telehealth, pharmacy, and lab services. This shift toward integrated, one-stop solutions aims to enhance the value offered to patients. Some telehealth companies that raised funding this quarter also followed suit, including Transcarent, Thirty Madison, and Pomelo Care.