Key takeaways

• Funding
  • Funding slowed down and flowed back to primary care: In Q4, the US Digital Health sector raised USD 3.6 billion across 205 rounds, down by 11% QoQ from the USD 4.0 billion raised in Q3. The average deal size, however, went up 11% QoQ to USD 17.4 million due to some large deals like Maplight Therapeutics’ USD 225 million Series C round. Preventive Healthcare startups raised the most (USD 475 million), dethroning AI Drug Discovery at the top. 
  • The GenAI fever that dominated Q3 funding continued this quarter as well, albeit at a slightly slower pace, resulting in AI Drug Discovery funding more than halving compared with the last quarter.
• Product updates
  • AI and GenAI continued to influence primary care products and services: The quarter witnessed 30 new product launches and updates—the majority from Preventive Healthcare and Telehealth. These included GenAI and AI-powered solutions from primary care companies Found and Videra Health that were aimed at enhancing the virtual care experience for patients via digital assistants and companion tools. 
  • Clinical Trial Technology company H1 also launched a GenAI solution to improve clinical trial operations. Also, German Big Pharma company Merck was reported to have introduced the first AI SaaS platform capable of discovering and synthesizing drugs.
• Partnerships
  • Tech giants focused on using AI to reduce administrative burden, while Big Pharma aimed for efficient drug discovery: Incumbents accounted for ~51% of partnerships in Q4, which included Big Tech companies like Alphabet and Microsoft and retail giants such as Best Buy and Walgreens. A large portion of the recorded alliances came from the AI Drug Discovery space (~38% of the total), which saw several Big Pharma companies creating ties with startups to accelerate drug discovery using AI.
• M&A
  • Overall M&A activity was muted, with the proposed USD 140 billion Cigna-Humana merger being called off: Q4 saw eight M&A transactions, of which five were acquisitions focused on expanding operational presence and offerings. No incumbent involvement was recorded for this quarter, in contrast to the previous quarter (five out of eight transactions). The Cigna-Humana merger, announced in November 2023, was called off the following month, as the parties could not agree on a merger price.
  • By industry, Telehealth and Preventive Healthcare reported two transactions each, focused mainly on expanding virtual care offerings like Sidekick Health’s acquisition of Aidhere, and the AristaMD-Sitka merger.
• Regulation 
  • Similar to the previous quarter, no noteworthy developments were observed across the Digital Health landscape in the US, except for the formation of a Digital Health Advisory Committee by the FDA to bring together a diverse group of experts to advise on the most effective way to regulate digital health technologies.

Funding: Overall funding drops from Q3 peak; investments return to primary care

Analyst Take: Following a GenAI-driven spike in funding during Q3 (USD 4.0 billion), investment during Q4 was down 11% QoQ. Despite this, funding in Q4 was in line with the averages seen during the other quarters of the year. In Q4, Preventive Healthcare regained the top spot in terms of the highest funds raised, dethroning AI Drug Discovery, which saw an 11x QoQ increase in funding last quarter on the heels of clinical advances and GenAI developments.

• We recorded 205 funding rounds that collectively raised USD 3.6 billion across companies that meet the FDA’s definition of digital health. This quarter saw an ~11% drop in funding value QoQ, following a spike in Q3 (USD 4.0 billion). We present a breakdown below of the 205 rounds based on the industries defined in SPEEDA Edge.

• In addition to the displayed funding activities, we identified 23 post-IPO rounds (post-IPO debt and post-IPO equity) of digital health players that raised an aggregate of USD 900 million during the quarter. Over a third of all post-IPO funding was accounted for by hospital management company Evolent Health, which raised USD 350 million in convertible debt in December.

Digital Health Q4 2023 funding breakdown

• The highest-funded Digital Health industry in Q4 2023 was Preventive Healthcare, securing USD 475.3 million (~13% of total funding), with an average deal size of USD 22.6 million. Around ~37% of this came from the population health management company Better Health Group, which raised USD 175 million in private equity financing to support new payor partnerships and acquisitions for expansion. 

Digital Health Q4 2023 funding by SPEEDA Edge industry

• Precision Medicine and Next-gen Medical Devices followed closely with USD 471.8 million (~13% of total funding) and USD 445.4 million (~12% of total funding), respectively. Precision Medicine funding was led by drug development companies MapLight Therapeutics and Odyssey Therapeutics, which raised USD 225 million and USD 101 million, respectively. The highest-funded Next-gen Medical Devices company was Calyxo, with a funding of USD 50 million.

Funding movement of top five industries: Q1 to Q4

• In terms of the number of rounds in Q4 2023, Next-gen Medical Devices (ranked third in funding value) led the pack with 46 rounds, followed by Preventive Healthcare (ranked first in funding value) with 21. The Next-gen Medical Devices industry also led the list of rounds that raised under USD 2 million, with 16 rounds (~31% of all industry rounds), raising a total of USD 11 million.

• Looking back at Preventive Healthcare, direct primary care company Forward also contributed USD 100 million to the overall funding tally by raising a combination of USD 25 million in debt financing and USD 75 million in Series E funds in November of this year. A majority (nine out of 21 rounds) of the Preventive Healthcare funding rounds were in the chronic care management space, recording an aggregate of USD 122.9 million, while in dollar terms, population health management secured the highest funding (USD 176.5 million across two rounds).

Preventive healthcare startups that raised funding in Q4 2023

Number of rounds vs. average deal size by industry

Total funding vs. number of rounds by series 

Mega deals: Two precision medicine companies collectively raised USD 326 million

• The top 10 funding rounds for Q4 2023 were all mega deals (rounds that raised USD 100 million or more) that totaled USD 1.3 billion (~35% of all rounds; consistent since Q2). 

• Precision medicine company Maplight Therapeutics, which develops novel therapeutics for neurological disorders, dominated the mega deals for the quarter, with a USD 225 million Series C fundraising. With Maplight’s massive contribution and Odyssey Therapeutics’ Series C round, the Precision Medicine industry was at the forefront of mega rounds, raising a total of USD 326 million during Q4.

Mega Digital Health deals in Q4 2023 

Digital Health funding by industry

• Funding composition across industries has varied throughout the year. Preventive Healthcare emerged as the winner in Q4, with a total funding of USD 475.3 million. AI Drug Discovery, which contributed around 19% to funding value in Q3 (highest funded industry in Q3), accounted for nearly half of that Q4. In contrast, Precision Medicine, which only contributed 4% in Q3, raised 12% of total funding in Q4.

• The Digital Health sector raised a total of USD 14.9 billion for the full year 2023, with Preventive Healthcare startups raising the highest funding—a whopping USD 1.9 billion (13% of total 2023 funding). This was followed by Next-gen Medical Devices, which raised USD 1.7 billion (11% of total 2023 funding), and AI Drug Discovery, which raised USD 1.3 billion (8.5% of total 2023 funding). Funding for Preventive Healthcare and AI Drug Discovery peaked during Q3, while Next-gen Medical Devices peaked in Q2.

Funding comparison among industries during 2023

Product updates: Disruptors follow incumbent footsteps in embracing GenAI integrations

Analyst Take: The overall number of product launches and updates rose in Q4 (30) compared with the previous quarter (18). Most of these were preventive healthcare products (23% of the total). GenAI also impacted new product launches and updates during the quarter, with several startups incorporating the tech in their products. Notably, German Big Pharma company Merck was reported to have introduced the first AI SaaS platform capable of discovering and synthesizing drugs.

• Q4 saw 30 new product launches and product updates—18 new products and 12 product updates. Most of these came from companies in Preventive Healthcare and Telehealth. At the same time, other industries, such as AI Drug Discovery and Clinical Trial Technology, also unveiled several new products and updates. Approximately 13% of these product updates came from incumbents.

Product updates by industry

• GenAI was a key theme in several new products and services launched during the quarter. Unlike the last quarter, which largely had GenAI product updates from incumbents, Q4 saw more of these coming from disruptors. A healthcare evidence generation operating system (GenevaOS) from telehealth company Atropos Health, a data analysis tool (GenosAI) from clinical trial intelligence company H1, and a GenAI assistant (Found Assistant) from preventive healthcare company Found were among the disruptor launches that stood out. Merck also introduced the first-ever GenAI-powered SaaS product that integrates the discovery and synthesis of drugs.

• A few product updates were recorded in the AI Drug Discovery space including Deepmind’s (Alphabet) upgraded version of AlphaFold and QuantHealth’s AI-powered clinical trial solution Katina. In addition, primary care providers also introduced AI-powered solutions such as Mendel.ai’s AI co-pilot for real-world data applications, Hypercube, and Hims & Hers’s health personalization technology, MedMatch.

• Some product launches were focused on entering new market segments, especially in the Preventive Healthcare space. These included WellTheory launching an enterprise solution for employers and payers to address autoimmune diseases; Welldoc adding a weight management solution to its platform that already addresses conditions like prediabetes, diabetes, and hypertension; and Parsley Health launching a gastrointestinal care program for employees.

• Incumbent product activity during Q4 was relatively muted, compared with the previous quarter. Only four incumbents (~13% of all total product updates) had recorded Digital Health product launches or updates, which included Amazon’s new service called “Cough, cold, and flu,” focused on providing personalized care, and GNC Holdings’ membership-based virtual healthcare service called GNC Health.

Partnerships: AI in healthcare continues to drive partnership activity

Analyst Take: Incumbent involvement in the AI Drug Discovery space seemed to continue in Q4, with several Big Tech and Big Pharma companies joining hands with startups to leverage AI in their processes. GenAI also acted as a catalyst in forming new alliances in the Hospital Management and Interoperability spaces, with a focus on streamlining time-consuming clinical documentation tasks and improving clinical workflow efficiency, in line with the previous quarter.

• We recorded 64 Digital Health partnerships in Q4 2023, a ~30% slowdown from last quarter when we recorded 91 partnerships. Similar to Q3, this quarter was dominated by AI Drug Discovery, with 24 partnerships, accounting for ~38% of all incumbent partnerships. This was followed by Preventive Healthcare partnerships (~11% of the total).

• During Q4, incumbents accounted for around 51% of the partnership activity, recording a total of 33 Digital Health partnerships, involving both healthcare and non-healthcare incumbents, especially in the tech and retail space. The highest incumbent activity was recorded across the AI Drug Discovery industry (36% of total incumbent partnerships), which was heavily driven by healthcare incumbents.

• Looking closer at the partnership activity for the quarter, we identified several partnerships from Big Tech companies such as Alphabet and Microsoft that were mostly active in Hospital Interoperability and Hospital Management spaces (each accounting for 15% of all incumbent partnerships). These alliances focused on developing tools that use AI and GenAI to help healthcare providers with seamless clinical data exchange and management, improving clinical operations, enhancing patient experience, and streamlining and eliminating administrative burdens. Google Cloud’s partnerships with smart care facility platform care.ai to enhance healthcare facility management and healthcare data solutions company Augmedix to streamline medical documentation were examples of such partnerships.

• The quarter also saw the involvement of retail giants such as Walgreens and Best Buy in digital health. For an in-depth analysis of incumbent activities in the healthcare sector, see our Tech & retail giants in healthcare (Q4 2023) report.

Incumbent partnerships in Digital Health

• Beyond Big Tech and retail incumbents, notable partnerships involving healthcare incumbents were also observed during the period, which leaned toward the AI Drug Discovery space. Big Pharma companies Sanofi and AstraZeneca entered multiple partnership agreements to discover and develop novel drugs using AI technologies, while telehealth incumbent Teladoc Health partnered with primary care companies Sword Health and Hinge Health to offer digital care solutions to a broader audience.

• During the quarter, almost 77% of the partnerships were focused on either integrating the technologies of both parties to offer a combined solution, developing a new digital health product, or developing new drugs by leveraging AI/ML technologies and drug discovery expertise. The remaining partnerships focused on expanding the availability of digital health products to a larger audience, either geographically or by gaining access to the partner's user base. 

M&A: Moves focus on market expansion and expanding product portfolio in primary care 

Analyst Take: M&A activity across the Digital Health space continued to be muted, with acquisitions focusing mainly on geographical expansion and product development in the primary care space. The USD 140 billion Cigna-Humana merger, had it gone through (after all the potential antitrust scrutiny), would have made Cigna the second-largest Medicare Advantage provider.

• The third quarter saw eight M&A transactions—three mergers and five acquisitions—which included initial announcements and transaction closures. Telehealth, Mental Health Tech, and Preventive Healthcare recorded two transactions each, while the Health Benefits Platforms and Fertility Tech industries recorded one each. 

• In contrast to the previous quarter, which was dominated by incumbents, Q4 did not see any notable incumbent involvement. Healthcare insurance giants Cigna and Humana announced a merger in November 2023, which would have potentially valued the combined entity at more than USD 140 billion. However, the deal did not materialize and was abandoned the following month after both parties failed to agree on a merger price. 

• Five of the transactions focused on expansion—expanding the companies’ operational presence, extending customer access, or entering new markets. This included:
  • Fertility tech company INVO Biosciences’ merger with NAYA Biosciences, which intended to expand and bolster INVO’s fertility operations and US clinic presence.
  • The acquisition of SentryHealth by First Stop Health, a specialty care benefits platform, for an undisclosed sum to enhance First Stop’s existing virtual care offerings with a focus on catering to employers and employees.

• Some transactions focused on developing new products and services, all of which were from the primary care space, by leveraging the expertise of both parties involved in the transaction. This included:
  • Bright.md’s acquisition by Evernorth (Cigna's pharmacy care and health benefits arm) via its subsidiary MDLive. The transaction intended to launch an emergency asynchronous option for virtual urgent care in 2024. MDLive plans to expand care options to other chronic disease management services and wellness visits over time.
  • The BehaVR-Fern Health merger formed RealizedCare to develop a new digital care management solution for chronic pain by exploiting the synergistic capabilities of the duo.