By Heather Landi, Fierce Healthcare | July 2, 2019

Investors continue to have a strong appetite for digital health with investment in the sector totaling $4.2 billion across 180 deals through the first half of 2019.

If this pace holds steady, the sector is on track to raise $8.4 billion in 2019 and could top 2018’s record-breaking annual funding total of $8.2 billion, according to Rock Health’s midyear report.

Just in the first six months of 2019, the digital health sector is close to surpassing the $4.6 billion in funding raised in 2016.

As in 2018, a handful of $100-million-plus megadeals are driving the overall trend, accounting for 30% of venture dollars, Rock Health reports.

RELATED: After record-setting 2018, digital health venture funding levels off

“Experienced investors continue to return to the well—69% of investors in the first half of the year were repeat investors. As digital health continues to mature as a sector, we expect this theme to persist in the near-term, even as macro-economic conditions fluctuate,” report author Sean Day, Rock Health research analyst, said in the report.

Digital health investment is holding steady as IPOs (initial public offerings) finally return after a three-year drought. Livongo was the latest digital health company filing to go public, following Health Catalyst, Phreesia, and Peloton. Change Healthcare had its IPO last week.

“Through the IPO drought, M&A was the sole exit route offering liquidity for digital health investors. M&A continues to dominate the exit scene with 43 acquisitions in the first six months of 2019. Projecting this forward six months, 86 acquisitions in 2019 would be roughly 25% fewer than in recent years,” Day said in the report.

The future of the digital health market

Among the 10 past and five projected digital health IPOs between 2011 and 2019, companies raised an average of $199 million and went public at an average age of 9.4 years, according to Rock Health. Using these 15 companies as a baseline, 19 more digital health startups have raised at least as much as this group’s average of $199 million. The report calls out telehealth company American Well, direct-to-consumer genetics company 23andMe, AI company HeartFlow, digital medicine company Proteus and software-as-a-service platform Welltok as potential candidates for future IPOs.

RELATED: Venture deals, funding for digital health companies reached $9.5B last year

While the most frequent acquirers of digital health companies are other digital health companies—accounting for 23 of the 43 transactions so far in 2019—Rock Health expects other categories of acquirers to become more active in the coming year.

“As more non-healthcare organizations enter the healthcare industry, their strategies include buying external innovation in addition to building it internally. Technology companies and other non-healthcare companies are consistently the second and third most active acquirers,” Day said in the report.

The $3.5 trillion healthcare market is a promising source of future growth for a number of large nonhealthcare companies like Amazon, Google, and Best Buy. These tech giants may be “premium” acquirers, willing to pay somewhat higher premiums to secure later-stage companies that fill a strategic need and meet financial objectives, Rock Health said.

For example, Amazon outbid Walmart to acquire PillPack, a deal later revealed in U.S. Securities and Exchange Commission documents to be worth $753 million.

JP Morgan also moved into digital health this year with the acquisition of InstaMed, a healthcare payments technology company. The deal, priced at more than $500 million according to CNBC, adds healthcare payment technology to JP Morgan’s growing wholesale payments business.

Consumer electronics retailer Best Buy also bought Great Call, a provider of connected health and personal emergency response services to the aging population.

Google-owned Nest quietly acquired Senosis, a developer of smartphone-based health monitoring solutions, according to Geek Wire. The move suggests digital health will be a component of Google’s smart home strategy, Rock Health reports.

And in May, Apple scooped up Tueo Health, a startup that uses apps and sensors to help parents manage asthma symptoms in children. Apple is making significant moves into healthcare, including its acquisition of personal health data startup Gliimpse in 2016 and its launch of a personal health records app that is now used by more than 200 healthcare organizations.

Rock Health estimates there is $29.4 billion of active venture capital, or what it refers to as digital health’s “net liquidity overhang,” anticipating a liquidity event (an exit) at some point in the future.

Though M&A within digital health remains more common, acquisition by large healthcare and nonhealthcare companies will be a significant source of liquidity and returns for digital health investors.