A maturing space buoyed by the pandemic: 2021 will be the year of the healthtech IPO

Steven Loeb · March 25, 2021 · Short URL: https://vator.tv/n/5202

There were more healthtech companies that went public in 2020 than in 2015 to 2018 combined

If you go back the last decade, the number of healthtech companies emerging onto the public market was paltry: two or three companies went IPO in a year, or none at all.

Then Livongo came along and changed everything. The company went public in July of 2019 and watched its price increase 36 percent in its first day of trading, valuing it at $3.4 billion. And just like that, a healthtech IPO boom was born.

According to a report from Silicon Valley Bank, there were seven healthtech IPOs in 2019, followed by another eight in 2020; that's more companies in one year than went public in 2015 to 2018 combined.

That trend does not look like it's going to slow down anytime soon either, as the report also predicts that there could be as many as 15 to 20 companies entering the public market this year. In addition to IPOs, a number of them might also choose the special purpose acquisition company (SPAC) route, in which they get acquired by an already publicly traded company and, essentially, take over that stock (Clover Health and HIMS are two major healthcare companies have already taken this route).

2021, it seems, is finally going to be year of the healthtech IPO.

"My general feeling is the IPO market for healthtech will continue to be great for the next 12 months, given that lots of money has been invested in this space over the last 10 years and the global pandemic has accelerated adoptions of technology innovations by all shareholders in the healthcare space," said Jun Deng, Partner at Joyance Partners, a venture fund focused on individual health experiences.

"We've seen great IPO exits for the health tech space for the past two years, increased acquisition activities and mega-rounds. I think the trend will continue. Given the low interest rate environment and trillions of dollars stimulus plan, overall public market will continue to be strong, and so will the healthtech space."

This sentiment was also echoed by Justin Norden, a partner at GSR Ventures on a recent podcast with VatorNews. Norden focuses on early-stage investments in digital health, AI/ML in healthcare, and enterprise technology.

"Companies are already going public this year with the SPACs and everything else, and with these new fast routes to going public, my perspective is any company that can go public is trying to go public as soon as possible," he said, noting that this isn't only unique to digital health, though that space in particular is already reaping the benefits.

"As we’ve all seen in looking at other macro environments, it’s not just in digital health, it’s across the board. There’s a record number of SPACs that were created in 2020 and then surpassing that in 2021. So, it’s actually not unique to digital health. Assuming things continue to hold up with the market, that’s going to happen throughout the rest of this year and we’re going to see many more digital health IPOs."

A maturing space

So, why are healthtech companies going public now? At first glance, this may all seem like strange timing for companies in the health space to be going public given everything that has happened around the pandemic, and is still happening, frankly.

Part of it just timing: the companies themselves happen to be maturing right now, as many of them are now 10 or 11 years old, making them the right age to finally make an exit on the public stage.

Steve Kraus, partner at Bessemer Venture Partners, began investing in the healthtech space back in 2009 and 2010, right around when Obamacare and the HITECH Act passed; back then, there was less than $300 million being invested, and only a few other firms even bothering to invest, he told me when I spoke to him for a podcast earlier this month.

Of course, that didn't stop other investors from asking for those IPOs fairly early on, despite it being way too early to even be thinking about it.

"Five years into it, in around 2015, I’d be in a conference and people would be like, ‘Hey, Steve, where are the IPOs?’ On the one hand I’d say, ‘Gosh, I hope they’re coming because I staked my career on it!’ but, at the same time it was like, ‘Let’s slow the roll a little bit. We’re only five years into the maturation of this industry.’ As we all know, it often takes seven, 10 years for companies to mature," he said.

"Fast forward to today, 10 or 11 years later, it makes a lot of sense that early players, the Accolades, the One Medicals, Teladoc, Amwell to go public. Those folks have been at it for a while, it makes sense that they’re now public."

Not only have the companies matured, but so has the space; as companies better defined themselves, it has led to an increased awareness among investors of what digital health actually is, said Chris Moniz, Managing Director and Head of Northwest & Northeast HealthTech & Medical Devices at Silicon Valley Bank.

"If you look back four years ago, what was healthtech? It was digital health. What was it before that? Wellness, maybe? It was convoluted and I don’t think people had defined the space," he said. "Companies really started thinking about how they're going to advertise themselves, how they're going to focus on chronic conditions, how they're going to focus on a specific kind of disease treatment, and then break out from there."

For companies to go public, Moniz explained, there has to be consumer and public sentiment on what you are and how you add value. The rise of the healthtech IPOs in the last few years has coincided with people finally being able to understand the space and what these companies do.

"I don't think that was there three years ago. You look at Livongo and others who paved the way, they've given us some really good predicates or examples for companies going public and how the streets responded."

Maybe the best indication of where healthtech, and digital health in particular, now sit is to look at the amount of money being poured into it: the space saw a record amount of funding last year, with $21.8 billion invested across 1,539 deals in Q3 alone.

"The venture capital world has woken up to the fact that digital health is real. Now, as opposed to $300 million, now one in every 10 venture dollars is invested in digital health, maybe more. Every single venture capitalist has someone on their team that’s looking at digital health; it’s no longer those healthcare old guard firms," said Kraus.

"You’re going to have a lot more innovation and entrepreneurship in this sector, which is great, which means that you’re going to have a long way to run in terms of IPOs."

Success begats success

The market conditions being ripe for companies to go public is only one side of the equation; the companies themselves also have to be comfortable with taking the potential risk involved. Basically, they needed some evidence that healthtech companies could thrive on the public markets. Someone needed to go first, and that company was Livongo.

"Within healthtech IPOs, if you look back two years there was almost nothing. This was before Livongo went public, when there were very few true digital health wins, from that perspective, from big, public companies we could point to. Now you can look at others, like Oak Street; if you want to be really broad, some people also include Peloton in the digital health field. There’s so much that’s happened in the last couple of years with these companies going public," GSR Ventures' Norden explained.

Not only have the companies been hitting the market, but they've been successful as well: the report from Silicon Valley Bank shows that the price of the six healthtech IPOs in 2020 have increased by an average of 116 percent, versus 35 percent for the companies that went public from 2015 to 2019.

"Companies that recently went public have performed very well, especially those with large TAMs (total addressable markets) and high growth stories, exhibiting diverse lines of business that are not solely tied to COVID-19 care. Disruptive companies that are completely changing the way healthcare is delivered, like GoodRx, One Medical, and Oak Street, are valued even more highly," said Dr. Garheng Kong, Founder and Managing Partner at HealthQuest Capital.

The success of Livongo, which merged with telemedicine company Teladoc in August of last year, in a deal worth $18.5 billion, showed other digital healthcare companies that they could also make it on the market, said Moniz, noting that, "A rising tide raises all ships."

"Once that happened, it educated the market because it just hadn't happened before. And once you educate the market, and people see how the market responds, it just kind of opens up for more people to try that avenue. We saw a lot the last two years, a lot more than we had before, and I think it's given a lot more folks confidence on the public side and the private side."

The COVID effect

It may seem counterintuitive, maybe even perverse, but COVID may wind up being a positive thing for healthtech, and digital health in particular. It's a tough thing to say, given the death and destruction that the pandemic has caused, but the fact is that digital health has been bouyed by COVID, and has seen its adoption accelerate in ways that nobody could have predicted.

Essentially, the pandemic turned virtual health services into a necessity, especially telehealth, which saw huge gains in 2020: during the first quarter of 2020, the number of telehealth visits increased by 50 percent compared with the same period in 2019. In all, telehealth company Teladoc saw 10.6 million virtual visits in 2020, up 156 percent year-to-year, while its paid membership jumped 41 percent from 36.7 million to 51.8 million.

That has been the story with a number of different telehealth companies over the last year, many of whom had to raise money just to keep up with demand, including Amwell, 98point6, and Doctor On Demand (which recently announced a merger with healthcare assistant Grand Rounds).

"Digital health was early in its adoption prior to 2020, and massively catalyzed by the pandemic for a few reasons. One is inability of patients to access hospital systems or doctors offices for non-urgent services," Healthquest Capital's Kong said. "The second are regulatory tailwinds to support adoption of telehealth, including expanded Medicare reimbursement, reimbursement parity with in-office visits, ability for practitioners to treat patients across state lines."

"If you look at what happened last year at the start of the pandemic, reimbursement and everything else was more favorable for companies that were providing alternative care. No one was going to hospital, so everyone had to find a different way to treat patients, whether you're going for a checkup, checking your rash, treating your heart or chronic conditions, it just changed. That just poured a lot of gasoline onto the space and really catalyzed a lot of company’s income statements and trajectory, and so we saw a lot of growth in that," Silicon Valley Banks' Moniz said.

"It was just kind of an alignment that we typically don't see: consumers wanted to get treated that way and then the health systems wanted to treat it that way and the payers wanted to align that way and that's something we haven't seen in healthcare systems in a while, the convergence of incentives, so that definitely helped."

Of course, we're still not out of the pandemic yet and nobody truly knows what healthcare will even look like when the dust settles. They could be going public in a world that looks very different from the one they'll be in even a year from now.

There's the possibility that, once COVID recedes, the companies that saw those gains in users and engagement might start to lose some of that traction. In fact, before COVID hit, digital health adoption was actually dipping, according a study from Accenture, with the percentage of people using mobile apps dropping from 48 percent to 35 percent from 2018 to 2020, and the percentage of people using wearable nearly dropping in half, from 33 percent to just 18 percent.

If these companies go public based on their figures from 2020, and then find their numbers are not quite what they thought they were before, that could be a problem for their long-term prospects. Moniz, however, isn't worried.

"We already saw that telemedicine is the future, we just didn't know how long it would take because healthcare is so slow moving, so this just catalyzed it. I think this is the future," he said.

The only thing that Moniz believes could potentially dampen things is on the regulations side, specifically whether Congress is going to take away some of the reimbursement that they opened up last year for in-person visits or virtual visits. But even that is unlikely to happen, he told me.

"I know there's a lot of powers that be on Capitol Hill right now making sure that doesn't go backwards. Because it’s just attuned to how we are consuming everything these days as patients and consumers, so it would definitely slow down the progress of care going forward. So, we don't know what's going to happen, but I'm hopeful it doesn’t."

Healthcare companies that went public in 2020 and their price: