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20th September 2022

New survey spots main drawbacks for digital health firms

A survey from Taylor Wessing, an international law firm, has identified three main obstacles for digital health companies to overcome so as to thrive in the shifting economic landscape.

Experts at the law firm find that funding, regulation, and competition are the three biggest threats to achieving dominance in the acute market, and for digital health, start-ups aiming to advance. They arrived at this after asking 250 digital health leaders about their views on the future of the industry. The result shows that, in the next five years, there will be a transformation in digital health.

About three-quarters of the participants say the wellness market, dominated by companies like Nike Apple, and Fitbit have dominated, is oversaturated; almost the same percentage of them believe that to remain competitive in the long term, they need to develop products that target acute and urgent medical needs.

Digital health is gradually moving from general well-being to addressing some of the major healthcare concerns being faced worldwide. We are beyond the stage of counting steps and calories, and products are developing in ambition, sophistication, and complexity. It is an exciting time for the industry, promising complete change to the way everyone interacts with the healthcare system, improving global medical access, and bringing groundbreaking scientific developments into everyday technology.

The COVID-19 pandemic, which completely shook the healthcare system and is still very much a menace, made obvious the need for healthcare to harness existing technology and reach more people. From the onset of the pandemic, start-ups started arriving on the scene to take on the new challenges posed by the viral disease. As new digital health start-ups troop in, the industry should watch for the key obstacles impacting rapid growth: funding, regulation, and competition.

Funding Start-ups In A Competitive Market

Taylor WessingA large amount of investment has gone into the development of digital health start-ups since 2020, indicating the market’s skyrocketing trajectory. The survey participants, on average, have raised £128 million per company. In 2021, Rock Health, a US-based digital health start-up, with an average deal size of $39.9 million, found total funding of about $29.1 billion across 729 deals, almost twice that of 2020 when it amounted to $14.9 billion.

The Breakthrough Digital Health survey found that while 56% of digital health leaders need more capital to expand their business, 74% believe rising inflation, interest rates, and geopolitical tension will cause a decrease in investors’ risk appetite. This could transform the industry’s corporate growth strategies.

While 44% of digital health innovators have built joint ventures as part of their growth plans, only 26% surveyed are looking at incorporating mergers and acquisitions (M&A) into their growth strategy – something that could change as the financial climate shifts.

The Regulatory Race

One big challenge to the development and adoption of digital health products, especially AI and data privacy, is technological limitations. For instance, even though the principle of operation of AI is known, how exactly its algorithm makes judgments is still unclear. This lacking knowledge has raised many questions among government, start-ups, and potential users: Can patients trust AI with their lives? How accurate is the diagnosis made by AI? What measures are in place to prevent misdiagnosis? Who should be held responsible when there is a problem? Consequently, there are a lot of restrictions and regulations put in place as regard to the use of digital health products.

50% of the survey participants consider regulation as a serious threat, 33% have an aligned regulatory and commercial approach, while 32% say that protecting against regulation isn’t a priority. The main areas that could topple start-ups are marketing, advertising, data compliance, and suppliers.

According to Taylor Wessing experts, for digital health start-ups to get ahead of the regulatory race, they need to keep up with the market and investors’ expectations using a watertight approach. Start-ups intending to thrive in the highly competitive and increasingly crowded market also need to put in place a solid regulatory strategy, which offers companies a competitive edge.

Strong Competition In A Difficult Climate

With the Healthcare Information and Management Systems Society (HIMSS) finding, most US and international healthcare systems intend to be in a stage of digital transformation in the next five years. Digital health seems promising, and the opportunities for digital health start-ups to transform healthcare appear unlimited.

Half of the respondents plan on targeting new markets, 44% are looking for new partnerships, and 40% are after new buyers. However, the shifting economic landscape and a shrinking pool of investment lead to the fiercer competition which distorts the balance in favour of the investors, thereby leaving digital health start-ups facing unfavourable terms. Of the surveyed digital health leaders, 44% say that agreeing to reasonable terms with investors was their biggest challenge in raising capital.

Almost three-quarters (72%) of the surveyed digital health leaders are concerned about delivering for investors, while 78% felt pressure to accept terms that are uncomfortable for them during investor negotiations.

With these identified drawbacks plaguing digital health start-ups, legal specialists advise tackling these early on to ensure growth in a difficult market.

These challenges facing the industry could make or break the success of digital health start-ups looking to move into acute healthcare needs. They need to be addressed promptly as none of the issues is insurmountable. With careful consideration and planning to solve these problems, digital health start-ups can flourish and succeed in a competitive landscape, achieving their ambition to revolutionise the delivery of healthcare.

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