Dive Brief:

• The flow of venture funding into digital health startups slowed in the third quarter after a busy first half, and the smaller number of deals could mark the first decline in year-over-year activity since 2011, according to a report Tuesday from Rock Health.
• Still, digital health remains attractive to investors, with attention currently focused on opportunities in behavioral and women’s health, and the sector is likely to post its second-highest funding year since the firm began tracking dealmaking in the space, the report said.
• Separately, a new analysis by law firm Ropes & Gray predicts an increase in partnerships between digital health companies and payers, healthcare providers and others involved in the life sciences.

Dive Insight:

Rock Health forecasts investments in digital health will hit $7.3 billion this year, shy of the $8.3 billion venture capital firms poured into the sector in 2018 but on track to record the second-best year for fundraising since the firm began following the industry in 2011.

Digital health deals are becoming fewer in number but larger in size. The average transaction was worth $20.9 million so far this year, near the $21.7 million average seen last year, and up 32% from 2017’s level. Rock Health expects the number of deals to be down 5% to 10% from last year.

Nine deals this year have topped $100 million. Last month, online pharmacy Capsule raised $200 million for a national expansion, and artificial pancreas developer Beta Bionics raised a total of $126 million in two Series B funding rounds.

Rock Health tallied 16 digital behavioral health companies that have raised a total of $416 million and 10 digital women’s health startups that together have garnered $177 million in funding so far this year. 

And five companies considered to fall under the digital health umbrella — Livongo, Health Catalyst, Phreesia, Change Healthcare and Peloton — launched initial public offerings this year. 

Ropes & Gray expects the pace of partnerships involving digital health startups to accelerate. It pointed to two such tie-ups in September: Mayo Clinic’s deal to store its data in Google’s cloud, and Microsoft and AstraZeneca’s launch of an innovation lab for digital health startups focused on artificial intelligence.

In a survey the firm conducted with business publisher Crain’s, more than a third (35%) of the 284 respondents working primarily in healthcare provider settings said they were likely or somewhat likely to hold talks about affiliating with a digital health company in the next year. The firm’s survey also found 42% of respondents were likely or somewhat likely to partner or contract with an artificial intelligence company over the next year.

More than half of the respondents said companies must spend a lot of time and money to meet FDA requirements, and a quarter of respondents think regulating new digital health products is the top challenge facing the agency.