Fenwick's fifth annual Digital Health Investor Summit brought together investors who are active in the digital health space to discuss the evolving digital health sector and their investment outlook for the year ahead.

Here are my three key takeaways from this year's Summit:

Playing in the Regulated Space

The consensus is it's time to stop worrying and learn to love the regulated space. In previous years most entrepreneurs and investors balked at business plans that targeted the regulated portion of the market. Better to sell fitness trackers to consumers than wrangle with the FDA.

But this year participants felt the opportunities of working within the healthcare system outweighed the downsides of longer product cycles and negotiating payment through third parties. Jason Portnoy of Subtraction Capital pointed out that technology has been able to disrupt other highly regulated portions of the economy and there is no reason to think healthcare can't be similarly disrupted. Vijay Lathi of New Leaf Venture Partners remarked that working in the regulated space provides protection from competitors.

Ambar Bhattacharyya of Maverick Capital Ventures summed up the regulated versus non-regulated path question succinctly, noting that "you can run, but you can't hide from regulations," adding that for wide adoption, payers and providers are going to demand data.

Healthcare Systems as Key Investors

One reason why investors and entrepreneurs are more comfortable with the regulated space may be because healthcare systems have become significant investors in the digital health sector. Healthcare systems have set up the equivalent of corporate venture investment arms to gain early access to new technologies that can help them reduce costs and improve efficiency. Like other strategic investors, these organizations should also be seen as potential acquirers.

Private Equity Continues to Flow but Public Markets Cool

As Rock Health reports, the digital health sector continues to attract record levels of venture investment. Even while the tech sector as a whole is experiencing a correction, year-over-year, aggregate digital health investment increased by nearly 50% in the first quarter of 2016.

Two Q1 deals accounted for more than a third of the quarter's transaction value. The average deal size grew while the number of deals decreased. When Rock Health's Mitchell Mom polled Summit participants, asking them to identify the biggest issue facing venture investment in digital health, the A-to-B round crunch was the clear winner.

In terms of public markets the outlook was gloomier. There were no digital health initial public offerings in the first quarter of the year, which was exacerbated by macroeconomic factors that pulled the market as a whole down during the quarter.

Furthermore, of the recent class of digital health companies that debuted in the public market since March 2014, only one is trading above its IPO price: IMS Health, which was not a typical venture backed IPO. Peter van der Goes of Goldman Sachs said this discount is a clear signal that the market likely wants to see something that looks different: a better value proposition, clearer ROI or demonstrated stickiness, etc.

Rock Health's Mom said M&A has been the primary source of exits in the past year and they expect that M&A will remain the most common path to liquidity. He pointed out that M&A deals in the digital health space nearly doubled between 2014 and 2015 in terms of transaction volume.

With jittery public markets, growing interest by large healthcare systems and an increased appetite to make plays in the regulated space (which may demand more resources), the consensus is that we should see more strategic investments and acquisitions and potentially consolidation in the coming year.

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