Proteus Digital Health Source: Proteus Digital Health

At the end of every year, investment fund Rock Health asks the venture and start-up community to vote on the top digital health IPO of the year. In 2017, Tabula Rasa Healthcare won -- even though the company actually went public in September 2016. It was such a drought that Rock Health couldn't find a single nominee for the calendar year. Tabula Rasa, which is focused on medication safety, almost doubled in value last year, but still has a market capitalization well south of $1 billion. Will the industry fare any better in 2018? With investors gathered in San Francisco for the annual J.P. Morgan Healthcare conference, the industry's biggest event of the year, CNBC asked a dozen investors for their take.

Don't expect many IPOs

Nina Kjellson, a health investor with Canaan Partners, doesn't expect to see more than three digital health IPO's in 2018. She said there's a deep malaise surrounding the lack of public offerings last year, a higher bar for IPOs and a lack of contenders that are far enough along in terms of revenue and partnerships. Kjellson polled the audience at this week's conference to name a single start-up that could file in the next two quarters. "An audience member said they may have one, but otherwise the room was crickets," she said. Investors said digital health companies considering an IPO need about $100 million in annual recurring revenue, and the vast majority aren't there. "The public market wants to see three to four quarters of predictable sales and ideally moving towards or at profitability," said Canaan's Julie Papanek. "Very few companies are pacing like that right now."

It's all about M&A

However, there are plenty of opportunities to get acquired. "M&A is the new IPO," said Bill Evans, Rock Health's managing director, who closely tracks the industry. But who will be the buyers of digital health companies in 2018? Some investors are betting on big pharma. Companies like Merck and Johnson & Johnson are increasingly talking up machine learning and artificial intelligence. Digital health companies, particularly those focused on clinical trial matching or that track how patients are responding to treatments, could be prime targets. Other venture capitalists, like Bessemer Venture Partners' Steve Kraus and Norwest Venture Partners' Robert Mittendorff, said that tech giants Alphabet, IBM, Apple and Microsoft will start to acquire digital health start-ups. UnitedHealth's Optum business, which describes itself as technology-enabled services, is also expected to make some strategic bets in the digital health sector. These acquisitions could result in a more active IPO pipeline for next year. "If they (tech companies) make a real big splash with some kind of acquisition, this could crack open the IPO markets and public market investor interest in the space sooner than maybe any of us think," suggested Kraus.

It's all about 2019

For most investors, 2019 holds more promise. Investors named a handful of companies including Health Catalyst, Welltok, American Well, Grand Rounds Health, GoodRx, Oscar Health, Doximity and Zocdoc that they see entering the public markets by then. Growth will be fueled by "robust business development deals among life sciences, medical device, payer, provider, employer, consumer and tech companies with leading digital health companies," said Flare Capital's Bill Geary. Those types of deals mean real revenue, rather than just hype.

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