Why digital health M&A could just be warming up
“Digital health is going to be one of the most active healthcare sectors for the foreseeable future,” PwC’s Dan Farrell said.
As the healthcare industry continues its transition to value-based care, mergers and acquisitions in the digital health space are picking up. During the first quarter of 2017, Rock Health tracked close to 20 M&A deals, including McKesson’s $1.1 billion cash purchase of electronic prior authorization startup CoverMyMeds and Castlight Health’s acquisition of employee wellness platform Jiff.
Earlier this month, Apple snapped up sleep tracking startup Beddit for an undisclosed sum, adding to its 2016 purchase of personal health data company Gliimpse. Other noteworthy 2016 acquisitions include Nokia’s purchase of French connected health device manufacturer Withings as well as One Medical Group’s purchase of nutrition coaching app Rise.
“Our perspective is that digital health is going to continue to be one of the most active healthcare sectors for the foreseeable future,” Dan Farrell, a partner at PriceWaterhouseCoopers told Healthcare Dive.
So far in 2017, both volume and value are up, though value has risen as much as volume. That could be a reflection of digital health following more of the venture capital model than traditional healthcare sectors, according to Farrell. “Right now you have a lot of different investors from a lot of different backgrounds that are spreading their investment dollars over a lot of opportunities … and hoping for that one superstar,” he said.
Digital health has been attracting more and more investors, but experts argue they are just warming up.
Why digital health is seeing more M&A
Driving digital health M&A is the desire, on the part of many companies, to be part of the growing U.S. healthcare spend, which is estimated to reach roughly 20% of GDP within a few years. The Affordable Care Act and MACRA have introduced new data-sharing requirements and care coordination mandates, which in turn has increased the need for solutions that improve care quality and outcomes while lowering costs. Many large companies and investors see healthcare as a necessary part of their portfolio.
For health systems transitioning to risk-based contracting, digital health also has the potential to be a major driver of profitability in the future by helping them manage populations better and reduce costs of care.
“The nice thing about the digital health sector is that it’s relatively insulated from the reimbursement risk of the rest of the healthcare sectors, which makes it an attractive play for a lot of both financial and strategic investors,” Farrell said.
Atul Kunwar, president of Tech Mahindra, has called digitalization “one of the five main pillars” of the company’s future growth strategy. The India-based company added to its own portfolio recently with the purchase of health IT consulting firm CJS Solutions Group for $110 million.
There’s plenty of “dry powder” in large players’ balance sheets for M&A once they’ve decided to pursue a digital health target, according to Farrell. The trick is ensuring they put their money to good use.
Digital health is also attracting new entrants who are not traditional healthcare investors as companies with money to play look to tap into the space. One of the areas that will continue to be hot is that of analytics and Big Data, which is feeding off the population health boom. “Anything that can help manage the long-term costs of care within the U.S. is going to be an active sector, and I think people see analytics and big data as one of the major drivers of being able to manage disease and populations,” Farrell said.
Investors are watching the wearable and biosensors subsector as well, according to Farrell. With the drive toward consumerism, investors see products that can be marketed directly to consumers to control their health as a big income earner.
Why some have a wait-and-see stance
Not everyone is jumping on the M&A bandwagon just yet. While much of the healthcare industry is in venture capital mode vis à vis digital health, many large potential acquirers are adopting a wait-and-see stance.
Some are waiting to see which companies emerge as winners in their particular subsectors, Farrell noted. For more well-funded major players, it makes sense to wait for that winner and then pay the higher valuation for a more mature company with a proven business model and value proposition.
Lisa Suennen, GE Ventures Senior Managing Director, agrees. “There is a lot of merging of companies that are really products, not companies, so there can be real platforms and critical mass,” Suennen told Healthcare Dive. “Companies that get significant revenue and evidence of economic and clinical efficacy are far better targets than the rest.”
With so much promise in digital health, the challenge for companies is to come up with a proven business model.
“There’s a lot of players in this sector right now all racing to come up with a better mousetrap,” Farrell said. “Those companies that are able to show the value, prove it and demonstrate that they can control healthcare costs — those will be the winners.”