Mergers & Acquisitions

Purpose-Driven Healthtech Remains a Hot M&A Investment Opportunity

By Cody Powers, Principal, ZS Associates

In 2021, healthtech deal activity and invested capital surged, with an increase in mega-deals designed to consolidate care. Historically, the space has been predominated by “point solutions” capable of solving one specific problem.

However, as the space has matured, companies have learned that scale is the ultimate driver of success by controlling a wide swath of the care continuum (essentially driven by network effects – i.e., the value of the ecosystem grows exponentially with the number of users). Companies are looking to consolidate through a partnership or vertical integration with a focus on building a stronger relationship between patients and providers, easy access to care, and delivering a more personalized and tailored experience.

The healthy ecosystem of young companies and readily accessible capital (via strong VC funding) have created a fertile environment for building new technology, combined with well-financed buyers seeking to consolidate more complete offerings across steps in the patient care process. Buyers on the largest M&A deals are largely traditional blue blood large caps; however, the emergence of relatively young, larger-scale players has the position to reorient the environment long term towards “build-for-purpose” healthtech companies.

New Opportunities are Emerging

We see multiple archetypes where companies are using M&A to drive scale in the space. Here are three key opportunities.

First, we see payers and providers and cross-sector technology companies are acquiring innovators to strengthen internal capabilities, find an inflection point in customer reach, and diversify their revenue sources (e.g., Optum and Change Health, Oracle, and Cerner).

Second, we see some incumbent health tech companies are expanding their portfolios to take advantage of data integration, platform interoperability, virtual health, cloud-based platforms, artificial intelligence, and other emerging technologies (e.g., Teladoc Health and Livongo, Datavant and Ciox, Ginger and Headspace).

Third, we’re noticing the shift to personalized care, such as home care, wearables, or telemedicine, with companies interested in tapping into that data. Transfer of data allows for personalized treatment and enables a leap from disease-first to patient-first practice (e.g., Humana and Kindred).

COVID-19’s Impact on Large Cap Transactions

Large cap momentum has seen a mixed reaction across the healthcare sector. While activity on the healthcare technology front has seen growth in capital deployed across large cap, the biopharma sector has seen a meaningful shift away from so-called “megadeals” to more digestible development-stage company acquisitions (e.g., the $1 billion to 10 billion range). Limitations in the ability to conduct standard transaction diligence effectively (meeting management teams, technical assessment of facilities, etc.) have complicated biopharma diligence and slowed momentum. By contrast, large caps in healthtech have fared better by comparison in terms of M&A size/volume – perhaps due to less need for physician interaction as in biopharma megadeals.

For Payers, Providers, and Biopharma Alike, Traditional Lines are Blurring

We see a few examples of how healthcare companies trying to push the envelope with respect to traditional M&A boundaries:

1. Payers

Payers with an increase in capital resulting from delayed/avoided care (reported due to lockdowns across states) are making technology M&A deals to improve the experience while trying to reduce costs. We see payers acquiring companies that are dealing with EHR, virtual care support, remote patient monitoring, and cost mitigation. Many of these transactions are heavily driven by transforming traditional payer mechanisms from purely financially driven to a more expansive look at population health via data and using that platform to drive higher quality care decisions with potential for cost offsets in care.

Example: OptumHealth acquired NaviHealth, a startup developing a software platform to help manage post-acute care. (Deal size: $2.9B). UHG made a $13 billion acquisition of Change Healthcare, and Cigna bought telehealth unicorn MDLivet.

2. Healthcare providers

US hospitals and health systems relied on M&A for digital transformation as they turned handicapped without the digital infrastructure in place. Many institutions have since come to embrace digital capabilities to better both better reflect new consumer expectations on how care is delivered (transformed by the pandemic). The majority of deals that happened were intended to build virtual care platforms including telehealth, cloud-based patient engagement settings, and wearable technologies.

Pure play telehealth providers are the biggest benefactors of this change. Telehealth utilization has had increased nearly 38 times higher than before the pandemic, moving from purely virtual urgent care to a range of services, e.g. longitudinal virtual care, specialized chronic disease clinic, and virtual health solutions beyond diagnosis/treatment (care management) to keep up with startups flooding the market. We see this as a trend to watch as the scale of the larger players in this space continues to push the boundaries on what is possible following continued waves of consolidation.

Examples: Prime examples in the space include M&A between Headspace and Ginger, and Teladoc Health and InTouch Health both expanding their offerings to more specialized care in the mental health space and chronic/specialty conditions.

3. Pharma and Biotech companies

Biopharma is increasingly relying on healthtech deals to reinvent the drug development process. These types of healthtech deals are different from the payer/provider angle in that they are not directly relevant to patient care but instead are tools to improve pipeline throughput, including accelerated drug discovery, clinical trials, and data analysis. Most of these technologies rely on sophisticated AI and machine learning technology, spanning massive datasets that biopharma companies now put a premium on to uncover solutions to a growing set of more complex scientific problems as “low hanging fruit” in widely prevalent conditions become a rarer and rarer get. We expect these deals to start as consolidations in the healthtech space but over time to become increasingly tied to large cap via direct investment (today these are largely either VC funded or sell to large cap pharma – we believe the discovery model will increasingly push large cap to take a stake in this space as access to data and supporting infrastructure transforms the approach to drug discovery).

Examples: Deals between Invitae and ArcherDX and Nurosene and Netramark highlights acquisition conducted to accelerate new drug development and clinical trials and redefine the landscape of how diseases are treated.

Final Thoughts

As scale continues to be an arguable measure of success, healthtech remains a critical tool to achieve more, faster. Time will tell where the aforementioned opportunities play out next. In the meantime, healthcare’s migration from point-solution-oriented to built-for-purpose presses on, and I’m excited to watch what happens next.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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