Four key trends in the current Digital Health M&A landscape

Executive Summary:

The digital health M&A landscape is currently very active. In 2022, there were over 270 digital health M&A deals, with a total value of over $20 billion. This represents a significant increase from 2021, when there were only 220 deals with a total value of $15 billion.

There are a number of factors driving the current wave of digital health M&A activity. One factor is the increasing demand for digital health solutions. As healthcare costs continue to rise, patients and providers are looking for ways to improve the efficiency and effectiveness of care. Digital health solutions can help to address these challenges by providing patients with access to care outside of the traditional brick-and-mortar setting, and by helping providers to better manage their patients' care.

Another factor driving digital health M&A activity is the increasing availability of capital.

Venture capitalists and other investors are pouring money into digital health startups, which is providing these companies with the resources they need to grow and scale. This influx of capital is making it possible for digital health companies to acquire other companies, which can help them to expand their reach and capabilities.

The current wave of digital health M&A activity is likely to continue in the years to come. As the digital health market continues to grow and mature, we can expect to see even more M&A activity as companies look to consolidate their positions and expand their reach.

Here are some of the four key trends in the current digital health M&A landscape:

• Focus on vertical integration: Healthcare providers are increasingly looking to acquire digital health companies that can help them to improve the efficiency and effectiveness of their operations. For example, hospitals are acquiring telemedicine companies, and health systems are acquiring electronic health record (EHR) vendors.

• Focus on horizontal integration: Digital health companies are also looking to acquire their competitors in order to consolidate their market share and expand their reach. For example, two major telemedicine companies, Teladoc and Livongo, recently merged to create a single, larger company.

• Focus on emerging technologies: M&A activity is also being driven by the development of new and emerging digital health technologies. For example, there has been a recent wave of M&A activity in the area of artificial intelligence (AI). This is because AI is seen as a key technology for improving healthcare outcomes and reducing costs.

• Focus on international expansion: M&A activity is also being driven by digital health companies increasingly looking to expand their reach into new markets. This is being driven by the growing demand for digital health solutions around the world.

The current wave of digital health M&A activity is a sign of the growing importance of digital health in the healthcare industry. As digital health solutions become more widely adopted, we can expect to see even more M&A activity in this space in the years to come.

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Trend 1: Vertical Integration

Vertical integration in digital health refers to the practice of healthcare organizations acquiring or partnering with digital health companies to provide a more seamless and integrated patient experience. This can include acquiring companies that provide software, hardware, or services that can be used to improve the efficiency and effectiveness of care delivery.

There are a number of reasons why healthcare organizations are increasingly pursuing vertical integration in digital health. One reason is that digital health solutions can help to improve the efficiency and effectiveness of care delivery. For example, telemedicine can help to reduce wait times and improve access to care, while electronic health records (EHRs) can help to improve the coordination of care.

Another reason for vertical integration is that it can help healthcare organizations to better understand and manage their patients' health. For example, by acquiring a digital health company that provides wearable devices or remote patient monitoring, healthcare organizations can collect more data about their patients' health. This data can then be used to identify patients who are at risk for certain diseases, develop personalized treatment plans, and provide patients with information and resources that are tailored to their specific needs.

Finally, vertical integration can help healthcare organizations to improve their competitive position. By acquiring or partnering with digital health companies, healthcare organizations can gain access to new technologies and capabilities that can help them to differentiate themselves from their competitors.

There are a number of challenges associated with vertical integration in digital health. One challenge is that it can be expensive. Healthcare organizations need to invest in the technology, infrastructure, and staff needed to integrate digital health solutions into their operations.

Another challenge is that vertical integration can lead to decreased competition. If a few large healthcare organizations acquire all of the leading digital health companies, it could reduce the number of options available to patients and providers.

Finally, vertical integration can be difficult to manage. Healthcare organizations need to have a clear strategy for integrating digital health solutions into their operations and they need to have the right people in place to manage these solutions.

Despite the challenges, vertical integration in digital health is a trend that is likely to continue in the years to come. As digital health solutions become more widely adopted, healthcare organizations will need to find ways to integrate these solutions into their operations in order to improve the efficiency and effectiveness of care delivery.

Trend 2: Horizontal Integration

Horizontal integration in digital health refers to the practice of two or more companies that offer similar products or services merging or partnering to gain a competitive advantage. This can be done through mergers, acquisitions, or joint ventures.

There are a number of reasons why companies in the digital health space are increasingly pursuing horizontal integration. One reason is that it can help them to achieve economies of scale. By merging or partnering with another company, they can combine their resources and operations, which can lead to lower costs and increased efficiency.

Another reason for horizontal integration is that it can help companies to expand their reach. By merging or partnering with a company that operates in a different geographic region or market, they can gain access to new customers and revenue streams.

Finally, horizontal integration can help companies to improve their products and services. By merging or partnering with a company that has complementary expertise, they can gain access to new technologies and capabilities that can help them to improve their offerings.

There are a number of challenges associated with horizontal integration in digital health.

One challenge is that it can be expensive. Companies need to invest in the technology, infrastructure, and staff needed to integrate their operations.

Another challenge is that horizontal integration can lead to decreased competition. If a few large companies merge or partner, it could reduce the number of options available to patients and providers.

Finally, horizontal integration can be difficult to manage. Companies need to have a clear strategy for integrating their operations and they need to have the right people in place to manage these integrations.

Despite the challenges, horizontal integration in digital health is a trend that is likely to continue in the years to come. As the digital health space becomes more competitive, companies will need to find ways to achieve economies of scale, expand their reach, and improve their products and services in order to remain competitive.

Here are some examples of horizontal integration in digital health:

• In 2019, Teladoc Health acquired Livongo Health, a company that provides remote patient monitoring services. This acquisition allowed Teladoc to expand its reach into the chronic care management market.

• In 2020, Apple acquired Evolent Health, a company that provides population health management services. This acquisition allowed Apple to expand its reach into the healthcare industry and to gain expertise in population health management.

• In 2021, Amazon acquired PillPack, an online pharmacy. This acquisition allowed Amazon to enter the pharmacy business and to offer a more comprehensive suite of healthcare services.

These are just a few examples of the many horizontal integration deals that have taken place in the digital health space in recent years. As the digital health space continues to grow and evolve, we can expect to see even more horizontal integration deals in the years to come.

Trend 3: Emerging Technologies

Digital health is a rapidly growing field, and there are many emerging technologies that have the potential to revolutionise healthcare. Some of the most promising emerging technologies in digital health include:

• Artificial intelligence (AI): AI is being used to develop new ways to diagnose diseases, recommend treatments, and manage chronic conditions. For example, AI-powered algorithms can be used to analyze medical images and data to help doctors diagnose diseases more accurately and quickly.

• Virtual reality (VR) and augmented reality (AR): VR and AR are being used to provide patients with a more immersive and interactive experience of healthcare. For example, VR can be used to help patients with anxiety or phobias to face their fears in a safe and controlled environment. AR can be used to provide surgeons with real-time information about a patient's anatomy during surgery.

• Wearable devices: Wearable devices such as smartwatches and fitness trackers are being used to collect data on patients' health and activity levels. This data can then be used to track patients' progress, identify any potential problems early on, and provide personalized feedback and advice.

• Telemedicine: Telemedicine is the use of telecommunications technology to provide healthcare services remotely. This can include video conferencing, online consultations, and remote patient monitoring. Telemedicine can help to improve access to healthcare, especially in rural areas, and can also help to reduce costs.

• Personalized medicine: Personalized medicine is the practice of tailoring healthcare to the individual patient's needs. This can include using genetic information to identify patients who are at risk for certain diseases, developing personalized treatment plans, and providing patients with information and resources that are tailored to their specific needs.

These are just a few of the many emerging technologies that are being developed and used in digital health today. As technology continues to advance, we can expect to see even more innovative and groundbreaking applications in healthcare in the years to come.

Trend 4: International Expansion

International expansion is a key strategy for many digital health companies. By expanding into new markets, digital health companies can reach a wider range of patients and providers, and they can also tap into new sources of revenue.

There are a number of factors that digital health companies need to consider when expanding internationally. These include:

• Regulatory requirements: Each country has its own set of regulatory requirements for digital health products and services. Digital health companies need to carefully research the regulatory landscape in each market they plan to enter.

• Cultural differences: Each country has its own culture and way of doing business. Digital health companies need to be aware of these differences and adapt their products and services accordingly.

• Language barriers: In some cases, digital health companies may need to translate their products and services into the local language.

• Partnerships: In some cases, it may be beneficial for digital health companies to partner with local companies in the markets they plan to enter. This can help the digital health companies to navigate the local market and to build relationships with key stakeholders.

Despite the challenges, international expansion can be a very rewarding strategy for digital health companies. By expanding into new markets, digital health companies can grow their business and make a positive impact on the lives of patients around the world.

Here are some examples of digital health companies that have successfully expanded internationally:

• Teladoc Health: Teladoc Health is a telemedicine company that offers video visits with doctors. Teladoc Health has expanded into over 150 countries and has over 45 million members.

• Livongo Health: Livongo Health is a company that provides remote patient monitoring for people with diabetes. Livongo Health has expanded into over 10 countries and has over 300,000 members.

• Akili Interactive: Akili Interactive is a company that develops video games that can be used to treat ADHD and other cognitive disorders. Akili Interactive has expanded into over 50 countries and has over 100,000 users.

These are just a few examples of the many digital health companies that are expanding internationally. As the digital health industry continues to grow, we can expect to see even more international expansion in the years to come.

The most likely digital health M&A targets

The most likely digital health M&A targets are companies that are:

• Innovative: Companies that are developing new and disruptive technologies are more likely to be acquired than companies that are simply offering incremental improvements to existing products and services.

• Growing: Companies that are growing rapidly are more attractive to potential acquirers than companies that are struggling to grow.

• Scalable: Companies that have the potential to scale quickly are more attractive to potential acquirers than companies that are limited in their ability to grow.

• Complementary: Companies that offer products or services that complement the products or services of the potential acquirer are more likely to be acquired than companies that offer products or services that compete with the products or services of the potential acquirer.

Here are some examples of digital health companies that are likely to be M&A targets:

• Companies that are developing new technologies for the diagnosis and treatment of diseases: These companies are developing technologies that have the potential to revolutionize healthcare, and they are likely to be attractive to potential acquirers who want to gain access to these technologies.

• Companies that are developing new technologies for the delivery of healthcare: These companies are developing technologies that can make healthcare more convenient and affordable, and they are likely to be attractive to potential acquirers who want to improve the efficiency and effectiveness of their healthcare delivery operations.

• Companies that are developing new technologies for the management of chronic diseases: These companies are developing technologies that can help patients manage their chronic diseases more effectively, and they are likely to be attractive to potential acquirers who want to improve the health outcomes of their patients.

• Companies that are developing new technologies for the prevention of diseases: These companies are developing technologies that can help prevent diseases from occurring in the first place, and they are likely to be attractive to potential acquirers who want to reduce the cost of healthcare.

These are just a few examples of the many digital health companies that are likely to be M&A targets. As the digital health industry continues to grow and evolve, we can expect to see even more M&A activity in this space in the years to come.

Future of Digital Health M&A

These four key trends are likely to continue in the years to come, as the digital health industry continues to grow and mature. As a result, we can expect to see even more M&A activity in this space in the years to come with the potential benefits being:

• Improved efficiency and effectiveness: M&A can help healthcare providers to improve the efficiency and effectiveness of their operations by acquiring digital health companies that can provide new technologies and solutions.

• Expanded reach: M&A can help digital health companies to expand their reach by acquiring competitors or companies that operate in new markets.

• Increased innovation: M&A can help to drive innovation in the digital health space by bringing together companies with different expertise and capabilities.

• Reduced costs: M&A can help to reduce costs by eliminating redundancies and streamlining operations.

However, there are also some potential risks associated with digital health M&A, including:

• Cultural clashes: M&A can be difficult to manage, especially when companies have different cultures and ways of doing things.

• Integration challenges: Integrating two companies can be complex and time-consuming, and it can lead to disruptions in operations.

• Regulatory challenges: M&A can be subject to regulatory scrutiny, which can delay or even derail deals.

• Financial risks: M&A can be expensive, and it can lead to financial losses if the deal does not go as planned.

Overall, the future of digital health M&A is expected to be positive, with the potential to bring about a number of benefits for healthcare providers, digital health companies, and patients.

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HealthTech M&A Advisory by Founders for Founders, Owners & Investors. Buy Side, Sell Side, Growth and Strategy mandates - Email lloyd@nelsonadvisors.co.uk

HealthTech Thought Leadership from Nelson Advisors - Industry Insights & Analysis for Founders, Owners & Investors. Visit https://www.healthcare.digital